UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
________________
Form
10-K
R
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
|
For
the fiscal year ended December 31, 2005
|
|
OR
|
ð
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the transition period from ____ to
____
|
Commission
File Number: 001-31593
________________
Apollo
Gold Corporation
(Exact
name of registrant as specified in its charter)
Yukon
Territory
|
Not
Applicable
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
5655
S. Yosemite Street, Suite 200
Greenwood
Village, Colorado 80111-3220
(Address
of Principal Executive Offices Including Zip Code)
(720)
886-9656
(Registrant’s
telephone number, including area code)
________________
Securities
registered pursuant to Section 12(b) of the Act:
Title
of Each
Class
|
|
Name
of Each Exchange on Which
Registered
|
Common
Shares, no par value
|
|
American
Stock Exchange
Toronto
Stock
Exchange
|
Securities
registered pursuant to Section 12 of the Act: Common Shares, no par
value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes
£ No
R
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes
£ No
R
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 R
No
£
Indicate
by a check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. R
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check
one):
Large accelerated filer £ |
Accelerated
filer £
|
Non-accelerated
filer R
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes
£ No
R
As
of
June 30, 2005, the approximate aggregate market value of voting stock held
by
non-affiliates of the registrant was $31,424,977 million (based upon the
closing price for shares of the registrant’s common shares as reported by the
American Stock Exchange on that date).
As
of
March 24, 2006, the registrant had 121,396,859 common shares, no par value
per
share, outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of our Definitive Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A in connection with the 2006 Annual Meeting
of Shareholders are incorporated by reference to Part III of this Annual Report
on Form 10-K.
REPORTING
CURRENCY, FINANCIAL AND OTHER INFORMATION
All
amounts in this Report are expressed in United States (“U.S.”) dollars. Unless
otherwise indicated Canadian currency is denoted as “Cdn$.”
Financial
information is presented in accordance with generally accepted accounting
principles (“GAAP”) in Canada (“Cdn GAAP”). Differences between accounting
principles generally accepted in the U.S. (“U.S. GAAP”) and those applied in
Canada, as applicable to Apollo Gold Corporation, are discussed in Note 20
to
the Consolidated Financial Statements.
Information
in Part I and II of this report includes data expressed in various measurement
units and contains numerous technical terms used in the gold mining industry.
To
assist readers in understanding this information, a conversion table and
glossary are provided below.
References
to “Apollo,” the “Company,” “we,” “our,” or “us” mean Apollo Gold Corporation,
its predecessors and consolidated subsidiaries, or any one or more of them,
as
the context requires.
NON-GAAP
FINANCIAL MEASURES
In
this
Annual Report on Form 10-K, we use the terms “cash operating costs,” “total cash
costs,” and “total production costs,” each of which are considered non-GAAP
financial measures as defined in the United States Securities and Exchange
Commission (the “SEC”) Regulation S-K Item 10 and should not be considered in
isolation or as a substitute for measures of performance prepared in accordance
with GAAP. These terms are used by management to assess performance of
individual operations and to compare our performance 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 cost as found on the
Consolidated Statements of Operations, less production royalty expenses and
mining taxes but includes by-product credits for payable silver, lead and
zinc.
The
term
“total cash costs” is equivalent to cash operating costs plus production
royalties and mining taxes.
The
term
“total production costs” is equivalent to total cash costs plus non-cash costs
including depreciation and amortization.
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 7, 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.
STATEMENTS
REGARDING FORWARD-LOOKING INFORMATION
This
Annual Report on Form 10-K contains forward-looking statements, as defined
in
the Private Securities Litigation Reform Act of 1995, with respect to our
financial condition, results of operations, business prospects, plans,
objectives, goals, strategies, future events, capital expenditure, and
exploration and development efforts. Words such as “anticipates,” “expects,”
“intends,” and similar expressions identify forward-looking statements. These
statements include comments regarding:
· Company's
future focus on Black Fox;
· the
establishment and estimates of mineral reserves and resources;
· production;
· production
commencement dates;
· total
production costs;
· cash
operating costs;
· total
cash costs;
· grade;
· processing
capacity;
· potential
mine life;
· feasibility
studies;
· publication
of reserves and an NI 43-101 report and any results therefrom;
· development
costs;
· expenditures;
· exploration;
· permits;
· expansion
plans;
· plans
for Black Fox and Huizopa;
· closure
costs;
· remediation
costs for Montana Tunnels;
· sale
of
and continued milling at Montana Tunnels;
· WARN
Act
notice and timing of layoff;
· development
drilling and its potential results;
· surveys
of claims;
· recovery
rates;
· geological
prospects;
· impact
of
governmental laws;
· nonpayment
of dividends and use of earnings from operations;
· delivery
of metals;
· hedging
contracts;
· cash
flows;
· future
financing;
· liquidity;
· our
ability to fund our estimated expenditure and capital requirements;
· estimated
environmental liabilities;
· factors
impacting our results of operations;
· application
of Sarbanes Oxley 404 reporting requirements and our ability to meet those
reporting requirements; and
· the
impact of adoption of new accounting standards.
Although
we believe that our plans, intentions and expectations reflected in these
forward-looking statements are reasonable, we cannot be certain that these
plans, intentions or expectations will be achieved. Our actual results could
differ materially from those anticipated in these forward-looking statements
as
a result of the risk factors set forth below and other factors described in
more
detail in this Annual Report on Form 10-K:
· unexpected
changes in business and economic conditions;
· significant
increases or decreases in gold prices;
· changes
in interest and currency exchange rates;
· timing
and amount of production;
· unanticipated
grade changes;
· unanticipated
recovery or production problems;
· changes
in mining and milling costs;
· operational
problems at our mining property;
· metallurgy,
processing, access, availability of materials, equipment, supplies and
water;
· determination
of reserves;
· changes
in project parameters;
· costs
and
timing of development of new reserves;
· results
of current and future exploration activities;
· results
of pending and future feasibility studies;
· joint
venture relationships;
· ability
to sell our mining property or its assets;
· political
or economic instability, either globally or in the countries in which we
operate;
· local
and
community impacts and issues;
· timing
of
receipt of government approvals;
· accidents
and labor disputes;
· environmental
costs and risks;
· competitive
factors, including competition for property acquisitions;
· availability
of external financing at reasonable rates or at all; and
· the
factors discussed in this Annual Report on Form 10-K under the heading “Risk
Factors.”
Many
of
these factors are beyond our ability to control or predict. These factors are
not intended to represent a complete list of the general or specific factors
that may affect us. We may note additional factors elsewhere in this Annual
Report on Form 10-K and in any documents incorporated by reference into this
Annual Report on Form 10-K. We undertake no obligation to update forward-looking
statements.
GLOSSARY
OF TERMS
We
report
our reserves on two separate standards to meet the requirements for reporting
in
both Canada and the United States (“U.S.”). Canadian reporting requirements for
disclosure of mineral properties are governed by National Instrument 43-101
(“NI
43-101”). The definitions given in NI 43-101 are adopted from those given by the
Canadian Institute of Mining Metallurgy and Petroleum. U.S. reporting
requirements for disclosure of mineral properties are governing by SEC Industry
Guide 7. These reporting standards have similar goals in terms of conveying
an
appropriate level of confidence in the disclosures being reported, but embody
differing approaches and definitions.
We
estimate and report our resources and reserves according to the definitions
set
forth in NI 43-101 and modify and reconcile them as appropriate to conform
to
SEC Industry Guide 7 for reporting in the U.S. The definitions for each
reporting standard are presented below with supplementary explanation and
descriptions of the parallels and differences.
NI
43-101 Definitions
|
|
|
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indicated
mineral resource
|
The
term “indicated mineral resource” refers to that part of a mineral
resource for which quantity, grade or quality, densities, shape and
physical characteristics can be established with a level of confidence
sufficient to allow the appropriate application of technical and
economic
parameters, to support mine planning and evaluation of the economic
viability of the deposit. The estimate is based on detailed and reliable
exploration and testing information gathered through appropriate
techniques from locations such as outcrops, trenches pits, workings
and
drill holes that are spaced closely enough for geological and grade
continuity to be reasonably assumed.
|
inferred
mineral resource
|
The
term “inferred mineral resource” refers to that part of a mineral resource
for which quantity and grade or quality can be estimated on the basis
of
geological evidence and limited sampling and reasonably assumed,
but not
verified, geological and grade continuity. The estimate is based
on
limited information and sampling gathered through appropriate techniques
from locations such as outcrops, trenches, pits, workings and drill
holes.
|
|
|
measured
mineral resource
|
The
term “measured mineral resource” refers to a part of a mineral resource
for which quantity, grade or quality, densities, shape and physical
characteristics are so well established that they can be estimated
with
confidence sufficient to allow the appropriate application of technical
and economic parameters to support production planning and evaluation
of
the economic viability of the deposit. The estimate is based on detailed
and reliable exploration, sampling and testing information gathered
through appropriate techniques from locations such as outcrops, trenches,
pits, workings and drill holes that are spaced closely enough to
confirm
both geological and grade continuity..
|
mineral
reserve
|
The
term “mineral reserve” refers to the economically mineable part of a
measured or indicated mineral resource demonstrated by at least a
preliminary feasibility study. The study must include adequate information
on mining, processing, metallurgical, economic, and other relevant
factors
that demonstrate, at the time of reporting, that economic extraction
can
be justified. A mineral reserve includes diluting materials and allowances
for losses that might occur when the material is mined.
|
mineral
resource
|
The
term “mineral resource” refers to a concentration or occurrence of
natural, solid, inorganic or fossilized organic material in or on
the
Earth’s crust in such form and quantity and of such a grade or quality
that it has reasonable prospects for economic extraction. The location,
quantity, grade, geological characteristics and continuity of a mineral
resource are known, estimated or interpreted from specific geological
evidence and knowledge.
|
probable
mineral reserve
|
The
term “probable mineral reserve” refers to the economically mineable part
of an indicated, and in some circumstances a measured mineral resource
demonstrated by at least a preliminary feasibility study. This study
must
include adequate information on mining, processing, metallurgical,
economic, can other relevant factors that demonstrate, at the time
of
reporting, that economic extraction can be justified.
|
proven
mineral reserve1
|
The
term “proven mineral reserve” refers to the economically mineable part of
a measured mineral resource demonstrated by at least a preliminary
feasibility study.
|
qualified
person2
|
The
term “qualified person” refers to an individual who is an engineer or
geoscientist with at least five years of experience in mineral
exploration, mine development, production activities and project
assessment, or any combination thereof, including experience relevant
to
the subject matter of the project or report and is a member in good
standing of a self-regulating
organization.
|
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SEC
Industry Guide 7 Definitions
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|
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exploration
stage
|
An
“exploration stage” prospect is one which is not in either the development
or production stage.
|
development
stage
|
A
“development stage” project is one which is undergoing preparation of an
established commercially mineable deposit for its extraction but
which is
not yet in production. This stage occurs after completion of a feasibility
study.
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mineralized
material3
|
The
term “mineralized material” refers to material that is not included in the
reserve as it does not meet all of the criteria for adequate demonstration
for economic or legal extraction.
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probable
reserve
|
The
term “probable reserve” refers to reserves for which quantity and grade
and/or quality are computed from information similar to that used
for
proven (measured) reserves, but the sites for inspection, sampling,
and
measurement are farther apart or are otherwise less adequately spaced.
The
degree of assurance, although lower than that for proven reserves,
is high
enough to assume continuity between points of
observation.
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production
stage
|
A
“production stage” project is actively engaged in the process of
extraction and beneficiation of mineral reserves to produce a marketable
metal or mineral product.
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proven
reserve
|
The
term “proven reserve” refers to reserves for which (a) quantity is
computed from dimensions revealed in outcrops, trenches, workings
or drill
holes; grade and/or quality are computed from the results of detailed
sampling and (b) the sites for inspection, sampling and measurement
are
spaced so closely and the geologic character is so well defined that
size,
shape, depth and mineral content of reserves are
well-established.
|
reserve
|
The
term “reserve” refers to that part of a mineral deposit which could be
economically and legally extracted or produced at the time of the
reserve
determination. Reserves must be supported by a feasibility study
done to
bankable standards that demonstrates the economic extraction. (“Bankable
standards” implies that the confidence attached to the costs and
achievements developed in the study is sufficient for the project
to be
eligible for external debt financing.) A reserve includes adjustments
to
the in-situ tonnes and grade to include diluting materials and allowances
for losses that might occur when the material is mined.
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|
|
1For
Industry Guide 7 purposes this study must include adequate information
on
mining, processing, metallurgical, economic, and other relevant factors
that demonstrate, at the time of reporting, that economic extraction
is
justified.
2
Industry
Guide 7 does not require designation of a qualified person.
3
This
category is substantially equivalent to the combined categories of
measured and indicated mineral resources specified in NI
43-101.
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Additional
Definitions
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|
breccia
|
rock
consisting of angular fragments of other rocks held together by mineral
cement or a fine-grained matrix
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call
|
a
financial instrument that provides the right, but not the obligation,
to
buy a specified number of ounces of gold at a specified
price
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clasts
|
fragments
of a pre-existing rock or fossil embedded within another
rock
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concentrate
|
a
processing product containing the valuable ore mineral from which
most of
the waste mineral has been eliminated
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cretaceous
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the
third and latest of the periods in the Mesozoic era
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cut-off
grade
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when
determining economically viable mineral reserves, the lowest grade
of
mineralized material that qualifies as ore, i.e. that can be mined
at a
profit
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diatreme
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an
upward sloping passage forced through sedimentary rock by volcanic
activity
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doré
|
unrefined
gold bullion bars containing various impurities such as silver, copper
and
mercury, which will be further refined to near pure
gold
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fault
|
a
rock fracture along which there has been displacement
|
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feasibility
study
|
a
definitive engineering and economic study addressing the viability
of a
mineral deposit taking into consideration all associated technical
factors, costs, revenues, and risks
|
|
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fold
|
a
curve or bend of a planar structure such as rock strata, bedding
planes,
foliation, or cleavage
|
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footwall
|
a
geologic or mining term meaning the rock below a fault or vein, or
underlying a natural feature, or the mining floor
|
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formation
|
a
distinct layer of sedimentary rock of similar
composition
|
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|
geochemistry
|
the
study of the distribution and amounts of the chemical elements in
minerals, ores, rocks, solids, water, and the
atmosphere
|
|
|
geophysicist
|
one
who studies the earth; in particular the physics of the solid earth,
the
atmosphere and the earth’s magnetosphere
|
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geotechnical
|
the
study of ground stability
|
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grade
|
quantity
of metal per unit weight of host
rock
|
|
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hanging
wall
|
a
geologic or mining term meaning the rock above a fault or vein, or
overlying a natural feature (as opposed to a footwall)
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heap
leach
|
a
mineral processing method involving the crushing and stacking of
ore on an
impermeable liner upon which solutions are sprayed to dissolve metals
such
as gold and copper; the solutions containing the metals are then
collected
and treated to recover the metals
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heterolithic
|
having
more than one, differing kinds of rock components
|
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host
rock
|
the
rock containing a mineral or an ore body
|
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hydrothermal
|
the
products of the actions of heated water, such as a mineral deposit
precipitated from a hot solution
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induced
polarization
|
a
method of conducting geophysics and locating drilling
targets
|
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intercalated
|
said
of layered material that exists or is introduced between layers of
a
different character
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latitic
composition
|
igneous
rock composed largely of equal amounts of orthoclase and plagioclase
feldspar minerals and less than 10% quartz
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mafic
|
pertaining
to or composed dominantly of the ferromagnesian rock-forming silicates;
said of some igneous rocks and their constituent
minerals
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mapped
or geological mapping
|
the
recording of geologic information such as the distribution and nature
of
rock units and the occurrence of structural features, mineral deposits,
and fossil localities
|
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mineral
|
a
naturally formed chemical element or compound having a definite chemical
composition and, usually, a characteristic crystal form
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mineralogy
|
the
science of minerals
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mineralization
|
a
natural occurrence in rocks or soil of one or more metal yielding
minerals
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mining
|
the
process of extraction and beneficiation of mineral reserves to produce
a
marketable metal or mineral product. Exploration continues during
the
mining process and, in many cases, mineral reserves are expanded
during
the life of the mine operations as the exploration potential of the
deposit is realized.
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National
Instrument 43-101
|
Canadian
standards of disclosure for mineral projects
|
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open
pit
|
surface
mining in which the ore is extracted from a pit or quarry, the geometry
of
the pit may vary with the characteristics of the ore
body
|
|
|
ore
|
mineral
bearing rock that can be mined and treated profitably under current
or
immediately foreseeable economic conditions
|
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|
ore
body
|
a
mostly solid and fairly continuous mass of mineralization estimated
to be
economically mineable
|
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outcrop
|
that
part of a geologic formation or structure that appears at the surface
of
the earth
|
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petrographic
|
the
systematic classification and description of rocks, especially by
microscopic examinations of thin sections
|
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pluton
|
a
body of igneous rock that has formed beneath the surface of the earth
by
consolidation from magma
|
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put
|
a
financial instrument that provides the right, but not the obligation,
to
sell a specified number of ounces of gold at a specified
price
|
|
|
pyrite
|
common
sulfide of iron
|
|
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quartz
|
a
mineral composed of silicon dioxide, SiO2 (silica)
|
|
|
quartz
monzonite
|
a
course-grained igneous rock made up principally of feldspar minerals
and
quartz
|
|
|
reclamation
|
the
process by which lands disturbed as a result of mining activity are
modified to support beneficial land use.
Reclamation
activity may include the removal of buildings, equipment, machinery
and
other physical remnants of mining, closure of tailings storage facilities,
leach pads and other mine features, and contouring, covering and
re-vegetation of waste rock and other disturbed areas.
|
|
|
reclamation
and closure costs
|
the
cost of reclamation plus other costs, including without limitation
certain
personnel costs, insurance, property holding costs such as taxes,
rental
and claim fees, and community programs associated with closing an
operating mine
|
|
|
recovery
rate
|
a
term used in process metallurgy to indicate the proportion of valuable
material physically recovered in the processing of ore, generally
stated
as a percentage of the material recovered compared to the total material
originally present
|
|
|
SAG
|
semi-autogenous
grinding, a method of grinding rock into fine particles, in which
the
grinding media consists of steel balls
|
|
|
SEC
Industry Guide 7
|
U.S.
reporting guidelines that apply to registrants engaged or to be engaged
in
significant mining operations
|
|
|
sedimentary
rock
|
rock
formed at the earth’s surface from solid particles, whether mineral or
organic, which have been moved from their position of origin and
redeposited
|
|
|
shear
|
a
form of strain resulting from stresses that cause or tend to cause
contiguous parts of a body of rock to slide relatively to each other
in a
direction parallel to their plane of contact
|
|
|
skarn
|
a
rock of complex mineral composition
|
|
|
stratigraphy
|
the
branch of geology which studies the formation, composition, sequence
and
correlation of the stratified rock as parts of the earth’s
crust
|
|
|
strike
|
the
direction or trend that a structural surface, e.g. a bedding or fault
plane, takes as it intersects the horizontal
|
|
|
strip
|
to
remove overburden in order to expose ore
|
|
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subangular
|
somewhat
angular, free from sharp angles but not smoothly
rounded
|
|
|
sulfide
|
a
mineral including sulfur (S) and iron (Fe) as well as other elements;
metallic sulfur-bearing mineral often associated with gold
mineralization
|
|
|
variogram
|
graphical
representation of the rate of change of grade with distance which
is
used
to define
parameters for controlling sample layout and resource
modeling
|
|
|
vein
|
a
thin, sheet like crosscutting body of hydrothermal mineralization,
principally quartz
|
|
|
volcaniclastics
|
volcanic
rocks containing significant amounts of rock fragments that have
been
moved from their place of origin during volcanic
activity
|
|
|
volcanic
rock
|
originally
molten rocks, generally fine grained, that have reached or nearly
reached
the
earth’s
surface before solidifying
|
|
|
wall
rock
|
the
rock adjacent to a vein
|
CONVERSION
FACTORS AND ABBREVIATIONS
For
ease
of reference, the following conversion factors are provided:
1
acre
|
=
0.4047 hectare
|
1
mile
|
=
1.6093 kilometers
|
1
foot
|
=
0.3048 meter
|
1
troy ounce
|
=
31.1035 grams
|
1
gram per metric tonne
|
=
0.0292 troy ounce/short ton
|
1
square mile
|
=
2.59 square kilometers
|
1
short ton (2000 pounds)
|
=
0.9072 tonne
|
1
square kilometer
|
=
100 hectares
|
1
tonne
|
=
1,000 kg or 2,204.6 lbs
|
1
kilogram
|
=
2.204 pounds or 32.151 troy oz
|
1
hectare
|
=
10,000 square meters
|
1
hectare
|
=
2.471 acres
|
The
following abbreviations could be used herein:
Au
|
=
gold
|
m(2)
|
=
square meter
|
g
|
=
gram
|
m(3)
|
=
cubic meter
|
Au
g/t
|
=
grams of gold per tonne
|
Mg
or mg
|
=
milligram
|
ha
|
=
hectare
|
mg/m(3)
|
=
milligrams per cubic meter
|
km
|
=
kilometer
|
T
|
=
tonnes
|
km(2)
|
=
square kilometers
|
t
|
=
ton
|
kg
|
=
kilogram
|
Oz
|
=
troy ounce
|
lb
|
=
pound
|
Ppb
|
=
parts per billion
|
m
|
=
meter
|
Ma
|
=
million years
|
Note:
All
units in this report are stated in metric measurements unless otherwise
noted.
PART
I
ITEM
1. DESCRIPTION
OF BUSINESS
OVERVIEW
OF APOLLO GOLD
The
earliest predecessor to Apollo Gold Corporation was incorporated under the
laws
of the Province of Ontario in 1936. In May 2003, it reincorporated under the
laws of the Yukon Territory. Apollo Gold Corporation maintains its registered
office at 204 Black Street, Suite 300, Whitehorse, Yukon Territory, Canada
Y1A
2M9, and the telephone number at that office is (867) 668-5252. Apollo Gold
Corporation maintains its principal executive office at 5655 S. Yosemite Street,
Suite 200, Greenwood Village, Colorado 80111-3220, and the telephone number
at
that office is (720) 886-9656. Our internet address is http://www.apollogold.com.
Information contained on our website is not a part of this Annual Report on
Form
10-K.
Apollo
is
engaged in gold mining including extraction, processing, refining and the
production of by-product metals, as well as related activities including
exploration and development. The Company owns and operates the Montana Tunnels
mine, an open pit mine and mill currently producing gold doré and lead-gold and
zinc-gold concentrates from stockpiled, low grade ore. See Item 2
“Description of Properties” for further information. In
March 2006, the Company adopted a plan to dispose of Montana Tunnels Mining,
Inc., the company which operates the Montana Tunnels mine.
On
November 18, 2005, Apollo sold Florida Canyon Mining, Inc., Standard Gold
Mining, Inc. and Apollo Gold Exploration, Inc. (collectively, the “Nevada
Assets”) to a wholly owned subsidiary of Jipangu, Inc., for $14 million.
See Item 7 “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” for further information.
With
the
plan of disposal of the Montana Tunnels mine, Apollo's future focus is on its
development property, the Black Fox project, which is located near the Township
of Matheson in the Province of Ontario, Canada. Apollo also owns Mexican
subsidiaries which own or have the right to acquire concessions at the Huizopa
exploration project, located in the Sierra Madre gold belt in Chihuahua, Mexico.
BACKGROUND
Apollo
Gold Corporation
The
following chart illustrates the operations and principal operating subsidiaries
and their jurisdictions of incorporation. Apollo owns 100% of the voting
securities of each subsidiary.
APOLLO
GOLD GROUP
(as
of March 24, 2006)
APOLLO
GOLD CORPORATION: American Stock Exchange and Toronto Stock Exchange listed
holding company which owns and operates the Black Fox development
property.
APOLLO
GOLD, INC.: Holding company, employs executive officers and furnishes corporate
services to Apollo Gold Corporation and its subsidiaries.
MINERA
SOL DE ORO S.A. de C.V.: Holds rights to the Huizopa exploration
property.
MONTANA
TUNNELS MINING, INC.: Owns and operates the Montana Tunnels mine and owns the
Diamond Hill mine.
MINE
DEVELOPMENT FINANCE INC.: Provides intercompany loans and other financial
services to affiliated companies.
MINAS
de
ARGONAUTAS, S. de R.L de C.V.: Conducts exploration at the Huizopa exploration
property in Mexico.
Financial
Information
Segmented
information is contained in note 19 of the “Notes to the Consolidated Financial
Statements” contained within this Annual Report on Form 10-K.
Products
The
Montana Tunnels mine produces gold, zinc, silver, and lead in gold doré and
lead-gold and zinc-gold concentrates. The metals produced are sold to custom
smelters, refiners and metals traders. The percentage of sales contributed
by
each class of product is reflected in the following table.
|
Year
Ended
December
31,
|
Product
Category
|
2005
|
2004
|
2003
|
Gold
|
46%
|
37%
|
55%
|
Zinc
|
34%
|
34%
|
29%
|
Silver,
lead and other metals
|
20%
|
29%
|
16%
|
The
table
below summarizes Montana Tunnels’ metals production and average metals prices
for the periods indicated.
|
|
Year
Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Production
Summary
|
|
|
|
|
|
|
|
Gold
ounces
|
|
|
44,099
|
|
|
33,743
|
|
|
44,124
|
|
Silver
ounces
|
|
|
524,722
|
|
|
970,751
|
|
|
411,216
|
|
Lead
pounds
|
|
|
10,428,061
|
|
|
10,064,265
|
|
|
10,843,184
|
|
Zinc
pounds
|
|
|
22,380,136
|
|
|
26,222,805
|
|
|
21,792,452
|
|
Average
metals prices
|
|
|
|
|
|
|
|
|
|
|
Gold
- London Bullion Mkt. ($/ounce)
|
|
$
|
445
|
|
$
|
409
|
|
$
|
364
|
|
Silver
- London Bullion Mkt. ($/ounce)
|
|
$
|
7.31
|
|
$
|
6.66
|
|
$
|
4.88
|
|
Lead
- LME Cash ($/pound)
|
|
$
|
0.44
|
|
$
|
0.40
|
|
$
|
0.23
|
|
Zinc
- LME Cash ($/pound)
|
|
$
|
0.63
|
|
$
|
0.48
|
|
$
|
0.38
|
|
Gold
Montana
Tunnels produced 44,099, 33,743, and 44,124 ounces of gold during the years
ended December 31, 2005, 2004, and 2003, respectively.
The
majority of our gold revenue is derived from the sale of gold contained within
the lead-gold and zinc-gold concentrates. See
Item
2 “Description of Properties - Montana Tunnels Mine” for further information.
The
balance of the gold revenue is derived from the sale of refined gold in the
form
of doré bars. Because doré is an alloy consisting primarily of gold but also
containing silver and other metals, bars are sent to refiners to produce bullion
that meets the required market standard of 99.99% pure gold. Under the terms
of
our refining contracts, the bars are refined for a fee, and our share of the
refined gold and the separately recovered silver is paid to us.
Gold
Uses
Gold
has
two primary uses: product fabrication and bullion investment. Fabricated gold
has a variety of end uses, including jewelry, electronics, dentistry, industrial
and decorative uses, medals, medallions and official coins. Gold investors
purchase gold bullion, official coins and high-carat jewelry.
Gold
Supply
The
worldwide supply of gold consists of a combination of new production from mining
and existing stocks of bullion and fabricated gold held by governments,
financial institutions, industrial organizations and private
individuals.
Gold
Price History
The
price
of gold is volatile and is affected by numerous factors beyond our control
such
as the sale or purchase of gold by various central banks and financial
institutions, inflation or deflation, fluctuation in the value of the US dollar
and foreign currencies, global and regional demand, and the political and
economic conditions of major gold-producing countries throughout the
world.
The
following table presents the high, low and average afternoon fixing prices
for
gold per ounce on the London Bullion Market over the past ten
years:
Year
|
|
High
|
|
Low
|
|
Average
|
|
1996
|
|
$
|
415
|
|
$
|
367
|
|
$
|
388
|
|
1997
|
|
|
362
|
|
|
283
|
|
|
331
|
|
1998
|
|
|
313
|
|
|
273
|
|
|
294
|
|
1999
|
|
|
326
|
|
|
253
|
|
|
279
|
|
2000
|
|
|
313
|
|
|
264
|
|
|
279
|
|
2001
|
|
|
293
|
|
|
256
|
|
|
271
|
|
2002
|
|
|
349
|
|
|
278
|
|
|
310
|
|
2003
|
|
|
416
|
|
|
320
|
|
|
364
|
|
2004
|
|
|
454
|
|
|
375
|
|
|
409
|
|
2005
|
|
|
537
|
|
|
411
|
|
|
445
|
|
Data
Source: www.kitco.com
As
of
March 15, 2006, the high, low, and average afternoon fixing prices for gold
per
ounce on the London Bullion Market were $572, $525 and $553 per ounce,
respectively.
Zinc
Production
from the Montana Tunnels mine also includes the extraction, processing and
sale
of zinc and lead contained in sulfide concentrates. The mine produced
approximately 22,400,000, 26,200,000 and 21,800,000 pounds of payable zinc
in
2005, 2004 and 2003, respectively.
Due
to
its corrosion resisting property, zinc is used primarily as the coating in
galvanized steel. Galvanized steel is widely used in construction of
infrastructure, housing and office buildings. In the automotive industry, zinc
is used for galvanizing and die-casting and in the vulcanization of tires.
Smaller quantities of various forms of zinc are used in the chemical and
pharmaceutical industries, including fertilizers, food supplements and
cosmetics, and in specialty electronic applications such as satellite
receivers.
Annual
Global Supply/ Demand Balance for Zinc, 2001-2005
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
(000
tonnes)
|
|
Refined
Consumption
|
|
|
10,638
|
|
|
10,470
|
|
|
9,832
|
|
|
9,388
|
|
|
8,917
|
|
Refined
Production
|
|
|
10,271
|
|
|
10,170
|
|
|
9,871
|
|
|
9,712
|
|
|
9,228
|
|
Release
of Inv. Stocks
|
|
|
25
|
|
|
12
|
|
|
7
|
|
|
3
|
|
|
23
|
|
Increase
(Decrease) World Stock
|
|
|
(342
|
)
|
|
(288
|
)
|
|
46
|
|
|
327
|
|
|
334
|
|
LME
Stocks -
Total
|
|
|
394
|
|
|
629
|
|
|
740
|
|
|
651
|
|
|
433
|
|
-
Weeks’ consumption
|
|
|
1.9
|
|
|
3.1
|
|
|
3.9
|
|
|
3.6
|
|
|
2.5
|
|
Reported
Stocks -
Total
|
|
|
801
|
|
|
1,020
|
|
|
1,202
|
|
|
1,095
|
|
|
946
|
|
-
Weeks’ consumption
|
|
|
3.9
|
|
|
5.1
|
|
|
6.4
|
|
|
6.1
|
|
|
5.5
|
|
LME
cash price -
$/tonne
|
|
|
1,380
|
|
|
1,048
|
|
|
828
|
|
|
779
|
|
|
886
|
|
-
cents/lb
|
|
|
62.6
|
|
|
47.5
|
|
|
37.6
|
|
|
35.3
|
|
|
40.2
|
|
Data
Source: Standard Bank Metals Report.
Zinc
Price History
The
following table sets forth for the periods indicated the London Metals Exchange
high and low settlement prices of zinc in U.S. dollars per pound:
|
Zinc
|
Year
|
High
|
Low
|
2001
|
0.48
|
0.33
|
2002
|
0.42
|
0.33
|
2003
|
0.46
|
0.34
|
2004
|
0.56
|
0.42
|
2005
|
0.86
|
0.53
|
2006*
|
1.08
|
0.87
|
*
Through
March 15, 2006
Silver
Montana
Tunnels produced 524,722, 970,751 and 411,216 ounces of silver in the years
ended December 31, 2005, 2004 and 2003, respectively. The silver production
is
derived from the gold doré as well as the lead and zinc concentrates.
Silver
has traditionally served as a medium of exchange, much like gold. While silver
continues to be used for currency, the current principal uses of silver are
for
industrial uses, primarily for electrical and electronic components,
photography, jewelry and silverware. Silver’s strength, malleability, ductility,
thermal and electrical conductivity, sensitivity to light and ability to endure
extreme changes in temperature combine to make silver a widely used industrial
metal. Specifically, it is used in photography, batteries, computer chips,
electrical contacts, and high technology printing. Silver’s anti-bacterial
properties also make it valuable for use in medicine and in water
purification.
Silver
Price History
The
following table sets forth for the periods indicated the London Metals Exchange
high and low settlement prices of silver in U.S. dollars per ounce.
|
Silver
|
Year
|
High
|
Low
|
2001
|
4.83
|
4.03
|
2002
|
5.13
|
4.22
|
2003
|
5.99
|
4.35
|
2004
|
8.29
|
5.49
|
2005
|
9.22
|
6.39
|
2006*
|
10.26
|
8.83
|
*
Through
March 15, 2006
Lead
Production
from Montana Tunnels also includes the extraction, processing and sale of lead
contained in sulfide concentrates. Montana Tunnels produced approximately
10,400,000, 10,100,000 and 10,800,000 pounds of payable lead in 2005, 2004
and
2003, respectively.
The
primary use of lead is in motor vehicle batteries, but it is also used in cable
sheathing, solder in printed wiring circuits, shot for ammunition and alloying.
Lead in chemical form is used in alloys, glass and plastics.
Annual
Global Supply/ Demand Balance for Lead, 2001-2005
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
(000
tonnes)
|
|
Refined
Consumption
|
|
|
7,543
|
|
|
7,068
|
|
|
6,814
|
|
|
6,656
|
|
|
6,476
|
|
Refined
Production
|
|
|
7,375
|
|
|
6,857
|
|
|
6,798
|
|
|
6,690
|
|
|
6,622
|
|
Release
of Stock
|
|
|
50
|
|
|
56
|
|
|
60
|
|
|
6
|
|
|
41
|
|
Increase
(Decrease) Stock
|
|
|
(118
|
)
|
|
(155
|
)
|
|
55
|
|
|
40
|
|
|
187
|
|
LME
Stocks - Total
|
|
|
44
|
|
|
40
|
|
|
109
|
|
|
184
|
|
|
98
|
|
-
Weeks’ consumption
|
|
|
0.3
|
|
|
0.3
|
|
|
0.8
|
|
|
1.4
|
|
|
0.8
|
|
Reported
Stocks - Total
|
|
|
0325
|
|
|
298
|
|
|
393
|
|
|
483
|
|
|
436
|
|
-
Weeks’ consumption
|
|
|
2.2
|
|
|
2.2
|
|
|
3.0
|
|
|
3.8
|
|
|
3.5
|
|
LME
cash price - $/tonne
|
|
|
976
|
|
|
887
|
|
|
516
|
|
|
453
|
|
|
476
|
|
-
cents/lb
|
|
|
44.3
|
|
|
40.2
|
|
|
23.4
|
|
|
20.5
|
|
|
21.6
|
|
Data
Source: Standard Bank Metals Report.
Lead
Price History
The
following table sets forth for the periods indicated the London Metals Exchange
high and low settlement prices for lead in U.S. dollars per pound.
|
Lead
|
Year
|
High
|
Low
|
2001
|
0.24
|
0.20
|
2002
|
0.24
|
0.18
|
2003
|
0.34
|
0.19
|
2004
|
0.45
|
0.29
|
2005
|
0.49
|
0.41
|
2006*
|
0.66
|
0.50
|
*
Through
March 15, 2006
The
price
of silver, lead and zinc is affected by numerous factors that are beyond our
control. See “Risk Factors.”
Smelting
and Refining Process
We
have
an agreement with Johnson Matthey to refine gold doré to a final finished
product. Johnson Matthey receives $0.50 for each ounce of gold doré it refines,
in addition to receiving a fee of 0.5% of the payable metal for silver and
0.1%
of the payable metal for gold, with a minimum charge of $500 per
delivery.
The
lead
and zinc concentrates are shipped by rail for smelting to Teck Cominco Metals
Ltd. in Trail, British Columbia, Canada, approximately five hours from the
Montana Tunnels mine. Our contract with Teck Cominco expires in March 2007.
See
Item
2 “Description of Properties - Montana Tunnels Mine” for further
information.
2006
Operating Outlook
Following
the sale in November 2005 to Jipangu Inc. of Apollo’s Nevada Assets, we have
three remaining properties: the Montana Tunnels mine, the Black Fox project
and
the Huizopa project. Below is a summary of our expectations for these three
properties in 2006.
Montana
Tunnels mine.
Open
pit mining activity was suspended on October 21, 2005. Currently the mill
continues to operate, processing low grade stockpiled ore and is expected
to continue milling through the end of April 2006. In March 2006, we
adopted a plan to dispose of Montana Tunnels Mining, Inc., which owns the
Montana Tunnels and Diamond Hill mines.
Black
Fox project,
a
development property. The Company's focus is on developing our Black Fox
project. We expect to publish updated reserves in April 2006 and issue an NI
43-101 report within 45 days of publishing the reserves. We expect that the
NI 43-101 report will reflect an increase from the 2004 reserve numbers
previously disclosed. We also expect to complete the feasibility study by the
end of 2006. Estimated expenditures at Black Fox for 2006 are $3.1 million.
Additionally, we will continue to evaluate financing opportunites in order
to
extend the drilling program at Black Fox given that the mineralization is still
open along strike and at depth.
Huizopa
project,
an
exploration property. In 2006, we expect to continue mapping, trenching,
sampling, and conducting geophysical studies on the property including the
selection of several primary targets for drill sites and the commencement of
a
drilling program. The costs of the project is expected to be approximately
$2.3 million for the year 2006.
Development
and Exploration.
During
2005, we drilled at Black Fox 160 underground holes totaling 34,456 meters
plus
51 surface holes totaling 9,813 meters, bringing the total number of underground
holes to 370 (75,521 meters) and surface holes to 449 (135,712 meters), giving
a
total number of holes of 819 (211,233 meters). Work continued throughout the
year on progressing the permitting of a combined open pit and underground mine,
with a 1,500 tonnes per day mill on site. The updated reserves are expected
to
be published in April 2006 followed by an NI 43-101 report. Completion of the
feasibility study is currently scheduled for the end of 2006.
Mineral
Reserves
Our
proven and probable mineral reserves are estimated in conformance with
definitions set out in NI 43-101 and on a basis consistent with the
definition of proven and probable mineral reserves set forth in SEC Industry
Guide 7. See our “Glossary of Terms.”
The
estimates of our mineral reserves are prepared by Apollo based on information
compiled and/or validated by Mr. Richard F. Nanna, our employee and Senior
Vice
President of Exploration. Mr. Nanna is a qualified professional geologist with
32 years of experience and a registered Professional Geologist in the State
of
Washington. Mr. Nanna is considered a qualified person under NI 43-101.
Since
we report our mineral reserves to both NI 43-101
and SEC Industry Guide 7 standards, it is possible for our reserve figure to
vary between the two. Where such a variance occurs it will arise from the
differing requirements for reporting mineral reserves. For example, the NI
43-101 has a minimum requirement that reserves be supported by a pre-feasibility
study, whereas SEC Industry Guide 7 requires support from a full feasibility
study done to bankable standards. The Black Fox project thus reports reserves
under NI 43-101, but reports no reserves under SEC Industry Guide 7 as
a final bankable feasibility study has not been completed. No reconciliation
between NI 43-101 and SEC Industry Guide 7 is included for Montana
Tunnels as there are no material differences.
The
proven and probable mineral reserves as of December 31, 2005, for Montana
Tunnels have been estimated at an economic cut-off grade based on a gold price
of $425 per ounce, and at a three-year rolling average gold price of $406 per
ounce.
The
proven and probable mineral reserves estimates disclosed below for Black Fox
were in an NI 43-101 report completed in March 2004 and were calculated
based on a gold price of $375 per ounce. At the present time, we expect to
update the reserves in April 2006 and issue an NI 43-101 report within 45
days of publishing the reserves for Black Fox. We expect the NI 43-101 report
to
reflect an increase in reserves based on the extensive drilling programs
conducted during 2004 and 2005. In addition, a feasibility study is underway,
which we expect to complete by the end of 2006.
Proven
and Probable Reserves - Gold Ounces
|
|
Year
Ended December 31,
|
|
Mines
|
|
2005
|
|
2004
|
|
2003
|
|
Montana
Tunnels (1)
|
|
|
535,900
|
|
|
643,800
|
|
|
692,500
|
|
Black
Fox Project
|
|
|
457,100
|
|
|
457,100
|
|
|
457,100
|
|
Apollo
Gold - Total
|
|
|
993,000
|
|
|
1,100,900
|
|
|
1,149,600
|
|
(1)
In March 2006 the Company adopted a plan to dispose
of the Montana Tunnels mine.
Montana
Tunnels Reserves
Montana
Tunnels Mine Reserve Statement at December 31, 2005(1)(2)
Pit
(Imperial Summary)
|
|
Classification
|
|
Tons
000’s
|
|
Grade
oz Au/t
|
|
Ag
oz
Ag/t
|
|
Pb
%
|
|
Zn
%
|
|
Ounces
Au
000’s
|
|
L8J5
(L Pit)
|
|
|
Proven
|
|
|
10,089.2
|
|
|
0.016
|
|
|
0.173
|
|
|
0.218
|
|
|
0.591
|
|
|
163.6
|
|
M4A
(M Pit)
|
|
|
Proven
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mill
Stockpile
|
|
|
Proven
|
|
|
36.0
|
|
|
0.009
|
|
|
0.180
|
|
|
0.080
|
|
|
0.190
|
|
|
0.3
|
|
Subtotal
|
|
|
Proven
|
|
|
10,125.2
|
|
|
0.016
|
|
|
0.173
|
|
|
0.217
|
|
|
0.589
|
|
|
163.9
|
|
L8J5
(L Pit)
|
|
|
Probable
|
|
|
217.4
|
|
|
0.016
|
|
|
0.175
|
|
|
0.208
|
|
|
0.508
|
|
|
3.5
|
|
M4A
(M Pit)
|
|
|
Probable
|
|
|
22,898.0
|
|
|
0.016
|
|
|
0.230
|
|
|
0.170
|
|
|
0.600
|
|
|
368.5
|
|
Subtotal
|
|
|
Probable
|
|
|
23,115.4
|
|
|
0.016
|
|
|
0.230
|
|
|
0.171
|
|
|
0.600
|
|
|
372.0
|
|
Total
|
|
|
Proven
+ Probable
|
|
|
33,240.6
|
|
|
0.016
|
|
|
0.212
|
|
|
0.185
|
|
|
0.596
|
|
|
535.9
|
|
(1) Recovery
rates are expected to be 80% for gold, 71% for silver, 85% for lead, and 84%
for
zinc.
(2)
In March 2006 the Company adopted a plan to dispose
of the Montana Tunnels mine.
Black
Fox Reserves
Pit
optimization studies were completed using the following parameters for the
deposit:
· |
Cut-off
grade- 1.27 Au g/tonne (or 0.037 oz
Au/t);
|
· |
Overburden
mining cost - $1.00 per tonne of
material;
|
· |
Rock
mining cost - $1.25 per tonne of
material
|
· |
Processing
cost - $9.00 per tonne ore;
|
· |
General
and administrative cost - $3.50 per tonne
ore;
|
· |
Plant
gold recovery - 96%;
|
· |
Assume
50% of existing underground workings backfilled with material having
a
density of 2.0;
|
· |
Pit
slopes - 48 degree overall in rock with ramp; 19 degree
overburden
|
Black
Fox Reserve Statement at December 31, 2005
Classification
(Imperial Summary)
|
|
Tons
000’s
|
|
Grade
oz
Au/t
|
|
Ounces
Au
000’s
|
|
Tons
Waste
000’s
|
|
Strip
Ratio
|
|
Proven
|
|
|
2,418.0
|
|
|
0.141
|
|
|
341.6
|
|
|
|
|
|
|
|
Probable
|
|
|
837.4
|
|
|
0.138
|
|
|
115.5
|
|
|
|
|
|
|
|
Total
- Proven + Probable
|
|
|
3,255.5
|
|
|
0.140
|
|
|
457.1
|
|
|
60,734.5
|
|
|
18.66
|
|
Waste
includes 12.18 million tons of overburden.
Employee
Relations
As
of
December 31, 2005, we had approximately 129 employees and contract employees,
including 10 employees at our principal executive office in Greenwood Village,
Colorado. If we sell Montana Tunnels or cease milling, we expect to have
approximately 30 employees and contract employees, including 6 employees at
our
principal executive office.
Competition
We
compete with major mining companies and other natural mineral resource companies
in the acquisition, exploration, financing and development of new prospects.
Many of these companies are larger and better capitalized than we are. There
is
significant competition for the limited number of gold acquisition and
exploration opportunities. Our competitive position depends upon our ability
to
successfully and economically explore, acquire and develop new and existing
mineral prospects. Factors that allow producers to remain competitive in the
market over the long term include the quality and size of their orebodies,
costs
of operation, and the acquisition and retention of qualified employees. We
also
compete with other mining companies for skilled mining engineers, mine and
processing plant operators and mechanics, geologists, geophysicists and other
technical personnel. This could result in higher turnover and greater labor
costs.
Available
Information
We
make
available, free of charge, on or through our Internet website links to our
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on
Form 8-K and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after
we
electronically file such material with, or furnish it to, the SEC. Our Internet
address is www.apollogold.com. Our Internet website and the information
contained therein or connected thereto are not incorporated into this Annual
Report on Form 10-K.
RISK
FACTORS
ITEM
1A.
In
addition to historic information, the information in this Annual Report on
Form
10-K contains “forward looking” statements about our future business and
performance. Our actual operating results and financial performance may be
very
different from what we expect as of the date of this Annual Report on Form
10-K.
The risks below address some of the factors that may affect our future operating
results and financial performance.
We
have identified a material weakness in our internal controls over financial
reporting.
We
identified a material weakness for the year ended December 31, 2004. A
material weakness is a significant deficiency, or combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. We lacked appropriate review of non-routine or complex accounting
matters, related accounting entries, and appropriate documentation, disclosure
and application of Canadian and U.S. GAAP, primarily due to a lack of sufficient
personnel with a level of technical accounting expertise commensurate with
our
reporting requirements.
The
following actions were taken in 2005 to remediate this material weakness. We
established a Financial Disclosure Policy Committee to review all non-routine
accounting matters and disclosure and application of Canadian and U.S. GAAP.
We
added additional technical accounting expertise to the accounting staff. We
implemented formal policies addressing the internal controls over non-routine
or
complex accounting matters, accounting entries, appropriate documentation,
and
disclosures. However, in January 2006 a major restructuring and streamlining
at
the corporate office significantly changed the design and structure of the
internal controls and procedures at the corporate level. As of this date
management has not had sufficient time to evaluate these controls and therefore
believes this material weakness still exists.
Additionally,
related to the reduction in staffing at the Montana Tunnels mine in mid October
2005, our controls at that location are not operating as previously designed
related to segregation of duties over procurement, inventory control and
accounting duties. Corporate management has increased its involvement with
day-to-day oversight and management of the Montana Tunnels mine, but as of
this
date, management has not had sufficient time to evaluate these controls and
therefore believes the change in controls is significant enough to be reported
as a material weakness. In an effort to address this material weakness, staffing
requirements and other changes in control are being evaluated as the future
operational requirements of the Montana Tunnels mine is being
determined.
As
a
result of the issuance of the SEC's Release No 33-8644, "Revisions to
Accelerated
Filer
Definition and Accelerated Deadlines for Filing Periodic Reports" the Company
exited accelerated filer status for its year ended December 31, 2005. As a
non-accelerated
filer
compliance with the internal control reporting requirements of Section 404
of
the Sarbanes-Oxley Act of 2002 have been deferred and we may be subject to
the requirements in our Annual Report on Form 10-K for fiscal year
2006 and will be for fiscal year 2007.
The
market price of our common shares could experience volatility and could decline
significantly.
Our
common shares are listed on the American Stock Exchange and the Toronto Stock
Exchange. Our share price has declined significantly since 2004. Securities
of
small-cap companies have experienced substantial volatility in the past, often
based on factors unrelated to the financial performance or prospects of the
companies involved. These factors include macroeconomic developments in North
America and globally and market perceptions of the attractiveness of particular
industries. Our share price is also likely to be significantly affected by
short-term changes in gold prices or in our financial condition or results
of
operations as reflected in our quarterly earnings reports. As a result of any
of
these factors, the market price of our common shares at any given point in
time
might not accurately reflect our long-term value. Securities class action
litigation often has been brought against companies following periods of
volatility in the market price of their securities. We could in the future
be
the target of similar litigation. Securities litigation could result in
substantial costs and damages and divert management’s attention and
resources.
If
we complete additional equity financings, then our existing shareholders may
experience dilution.
Any
additional equity financing that we obtain would involve the sale of our common
shares and/or sales of securities that are convertible or exercisable into
our
common shares, such as share purchase warrants or convertible notes. There
is no
assurance that we will be able to complete equity financings that are not
dilutive to our existing shareholders.
The
existence of outstanding rights to purchase common shares may impair our ability
to raise capital.
As
of
March 24, 2006, approximately 30 million additional common shares are
issuable on exercise of warrants, options or other rights to purchase common
shares at prices ranging from $0.20 to $2.34. In addition, there are
approximately 11.7 million common shares issuable upon the conversion of the
$8,731,000 outstanding principal amount of our Series B Convertible Debentures
at the option of the holder at a conversion price of $0.75 per share. During
the
term of the warrants, options and other rights, the holders are given an
opportunity to profit from a rise in the market price of our common shares
with
a resulting dilution in the interest of the other shareholders. Our ability
to
obtain additional financing during the period such rights are outstanding may
be
adversely affected, and the existence of the rights may have an adverse effect
on the price of our common shares. The holders of the warrants, options and
other rights can be expected to exercise them at a time when we would, in all
likelihood, be able to obtain any needed capital by a new offering of securities
on terms more favorable than those provided by the outstanding rights.
There
may be certain tax risks associated with investments in our
company.
Potential
investors that are United States taxpayers should consider that we could be
considered to be a “passive foreign investment company” (“PFIC”) for federal
income tax purposes. Although we believe that we currently are not a PFIC and
do
not expect to become a PFIC in the near future, the tests for determining PFIC
status are dependent upon a number of factors, some of which are beyond our
control, and we can not assure you that we will not become a PFIC in the future.
If we were deemed to be a PFIC, then a United States taxpayer who disposes
or is
deemed to dispose of our shares at a gain, or who received a so-called “excess
distribution” on the shares, generally would be required to treat such gain or
excess distribution as ordinary income and pay an interest charge on a portion
of the gain or distribution unless the taxpayer makes a timely qualified
electing fund election (a “QEF” election). A United States taxpayer who makes a
QEF election generally must report on a current basis his or her share of any
of
our ordinary earnings and net capital gain for any taxable year in which we
are
a PFIC, whether or not we distribute those earnings. Special estate tax rules
could be applicable to our shares if we are classified as a PFIC for income
tax
purposes.
We
have a history of losses and we expect to incur losses in the
future.
Since
our
inception through a merger in June 2002, we have incurred significant losses
and
we expect significant losses to continue for the foreseeable future. Our net
losses were $22,208,000, $31,007,000 and $14,090,000 for the years ended
December 31, 2005, 2004 and 2003, respectively. There can be no assurance that
we will achieve or sustain profitability in the future.
We
have a limited operating history on which to evaluate our potential for future
success.
We
were
formed as a result of a merger in June 2002 and have only a limited operating
history upon which you can evaluate our business and prospects. During this
period, we have not generated sufficient revenues to cover our expenses and
costs. If we are unsuccessful in addressing these risks and uncertainties,
our
business, results of operations and financial condition will be materially
and
adversely affected.
We
are dependent on certain key personnel.
We
are
currently dependent upon the ability and experience of R. David Russell, our
President and Chief Executive Officer; Richard F. Nanna, our Senior Vice
President-Exploration; and Melvyn Williams, our Chief Financial Officer and
Senior Vice President-Finance and Corporate Development. We believe that our
success depends on the continued service of our key officers and there can
be no
assurance that we will be able to retain any or all of such officers. We
currently do not carry key person insurance on any of these individuals, and
the
loss of one or more of them could have a material adverse effect on our
operations.
Our
earnings may be affected by metals price volatility, specifically the volatility
of gold and zinc prices.
We
derive
all of our revenues from the sale of gold, silver, lead and zinc and our
development and exploration activities are focused on gold. As a result, our
earnings are directly related to the prices of these metals. Changes in the
price of gold significantly affect our profitability. Gold prices historically
have fluctuated widely, based on numerous industry factors
including:
· industrial
and jewelry demand;
· central
bank lending, sales and purchases of gold;
· forward
sales of gold by producers and speculators;
· production
and cost levels in major gold-producing regions; and
· rapid
short-term changes in supply and demand because of speculative or hedging
activities.
Gold
prices are also affected by macroeconomic factors, including:
· confidence
in the global monetary system;
· expectations
of the future rate of inflation (if any);
· the
strength of, and confidence in, the U.S. dollar (the currency in which the
price
of gold is generally quoted) and other currencies;
· interest
rates; and
· global
or
regional political or economic events, including but not limited to acts of
terrorism.
The
current demand for, and supply of, gold also affects gold prices. The supply
of
gold consists of a combination of new production from mining and existing shares
of bullion held by government central banks, public and private financial
institutions, industrial organizations and private individuals. As the amounts
produced by all producers in any single year constitute a small portion of
the
total potential supply of gold, normal variations in current production do
not
usually have a significant impact on the supply of gold or on its price.
Mobilization of gold held by central banks through lending and official sales
may have a significant adverse impact on the gold price.
The
market prices for silver, zinc and lead are also volatile and are affected
by
numerous factors beyond our control, including global or regional consumptive
patterns, speculative activities, and general global political and economic
conditions.
All
of
the above factors are beyond our control and are impossible for us to predict.
If the market prices for gold, silver, zinc or lead fall below our costs to
produce them for a sustained period of time, we will experience additional
losses and we could also be required by our reduced revenue to discontinue
exploration, development and/or mining at one or more of our
properties.
Our
reserve estimates are potentially inaccurate.
We
estimate our reserves on our properties as either “proven reserves” or “probable
reserves.” Our ore reserve figures and costs are primarily estimates and are not
guarantees that we will recover the indicated quantities of these metals. We
estimate proven reserve quantities based on sampling and testing of sites
conducted by us and by independent companies hired by us. Probable reserves
are
based on information similar to that used for proven reserves, but the sites
for
sampling are less extensive, and the degree of certainty is less. Reserve
estimation is an interpretive process based upon available geological data
and
statistical inferences and is inherently imprecise and may prove to be
unreliable.
Our
reserves are reduced as existing reserves are depleted through production.
Reserves may be reduced due to lower than anticipated volume and grade of
reserves mined and processed and recovery rates.
Reserve
estimates are calculated using assumptions regarding metals prices. These prices
have fluctuated widely in the past. Declines in the market price of metals,
as
well as increased production costs, capital costs and reduced recovery rates,
may render reserves uneconomic to exploit. Any material reduction in our
reserves may lead to increased net losses, reduced cash flow, asset write-downs
and other adverse effects on our results of operations and financial condition.
Reserves should not be interpreted as assurances of mine life or of the
profitability of current or future operations. No assurance can be given that
the amount of metal estimated will be produced or the indicated level of
recovery of these metals will be realized.
We
may not achieve our production estimates.
We
prepare estimates of future production for our operations. We develop our
estimates based on, among other things, mining experience, reserve estimates,
assumptions regarding ground conditions and physical characteristics of ores
(such as hardness and presence or absence of certain metallurgical
characteristics) and estimated rates and costs of mining and processing. In
the
past, our actual production from time to time has been lower than our production
estimates and this may be the case in the future.
Each
of
these factors also applies to future development properties and to any future
recommencement of mining at Montana Tunnels. In the case of mines we may develop
in the future, we do not have the benefit of actual experience in our estimates,
and there is a greater likelihood that the actual results will vary from the
estimates. In addition, development and expansion projects are subject to
unexpected construction and start-up problems and delays.
Our
future profitability depends in part, on actual economic returns and actual
costs of developing mines, which may differ significantly from our estimates
and
involve unexpected problems, costs and delays.
From
time
to time we will engage in the development of new ore bodies. Our ability to
sustain or increase our present level of production is dependent in part on
the
successful exploration and development of new ore bodies and/or expansion of
existing mining operations. Decisions about the development of Black Fox and
other future projects are subject to the successful completion of feasibility
studies, issuance of necessary governmental permits and receipt of adequate
financing.
Development
projects have no operating history upon which to base estimates of future cash
flow. Our estimates of proven and probable ore reserves and cash operating
costs
are, to a large extent, based upon detailed geologic and engineering analysis.
We also conduct feasibility studies that derive estimates of capital and
operating costs based upon many factors.
It
is
possible that actual costs and economic returns may differ materially from
our
best estimates. It is not unusual in the mining industry for new mining
operations to experience unexpected problems during the start-up phase and
to
require more capital than anticipated. There can be no assurance that the Black
Fox property will be profitable.
Exploration
in general, and gold exploration in particular, are speculative and are
frequently unsuccessful.
Mineral
exploration, particularly for gold and silver, is highly speculative in nature,
capital intensive, involves many risks and frequently is nonproductive. There
can be no assurance that our mineral exploration efforts will be successful.
If
we discover a site with gold or other mineralization, it will take a number
of
years from the initial phases of drilling until production is possible, during
which time the economic feasibility of production may change. Substantial
expenditures are required to establish ore reserves through drilling, to
determine metallurgical processes to extract the metals from the ore and, in
the
case of new properties, to construct mining and processing facilities. As a
result of these uncertainties, no assurance can be given that our exploration
programs will result in the expansion or replacement of existing ore reserves
that are being depleted by current production.
We
have experienced operational problems at our Montana Tunnels
mine.
All
of
our revenues are currently derived from our milling operations at the Montana
Tunnels mine, which is a low-grade mine. Historically, the Montana Tunnels
mine
has been unprofitable. During 2004 we experienced problems related to the
milling of low-grade ore at the Montana Tunnels mine, which negatively affected
our revenues and earnings and throughout 2005 we experienced operational
problems, particularly in the open pit, leading to the suspension of mining
on
October 21, 2005, for safety reasons due to increased wall activity in the
open
pit. Since suspension of mining the Company has continued to produce gold
doré,
lead-gold and zinc-gold concentrates from milling low grade stockpiled
ore. The Montana Tunnels mine plans to continue milling this ore through
the end of April 2006. In March 2006, the Company adopted a plan to
dispose of the Montana Tunnels mine.
We
do not currently have and may not be able to raise the funds necessary to
explore and develop our Black Fox and Huizopa properties and our other
properties.
We
do not
currently have sufficient funds to complete all of our planned exploration
activities at Black Fox and Huizopa or to develop a mine at Black Fox. The
development of Black Fox, and exploration of Huizopa and our other properties
will require significant capital expenditures. Sources of external financing
may
include bank and nonbank borrowings and future debt and equity offerings. There
can be no assurance that financing will be available on acceptable terms, or
at
all. The failure to obtain financing would have a material adverse effect on
our
growth strategy and our results of operations and financial
condition.
Our
Black Fox property is pledged to the holders of our 12% Series 2004-B
Secured Convertible Debentures and we may not be able to obtain financing from
an asset based lender.
Our
Black
Fox property is pledged to the holders of our 12% Series 2004-B Secured
Convertible Debentures as security for our obligations under these debentures.
It may be difficult for us to raise additional external funds through banks,
asset based lenders, or other types of lenders, which may require us to raise
additional funds through future debt and equity offerings. In addition, the
inability to pledge any additional significant assets may make it difficult
or
impossible to obtain financing on acceptable terms, or at all. The failure
to
obtain acceptable financing would have a material adverse effect on our growth
strategy and our results of operations and financial condition.
Possible
hedging activities could expose us to losses.
In
the
future, we may enter into precious and/or base metals hedging contracts that
may
involve outright forward sales contracts, spot-deferred sales contracts, the
use
of options which may involve the sale of call options and the purchase of all
these hedging instruments. There can be no assurance that we will be able to
successfully hedge against price, currency and interest rate fluctuations.
In
addition, our ability to hedge against zinc and lead price risk in a timely
manner may be adversely affected by the smaller volume of transactions in both
the zinc and lead markets. Further, there can be no assurance that the use
of
hedging techniques will always be to our benefit. Some hedging instruments
may
prevent us from realizing the benefit from subsequent increases in market prices
with respect to covered production. This limitation would limit our revenues
and
profits. Hedging contracts are also subject to the risk that the other party
may
be unable or unwilling to perform its obligations under these contracts. Any
significant nonperformance could have a material adverse effect on our financial
condition and results of operations.
We
face substantial governmental regulation.
Safety.
Our
U.S. mining operation is subject to inspection and regulation by the Mine Safety
and Health Administration of the United States Department of Labor (“MSHA”)
under the provisions of the Mine Safety and Health Act of 1977. The Occupational
Safety and Health Administration (“OSHA”) also has jurisdiction over safety and
health standards not covered by MSHA. Our policy is to comply with applicable
directives and regulations of MSHA and OSHA. We have made and expect to make
in
the future, significant expenditures to comply with these laws and
regulations.
Current
Environmental Laws and Regulations.
We must
comply with environmental standards, laws and regulations that may result in
increased costs and delays depending on the nature of the regulated activity
and
how stringently the regulations are implemented by the regulatory authority.
The
costs and delays associated with compliance with such laws and regulations
could
stop us from proceeding with the exploration of a project or the operation
or
future exploration of a mine. Laws and regulations involving the protection
and
remediation of the environment and the governmental policies for implementation
of such laws and regulations are constantly changing and are generally becoming
more restrictive. We have made, and expect to make in the future, significant
expenditures to comply with such laws and regulations.
Some
of
our properties are located in historic mining districts with past production
and
abandoned mines. The major historical mine workings and processing facilities
owned (wholly or partially) by us in Montana are being targeted by the Montana
Department of Environmental Quality (“MDEQ”) for publicly funded cleanup, which
reduces our exposure to financial liability. We are participating with the
MDEQ
under Voluntary Cleanup Plans on those sites. Our cleanup responsibilities
have
been completed at the Corbin Flats Facility and at the Gregory Mine site, both
located in Jefferson County, Montana, under programs involving cooperative
efforts with the MDEQ. MDEQ is also contemplating remediation of the Washington
Mine site at public expense under the Surface Mining Control and Reclamation
Act
of 1977 (“SMCRA”). In February 2004, we consented to MDEQ’s entry onto the
portion of the Washington Mine site owned by us to undertake publicly funded
remediation under SMCRA. In March 2004, we entered into a definitive written
settlement agreement with MDEQ and the Bureau of Land Management (“BLM”) under
which MDEQ will conduct publicly funded remediation of the Wickes Smelter site
under SMCRA and will grant us a site release in exchange for our donation of
the
portion of the site owned by us to BLM for use as a waste repository. However,
there can be no assurance that we will continue to resolve disputed liability
for historical mine and ore processing facility waste sites on such favorable
terms in the future. We remain exposed to liability, or assertions of liability,
that would require expenditure of legal defense costs, under joint and several
liability statutes for cleanups of historical wastes that have not yet been
completed.
Environmental
laws and regulations may also have an indirect impact on us, such as increased
costs for electricity due to acid rain provisions of the Clean Air Act
Amendments of 1990. Charges by refiners to which we sell our metallic
concentrates and products have substantially increased over the past several
years because of requirements that refiners meet revised environmental quality
standards. We have no control over the refiners’ operations or their compliance
with environmental laws and regulations.
Potential
Legislation.
Changes
to the current laws and regulations governing the operations and activities
of
mining companies, including changes to the U.S. General Mining Law of 1872,
and
permitting, environmental, title, health and safety, labor and tax laws, are
actively considered from time to time. We cannot predict which changes may
be
considered or adopted and changes in these laws and regulations could have
a
material adverse impact on our business. Expenses associated with the compliance
with new laws or regulations could be material. Further, increased expenses
could prevent or delay exploration or mine development projects and could
therefore affect future levels of mineral production.
We
are subject to environmental risks.
Environmental
Liability. We
are
subject to potential risks and liabilities associated with environmental
compliance and the disposal of waste rock and materials that could occur as
a
result of our mineral exploration and production. To the extent that we are
subject to environmental liabilities, the payment of such liabilities or the
costs that we may incur to remedy any non-compliance with environmental laws
would reduce funds otherwise available to us and could have a material adverse
effect on our financial condition or results of operations. If we are unable
to
fully remedy an environmental problem, we might be required to suspend
operations or enter into interim compliance measures pending completion of
the
required remedy. The potential exposure may be significant and could have a
material adverse effect on us. We have not purchased insurance for environmental
risks (including potential liability for pollution or other hazards as a result
of the disposal of waste products occurring from exploration and production)
because it is not generally available at a reasonable price or at
all.
Environmental
Permits.
All of
our exploration, development and production activities are subject to regulation
under one or more of the various state, federal and provincial environmental
laws and regulations in Canada, Mexico and the U.S. Many of the regulations
require us to obtain permits for our activities. We must update and review
our
permits from time to time, and are subject to environmental impact analyses
and
public review processes prior to approval of the additional activities. It
is
possible that future changes in applicable laws, regulations and permits or
changes in their enforcement or regulatory interpretation could have a
significant impact on some portion of our business, causing those activities
to
be economically reevaluated at that time. Those risks include, but are not
limited to, the risk that regulatory authorities may increase bonding
requirements beyond our financial capabilities. The posting of bonding in
accordance with regulatory determinations is a condition to the right to operate
under all material operating permits, and therefore increases in bonding
requirements could prevent our operations from continuing even if we were in
full compliance with all substantive environmental laws.
We
face strong competition from other mining companies for the acquisition of
new
properties.
Mines
have limited lives and as a result, we may seek to replace and expand our
reserves through the acquisition of new properties. In addition, there is a
limited supply of desirable mineral lands available in the United States, Canada
and Mexico and other areas where we would consider conducting exploration and/or
production activities. Because we face strong competition for new properties
from other mining companies, some of which have greater financial resources
than
we do, we may be unable to acquire attractive new mining properties on terms
that we consider acceptable.
The
titles to some of our properties may be uncertain or
defective.
Certain
of our United States mineral rights consist of “unpatented” mining claims
created and maintained in accordance with the U.S. General Mining Law of 1872.
Unpatented mining claims are unique U.S. property interests, and are generally
considered to be subject to greater title risk than other real property
interests because the validity of unpatented mining claims is often uncertain.
This uncertainty arises, in part, out of the complex federal and state laws
and
regulations that supplement the General Mining Law. Also, unpatented mining
claims and related rights, including rights to use the surface, are subject
to
possible challenges by third parties or contests by the federal government.
The
validity of an unpatented mining claim, in terms of both its location and its
maintenance, is dependent on strict compliance with a complex body of federal
and state statutory and decisional law. In addition, there are few public
records that definitively control the issues of validity and ownership of
unpatented mining claims.
In
recent
years, the U.S. Congress has considered a number of proposed amendments to
the
General Mining Law. Although no such legislation has been adopted to date,
there
can be no assurance that such legislation will not be adopted in the future.
If
ever adopted, such legislation could, among other things, impose royalties
on
gold production from unpatented mining claims located on federal lands or impose
fees on production from patented mining claims. If such legislation is ever
adopted, it could have an adverse impact on earnings from our operations, could
reduce estimates of our reserves and could curtail our future exploration and
development activity on federal lands or patented claims.
While
we
have no reason to believe that the existence and extent of any of our properties
are in doubt, title to mining properties are subject to potential claims by
third parties claiming an interest in them.
We
may lose rights to properties if we fail to meet payment requirements or
development or production schedules.
We
derive
the rights to most of our mineral properties from unpatented mining claims,
leaseholds, joint ventures or purchase option agreements which require the
payment of maintenance fees, rents, or purchase price installments, exploration
expenditures, or other fees. If we fail to make these payments when they are
due, our rights to the property may lapse. There can be no assurance that we
will always make payments by the requisite payment dates. In addition, some
contracts with respect to our mineral properties require development or
production schedules. There can be no assurance that we will be able to meet
any
or all of the development or production schedules. Our ability to transfer
or
sell our rights to some of our mineral properties requires government approvals
or third party consents, which may not be granted.
Our
operations may be adversely affected by risks and hazards associated with the
mining industry.
Our
business is subject to a number of risks and hazards including adverse
environmental effects, technical difficulties due to unusual or unexpected
geologic formations, and pit wall failures.
Such
risks could result in personal injury, environmental damage, damage to and
destruction of production facilities, delays in mining and liability. For some
of these risks, we maintain insurance to protect against these losses at levels
consistent with our historical experience and industry practice. However, we
may
not be able to maintain current levels of insurance, particularly if there
is a
significant increase in the cost of premiums. Insurance against environmental
risks is generally too expensive or not available for us and other companies
in
our industry, and, therefore, we do not maintain environmental insurance. To
the
extent we are subject to environmental liabilities, we would have to pay for
these liabilities. Moreover, in the event that we are unable to fully pay for
the cost of remedying an environmental problem, we might be required to suspend
or significantly curtail operations or enter into other interim compliance
measures.
You
could have difficulty or be unable to enforce certain civil liabilities on
us,
certain of our directors and our experts.
We
are a
Yukon Territory, Canada, corporation. Substantially all of our assets are
located inside of Canada and our head office is located in the United States.
Additionally, a number of our directors and the experts named in this Annual
Report on Form 10-K are residents of Canada. Although we have appointed
Lackowicz, Shier & Hoffman as our agents for service of process in the Yukon
Territory, it might not be possible for investors to collect judgments obtained
in Canadian courts predicated on the civil liability provisions of securities
legislation. It could also be difficult for you to effect service of process
in
connection with any action brought in the United States upon such directors
and
experts. Execution by United States courts of any judgment obtained against
us,
or any of the directors, executive officers or experts named in this Annual
Report on Form 10-K, in United States courts would be limited to the assets
or
the assets of such persons or corporations, as the case might be, in the United
States. The enforceability in Canada of United States judgments or liabilities
in original actions in Canadian courts predicated solely upon the civil
liability provisions of the federal securities laws of the United States is
doubtful.
ITEM
2. DESCRIPTION
OF PROPERTIES
Maps
of Operations and Properties
The
maps
below show the locations of the Montana Tunnels mine, the Black Fox project
and
the Huizopa project in North America. These properties are described in further
detail below.
Figure
1
- Property locations in North America
Montana
Tunnels Mine
The
mine
was originally owned, constructed and operated in 1987 by Pegasus Gold
(“Pegasus”), a mining company incorporated in Canada. In 1998, Pegasus filed for
bankruptcy and in 2002, Apollo purchased Montana Tunnels Mining, Inc., the
owner
and operator of the Montana Tunnels mine.
Figure
2
- Montana Tunnels mine location in Montana, U.S.
Location
The
Montana Tunnels mine is an open pit, poly-metallic mine and mill located about
five miles west of Jefferson City, Montana. The mine is located in the historic
“Wickes-Corbin” mining district in Section 8 of Township 7 North, Range 4 West,
Jefferson County. The mine’s elevations range from 5,200 to 6,300 feet with
moderately mountainous topography that is cut by conveyers with steeper slopes.
The mine is easily accessible by way of interstate highway and paved roads.
The
mine and mill receive power supply from Northwestern Energy from overland power
lines.
Production
For
the
year ended December 31, 2005, a total of 44,682 ounces of gold, 544,613 ounces
of silver, 10,428,061 lbs of lead and 22,380,136 lbs of zinc were produced.
Most
of this production was from modeled and unmodeled “fringe” ores mined from the
open pit through mid October, 2005.
Mining
was suspended mid October 2005 as a result of pit wall instability in September
and early October 2005 along the upper East Wall of the open pit. The
instability is the result of a complex interaction between relatively weak,
altered Lowland Creek Volcanic (LCV) rock units, steeply dipping faults and
joints, and occasional zones of relatively less altered and more competent
sub-vertical rock zones. Toppling type displacement patterns were evident where
the more resistant rock outcrops within weak, sheared LCV rock units on the
upper East Wall. The pattern of displacements that occurred during September
and
October 2005 was consistent with previous slope performance when active mining
unloads the toe of the slope.
The
on-going slope deformations resulted in too steep a slope between the ramps
and
weakening of the rock mass, creating localized instabilities along the haul
ramp
that reduced ramp width and increased the frequency of rock falls. We therefore
decided on October 22, 2005, for safety reasons, to cease mining and retain
a
third party consultant to review mine design criteria and determine scenarios
under which mining the pit could safely resume.
The
consultant focused on geotechnical issues associated with the East Wall area
and
upper access ramp location for the open pit, completing its work in late
November. The consultant developed several alternative mine designs and plans
for ramp relocation, unloading the upper benches and remediation. Each plan
calls for additional unloading of up to 4.6 million tons from upper benches
of
the East Wall to mitigate rock fall hazards by reducing slope deformation and
rock mass degradation in the weak rock units exposed along the upper East Wall.
The plans also call for a new, wider haul ramp to reduce the potential for
haul
ramp instability along the East Wall. In addition, mining practices would be
changed to increase the rate at which upper benches are unloaded during mining
operations. The estimated cost of completing the East Wall remediation, waste
material removal, ramp relocation and widening is approximately $12
million.
Since
the
open pit mine operations were suspended, the mill has been producing gold doré
and lead-gold and zinc-gold concentrate from low grade ore stockpiles. On
January 31, 2006, we gave a Workers Adjustment and Retraining Notification
(“WARN”) Act Notice to all hourly and salaried Montana Tunnels Mining, Inc.
employees. The WARN Act requires companies to give employees 60 days’ notice
prior to a plant shutdown or mass layoff. We now expect to postpone a mass
layoff until late April 2006 as we continue to mill low grade stockpiled ore.
In
March 2006 the Company adopted a plan to dispose of the Montana Tunnels mine.
The following table sets forth annual production levels for gold, silver, lead
and zinc at the Montana Tunnels mine since 2003.
Montana
Tunnels Mine Production History
Year
Ended December 31,
|
|
Year
|
|
Milled
Tons
000’s
|
|
Au
Oz Au/t
|
|
Oz
Au
000’s
|
|
Ag
Oz Ag/t
|
|
Oz
Ag
000’s
|
|
Pb
%
|
|
Tons
Pb
000’s
|
|
Zn
%
|
|
Tons
Zn
000’s
|
|
2005
|
|
|
4,955
|
|
|
0.0129
|
|
|
44.6
|
|
|
0.19
|
|
|
544.6
|
|
|
0.15
|
|
|
5.2
|
|
|
0.34
|
|
|
11.6
|
|
2004
|
|
|
5,394
|
|
|
0.0096
|
|
|
33.7
|
|
|
0.32
|
|
|
970.8
|
|
|
0.14
|
|
|
5.0
|
|
|
0.37
|
|
|
13.1
|
|
2003
|
|
|
4,663
|
|
|
0.0157
|
|
|
44.1
|
|
|
0.22
|
|
|
411.2
|
|
|
0.19
|
|
|
5.4
|
|
|
0.44
|
|
|
10.9
|
|
|
|
Year
Ended December 31,
|
|
Payable
Metal
|
|
2005
|
|
2004
|
|
2003
|
|
Gold
(oz)
|
|
|
44,682
|
|
|
33,743
|
|
|
44,124
|
|
Silver
(oz)
|
|
|
544,613
|
|
|
970,751
|
|
|
411,216
|
|
Lead
(lb)
|
|
|
10,515,148
|
|
|
10,064,265
|
|
|
10,843,184
|
|
Zinc
(lb)
|
|
|
23,255,833
|
|
|
26,222,805
|
|
|
21,792,452
|
|
|
|
|
Year
Ended December 31,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
Total
Cost/ Ton Ore Processed
|
|
$
|
9.46
|
|
$
|
9.47
|
|
$
|
7.10
|
|
Cash
Operating Cost/Oz Gold
|
|
$
|
529.36
|
|
$
|
797.91
|
|
$
|
432.42
|
|
Total
Cash Cost/Oz Gold
|
|
$
|
562.96
|
|
$
|
838.54
|
|
$
|
456.96
|
|
Total
Production Cost/Oz Gold
|
|
$
|
617.77
|
|
$
|
913.43
|
|
$
|
595.66
|
|
In
2006 the Montana Tunnels mine continues to produce
metals by milling low grade ore stockpiles and plans to continue through the
end
of April 2006. Production at Montana Tunnels is not currently cash
positive. The revenue generated does pay for the variable cost of production
and
contributes to the fixed costs of the mine. In March 2006, the Company adopted
a
plan to dispose of the Montana Tunnels mine.
The
mine
produced the following aggregate amounts of the listed metals from its
inception in 1987 through December 31, 2005.
|
|
Production
|
|
Gold |
|
|
1,503,000
ozs |
|
Silver |
|
|
27,678,000
ozs |
|
Lead |
|
|
354,000,000
lbs. |
|
Zinc |
|
|
946,800,000
lbs. |
|
Description
of Land, Geology, Process and Equipment
About
half of Section 8 lands are our owned fee lands. Mining claims that cover the
pit are listed in the table below.
Claims
Covering Montana Tunnels Mine
Patented
Claims
|
|
Mineral
Survey
|
|
Unpatented
Claims
|
|
Geraldine
C
|
|
|
9184
|
|
|
MF
1
|
|
P.Q.C
|
|
|
9184
|
|
|
F
14
|
|
Montana
|
|
|
9184
|
|
|
F
15
|
|
General
Harris
|
|
|
2038
|
|
|
-
|
|
Black
Rock No. 2
|
|
|
9184
|
|
|
-
|
|
Black
Rock No. 3
|
|
|
8940
|
|
|
-
|
|
D.E.D
|
|
|
9184
|
|
|
-
|
|
Placer
|
|
|
258
|
|
|
-
|
|
Anna
|
|
|
8940
|
|
|
-
|
|
We
own or
lease an aggregate of 5,088 acres in fee and patented lands at the Montana
Tunnels mine. The property consists of 139 wholly or partially owned patented
claims (2,413.42 acres), three patented leased claims (45.19 acres) which we
hold pursuant to a mining lease expiring on March 19, 2014, and 2,629.44 acres
of owned fee lands. All patented claims and fee lands have been surveyed. In
addition, 213 unpatented claims are maintained (4,260 acres). We estimate that
90% of the unpatented claims have been surveyed. A number of claims outside
the
contiguous mining claims and fee land are isolated.
None
of
the Montana Tunnels mine’s reserves are subject to royalties, but we do have
three leased claims that contain mineralization, which will be subject to a
4.5%
net smelter return royalty if they are mined. The annual holding costs of the
Montana Tunnels properties, exclusive of property taxes, total
$52,582.
The
Montana Tunnels deposit is hosted in the central part of the diatreme, an
upward-sloping passage forced through sedimentary rock by volcanic activity.
The
diatreme is a heterolithic breccia, characterized by a sand-size fragmented
matrix of quartz latitic composition surrounding subangular to well-rounded
fragments of Cretaceous Elkhorn Mountains Volcanics, Tertiary Lowland Creek
Volcanics, and clasts derived from the Cretaceous Butte Quartz Monzonite
pluton.
There
are
two main zones of mineralization at Montana Tunnels: (i) a central, pipe-like
core of contiguous mineralization, and (ii)discontinuous zones of mineralization
peripheral to the core deposit, termed fringe mineralization. The core of the
deposit in plan view is oblong in shape and ranges from about 200 feet to 1000
feet in width, and from 1400 to 2000 feet in length, with a vertical extent
of
at least 2000 feet. The core zone strikes approximately N30 E and dips steeply
(60 degrees to 80 degrees) to the northwest. Metallurgical projections are
based
on historical feed grade versus tails grade trends; mill throughput tonnage,
ore
properties relative to pit location and bench elevation; and ore blending
requirements.
Prior
to
suspending mining in October 2005, open pit mining at Montana Tunnels was
normally conducted 24 hours per day seven days per week. Mining was performed
by
two shovels, eight 150 ton and two 85 ton haul trucks in addition to ancillary
equipment. While fully operational, mine production averaged approximately
40,000 tons per day of ore and waste.
When
in
full production we use a primary and secondary crusher, in series, to generate
a
coarse ore stockpile ahead of the concentrator. The crusher has a capacity
of
16,500 tons per day. The grinding circuit consists of a SAG mill, ball mill
and
tertiary crusher (SABC circuit) followed by conventional differential flotation.
A gravity circuit, in closed loop with the ball mill, recovers 12-15% of gold
produced by the concentrator. The remainder of the mill’s production is in the
form of concentrates: a zinc-gold concentrate and a lead-gold-silver
concentrate. The dried concentrates are shipped, via rail, to a smelter. The
original plant was constructed during 1986 and 1987, and is currently in good
working order. In 2004, we increased mill capacity from 15,000 tons per day
to
16,500 tons per day with the addition of a primary crusher.
Model
Reconciliation
During
2005, in an effort to supply the mill with feed, larger ore zones of a lower
grade were mined, most from outside of the modeled zones. The reconciliation
to
the model was skewed due to mining such large amounts of low grade ore outside
the model to supply mill feed. In addition, the mill produces more gold than
mine sampling can detect. Generally mined ounces of gold were as predicted
but
mined tons were higher and ore tons were lower.
The
following table summarizes the reconciliation for the year ended December 31,
2005.
Summary
of Operational Statistics for the Year Ended December 31,
2005
Entity
|
|
Tons
000’s
|
|
Au
opt
|
|
Ag
opt
|
|
Pb
%
|
|
Zn
%
|
|
Au
Ozs.
|
|
Ag
Ozs.
|
|
Pb
tons
|
|
Zn
tons
|
|
Model
|
|
|
2,933.8
|
|
|
0.0173
|
|
|
0.19
|
|
|
0.19
|
|
|
0.47
|
|
|
50,749
|
|
|
558,750
|
|
|
5,569
|
|
|
13,647
|
|
Mine
|
|
|
4,124.0
|
|
|
0.0130
|
|
|
0.21
|
|
|
0.20
|
|
|
0.46
|
|
|
53,410
|
|
|
860,237
|
|
|
8,224
|
|
|
18,825
|
|
Mill
|
|
|
4,010.9
|
|
|
0.0140
|
|
|
0.19
|
|
|
0.17
|
|
|
0.37
|
|
|
55,064
|
|
|
747,847
|
|
|
6,833
|
|
|
14,788
|
|
Note:
The
above comparison is for production through mid-October 2005.
Mineral
Reserves
The
table
below shows the mineral reserves at Montana Tunnels.
Montana
Tunnels Mine Reserve Statement at December 31, 2005(1)(2)
Pit
(Imperial Summary)
|
|
Classification
|
|
Tons
000’s
|
|
Grade
oz Au/t
|
|
Ag
oz
Ag/t
|
|
Pb
%
|
|
Zn
%
|
|
Ounces
Au
000’s
|
|
L8J5
(L Pit)
|
|
|
Proven
|
|
|
10,089.2
|
|
|
0.016
|
|
|
0.173
|
|
|
0.218
|
|
|
0.591
|
|
|
163.6
|
|
M4A
(M Pit)
|
|
|
Proven
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mill
Stockpile
|
|
|
Proven
|
|
|
36.0
|
|
|
0.009
|
|
|
0.180
|
|
|
0.080
|
|
|
0.190
|
|
|
0.3
|
|
Subtotal
|
|
|
Proven
|
|
|
10,125.2
|
|
|
0.016
|
|
|
0.173
|
|
|
0.217
|
|
|
0.589
|
|
|
163.9
|
|
L8J5
(L Pit)
|
|
|
Probable
|
|
|
217.4
|
|
|
0.016
|
|
|
0.175
|
|
|
0.208
|
|
|
0.508
|
|
|
3.5
|
|
M4A
(M Pit)
|
|
|
Probable
|
|
|
22,898.0
|
|
|
0.016
|
|
|
0.230
|
|
|
0.170
|
|
|
0.600
|
|
|
368.5
|
|
Subtotal
|
|
|
Probable
|
|
|
23,115.4
|
|
|
0.016
|
|
|
0.230
|
|
|
0.171
|
|
|
0.600
|
|
|
372.0
|
|
Total
|
|
|
Proven
+ Probable
|
|
|
33,240.6
|
|
|
0.016
|
|
|
0.212
|
|
|
0.185
|
|
|
0.596
|
|
|
535.9
|
|
(1) Recovery
rates are expected to be 80% for gold, 71% for silver, 85% for lead, and 84%
for
zinc.
(2)
In March 2006 the Company adopted a plan to dispose
of the Montana Tunnels mine.
Environmental
The
permitted plan of operations allows mining of ore reserves from the L-Pit mine
design. Unstable pit walls in the ramp sector on the east side of the mine
closed down the open pit in October 2005, however, milling operations have
continued processing stockpiled low grade ore. A pit wall layback and pit ramp
reconstruction in the east sector of the open pit was subsequently developed
using extensive geotechnical analysis to ensure stability and safety for ongoing
mining operations. A permit revision for the pit wall layback and associated
changes was approved by the Department of Environmental Quality in December
2005.
A
major
mine plan amendment (M-Pit) continues to progress through an Environmental
Impact Statement permitting process. Approval for the M-Pit mine by the Montana
Department of Environmental Quality and Bureau of Land Management will provide
approximately 28 million tons of additional ore for processing.
The
bonding requirements for the Montana Tunnels mine are met by the following
bond
instruments:
|
|
Year
Ended December
31,
|
|
Type
of Bonding
|
|
2005
|
|
2004
|
|
Partially
secured surety bond issued by CNA pursuant to the Term Bonding Agreement
described immediately below
|
|
$
|
14,987,688
|
|
$
|
14,987,688
|
|
Cash
bond posted directly with the State of Montana
|
|
|
128,697
|
|
|
128,697
|
|
Real
estate bond posted directly with State of Montana
|
|
|
1,264,893
|
|
|
772,570
|
|
Total
Obligated Bonding Requirement Met
|
|
$
|
16,381,278
|
|
$
|
15,888,955
|
|
National
Fire Insurance Company of Hartford, a unit of Continental Casualty Company
(“CNA”), provides $14,987,688 of the total reclamation bonding for the Montana
Tunnels mine plan of operations at a deferred bond premium cost of $14 per
$1,000 of bonding under a Term Bonding Agreement dated August 1,
2002.
Bonding
requirements are subject to adjustment by the State of Montana for various
reasons from time to time. As noted above, the bonding requirement for the
Montana Tunnels mine increased from $15,888,955 to $16,381,278 during 2005
as
the result of a minor revision to the operating permit and a bond inflation
adjustment.
Black
Fox Project
Figure
3
- Black Fox project location along Destor-Porcupine Fault Zone in Province
of
Ontario, Canada
Location
The
Black
Fox project is located approximately five miles east of the township of Matheson
and 40 miles east of Timmins, Ontario, Canada. Lake Abitibi is six miles
northwest of the project site. The property encompasses over 1,983 acres within
the Hislop and Beatty Townships. Access and surface rights are owned solely
by
Apollo. The property is easily accessible by interstate highway and power is
supplied by Hydro One.
The
Black
Fox property was formerly known as the Glimmer mine. In April 1996, Exall
Resources Ltd. (“Exall”) purchased 60% of the property from Hemlo Gold Inc., and
Glimmer Resource Inc. (“Glimmer”) held the remaining 40%.
In
September, 2002, we purchased all of the real estate and related assets of
the
Glimmer Mine from Exall and Glimmer. The mine, which ceased operations in May
2001, was renamed Black Fox. Apollo paid Exall and Glimmer an aggregate purchase
price consisting of Cdn$3 million in cash and an aggregate of 2,080,000 of
our
common shares. Pursuant to the terms of the acquisition, an additional Cdn$3
million was payable to Exall and Glimmer. See subsequent event Note 21 of the
“Notes to the Consolidated Financial Statements”.
Black
Fox
sits astride the Destor-Porcupine Fault Zone (DPFZ), which is a deep break
in
the Precambrian rocks of the Abitibi Greenstone Belt. This fault system hosts
many of the deposits in the Timmins area. The system regionally strikes
east-west and dips variably to the south. Black Fox lies on the southern limb
of
a large scale fold on a flexure in the DPFZ Fault where the strike changes
from
east-west to southeast. Folded and altered ultra mafic and mafic are the host
rocks for mineralization. Gold occurs as free gold in quartz veining and
stockworks in altered ultra mafics and in gold associated with pyrite in altered
tholeiitic basalts.
From
1997
until 2001, the mine produced approximately 210,000 ounces of gold. In early
2003, we commenced a drilling program consisting of shallow holes to test the
mine’s open pit potential. During 2003, 297 surface core holes were completed
with depths varying from 200 to 500 meters. As a result of this drilling, proven
and probable open pit gold reserves at Black Fox of 457,000 ounces were
identified and we published such reserve estimates in an NI 43-101 report in
March 2004.
We
are in
the process of updating our reserves, and expect to report new reserve
estimates, which we expect to include underground reserves, in April 2006 and
issue an NI 43-101 report within 45 days of publishing the new
reserves.
Property,
plant and equipment at the mine consists of an administration office, change
house facilities, core sheds and surface infrastructure for the mine (pumps,
heating, etc.), all of which are in good working condition, with an aggregate
value of $1.0 million.
None
of
the currently defined reserves are subject to production royalties. However,
the
Ewen property (155 acres), purchased in 2003, is subject to a 3% net smelter
return royalty if in the future any reserves are found on that
property.
Mineral
Reserves
The
reserves reported in an NI 43-101 report in March 2004 of 457,000 ounces of
gold were estimated based upon the 2003 exploration program and included a
pre-feasibility study of developing an open pit mine on the Black Fox property.
This study did not consider underground mining as an option. We report no
reserves at Black Fox under SEC Industry Guide 7, which requires a final
bankable feasibility study.
Black
Fox Reserve Statement at December 31, 2005
Classification
(Imperial Summary)
|
|
Tons
000’s
|
|
Grade
oz
Au/t
|
|
Ounces
Au
000’s
|
|
Tons
Waste
000’s
|
|
Strip
Ratio
|
|
Proven
|
|
|
2,418.0
|
|
|
0.141
|
|
|
341.6
|
|
|
|
|
|
|
|
Probable
|
|
|
837.4
|
|
|
0.138
|
|
|
115.5
|
|
|
|
|
|
|
|
Total
- Proven + Probable
|
|
|
3,255.5
|
|
|
0.140
|
|
|
457.1
|
|
|
60,734.5
|
|
|
18.66
|
|
Waste
includes 12.18 million tons of overburden.
See
the proven and probable mineral reserve table in
Item 1 of this Annual Report on Form 10-K.
Exploration
and Development 2004
In
February 2004, a new drilling program commenced which first required the
existing ramp system to be extended down to the 235 meter level and the
construction of a 913 meter drift so as to allow drilling of the orebody from
underground. During 2004, 210 underground holes totaling 41,065 meters were
drilled.
Also
in
2004, an additional 105 surface holes were completed, totaling another 43,284
meters. Our objectives for drilling these surface holes were to better define
the open pit reserves; extend our resources along strike; extend resources
in
the eastern and western extensions of the main structure, bracketing or
undercutting known gold-bearing zones; and explore known geophysical
targets.
In
April
2004, through surface exploration drilling we discovered a new orebody in the
footwall of the DPFZ. The discovery hole was based on the extension of an
induced polarization anomaly. There are two components to the mineralization,
the quartz breccia veins and the massive sulfide mineralization (Pb, Zn, Ag).
These appear to be two mineralizing events sharing the same “plumbing system.”
Exploration
and Development 2005
During
2005 the surface and underground drilling programs continued with a total of
51
surface holes and 160 underground holes being completed. As of December 31,
2005, Apollo had completed a total of 449 surface diamond drill holes, totaling
over 135,711 meters as well as 370 underground holes totaling 75,520.7 meters
giving a to-date total for both of 211,232.6 meters as shown in the table
below.
Drilling
at Year Ended December 31, 2005
Drilling
|
|
Holes
Completed
|
|
Meters
|
|
Surface
2005
|
|
|
51
|
|
|
9,813.6
|
|
UG
2005
|
|
|
160
|
|
|
34,455.8
|
|
Total
All 2005 Drilling
|
|
|
211
|
|
|
44,269.4
|
|
Total
Surface To Date
|
|
|
449
|
|
|
135,711.9
|
|
Total
UG To Date
|
|
|
370
|
|
|
75,520.7
|
|
Grand
Total All Drilling
|
|
|
819
|
|
|
211,232.6
|
|
Apollo’s
drilling supplemented the data from the 284 surface and 720 underground drill
holes drilled by the previous owners. A table of total drill holes is shown
below.
Black
Fox Project Drill Hole Database
Company
|
|
Period
|
|
Location
|
|
Number
|
|
Meters
|
|
Noranda
|
|
|
1989-1994
|
|
|
Surface
|
|
|
142
|
|
|
27,930
|
|
Exall
|
|
|
1995-1999
|
|
|
Surface
|
|
|
142
|
|
|
21,295
|
|
Exall
|
|
|
1996-2001
|
|
|
Underground
|
|
|
720
|
|
|
62,827
|
|
Apollo
|
|
|
2002-2003
|
|
|
Surface
|
|
|
297
|
|
|
82,622
|
|
Apollo
|
|
|
2004
|
|
|
Surface
|
|
|
105
|
|
|
43,280
|
|
Apollo
|
|
|
2004
|
|
|
Underground
|
|
|
210
|
|
|
41,065
|
|
Apollo
|
|
|
2005
|
|
|
Surface
|
|
|
51
|
|
|
9,813
|
|
Apollo
|
|
|
2005
|
|
|
Underground
|
|
|
160
|
|
|
34,456
|
|
Totals
|
|
|
|
|
|
|
|
|
1,823
|
|
|
323,288
|
|
In
2005,
we began the permitting process for the project, which we anticipate will take
approximately two years based on a plan for a combined open pit and underground
mine with a 1,500 tonnes per day on-site mill. The estimated cost of the mine
and mill is approximately $80 million.
Bonding
We
met
our bonding requirements, established by the Province of Ontario, for the Black
Fox project through the following bonding instrument:
|
|
Year
Ended December 31,
|
|
Type
of Bonding
|
|
2005
|
|
2004
|
|
Letter
of Credit issued by TD Canada Trust secured by pledged deposit
account
|
|
|
Cdn$644,650
|
|
|
Cdn$489,200
|
|
Total
Bonding Requirement met
|
|
|
Cdn$644,650
|
|
|
Cdn$489,200
|
|
The
obligations to reimburse TD Canada Trust for any drawing under the letter of
credit are secured by Apollo’s maintenance of an amount equal to the amount
available for drawing in a deposit account pledged to TD Canada Trust. The
annual letter of credit fee is 1% of the amount available for drawing. Interest
is earned on the deposit account at a rate established by TD Canada Trust from
time to time.
Exploration
Stage Properties
Huizopa
We
own
Mexican subsidiaries which own or have the right to acquire concessions at
the
Huizopa exploration project. Pursuant to an agreement with the previous owner
of
one of those Mexican subsidiaries (the “Previous Owner”), if we exercise our
right to acquire those concessions at the Huizopa project on which we currently
hold an option, one of our Mexican subsidiaries and a Mexican company owned
by
the Previous Owner will enter into a joint venture agreement governing
activities at the Huizopa project going forward, pursuant to which we can elect
to ultimately retain up to an 80% interest in the Huizopa project. If our
Mexican subsidiary chooses not to go forward with the Huizopa project, it is
obligated to transfer a controlling interest in the subsidiary that holds the
option back to the Previous Owner, and to transfer 91% of the concessions it
owns at the Huizopa project back to the Previous Owner.
The
Huizopa project is located in the northern part of the Sierra Madre Gold Belt
in
the state of Chihuahua, Mexico, near the border with the State of Sonora, and
encompasses a block of mining concession claims of approximately 22 sq. km.
Huizopa is located about 17 km southwest of the Dolores project and
approximately 33 km to the northeast of the Mulatos project. Mulatos and Dolores
are both multi-million ounce gold-silver deposits owned by other companies
that
are currently in development. Sporadic shallow underground mining limited to
a
few high-grade zones was done in the past but no mining has taken place at
Huizopa since 1936. The property is very remote and will be accessed initially
by helicopter. During 2004, we acquired new claims that completely surround
the
old Huizopa land position and, as a result, have expanded our land position
to a
total of 128 sq. km.
The
geology is characterized by a series of parallel, low sulfidation gold-silver,
quartz veins hosted by Tertiary-age volcanic rocks. Silver to gold ratios in
the
veins and from the material on historic mine dumps indicate the Huizopa area
hosts an extensive gold-bearing hydrothermal system. Two major parallel quartz
vein systems with north trending structures contain many single vein outcrops
7
to 10 meters thick suggesting a series of stacked veins. Strike lengths are
over
2.0 km on the property with untested down dip potential. The stratigraphy of
the
Huizopa area has two sections of relatively mafic lava flows with intercalated
volcaniclastics. The dominant strike azimuths of faults are 340º and 160º with
dips ranging from vertical to 33º. Most of these structures, including the major
faults with associated thick gouge or breccia zones, dip eastward. These east
dipping faults are the faults associated with quartz veins, brecciation, and
mineralization.
Initial
favorable geochemical sampling and field studies by the Previous Owner in
December 2003 were confirmed by us when we reviewed the data and conducted
a
field evaluation between February and March 2004.
Mapping
of the mining concession began in June 2004 and continued throughout 2005.
The
results were compiled and transferred to our new topography maps and air photos
as well as the Mexican government’s Chabacan topographical sheet which has been
enlarged from 1:50,000 scale to 1:10,000. Geologic mapping suggests that the
faults that host gold-silver mineralization may be more numerous and more
continuous than earlier field work indicated. Petrographical examination
revealed the presence of native gold, silver, and electrum in many samples
and
widespread vein features indicative of repeated boiling and explosive
brecciation. Overall vein textures are consistent with high-level exposures
of
epithermal quartz-adularia and/or fault breccia veins.
Throughout
2006, we expect to continue mapping, trenching, sampling and conducting
geophysical studies on the property, including the selection of several primary
targets for drill sites and the commencement of a drilling program. The
cost of the project is expected to be approximately $2.3 million for the
year 2006.
Diamond
Hill
The
Diamond Hill mine, which has been on care and maintenance since 2000, is owned
by Montana Tunnels Mining, Inc. The mine is an underground gold mine and is
located approximately 28 miles southeast of Helena, Montana, in Broadwater
County and on the east flank of the Elkhorn Mountains, within the Hassel Mining
District. The Diamond Hill mine was in production from 1996 to 2000, during
which time, 775,000 tons of ore were mined at an average grade of 0.233 ounces
of gold per ton. In March 2006, the Company adopted a plan to dispose of Montana
Tunnels Mining, Inc., which owns the Diamond Hill mine.
The
Diamond Hill mine covers over 2,590 acres of patented and unpatented claims.
We
have 100% ownership of the main patented claims that contain the current
deposits, subject to a 0.5 to 1% net smelter return and a 10% net profits
royalty. We also have 50% ownership of four additional patented claims, which
are peripheral to the main land package. As of December 31, 2005, we hold 103
unpatented claims and lease 19 unpatented claims. The current mine permit covers
270 acres with most of the disturbance within a 27 acre area.
The
Diamond Hill orebodies and mine workings are in solid unfractured rock and
accordingly are amenable to low cost sublevel open stoping methods. Ore was
transported to the Montana Tunnels mill facility by truck where it was processed
in a separate circuit designed for Diamond Hill ore. Most of the gold was
recovered into a high grade pyrite concentrate and sold to Japanese
smelters.
The
deposit is classed as a skarn hosted sulfide deposit where the predominant
ore
mineralogy is gold associated with pyrite and lesser other metal sulfides.
The
bonding requirements for Diamond Hill, totaling approximately $623,000, are
incorporated as part of the bonding at Montana Tunnels.
ITEM
3. LEGAL
PROCEEDINGS
We
are
not currently subject to any material pending legal proceedings. We are,
however, engaged in routine litigation incidental to our business. No material
legal proceedings, involving us or our business are pending, or, to our
knowledge, contemplated, by any governmental authority. We are not aware of
any
material events of noncompliance with environmental laws and
regulations.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted to a vote of security holders during the fourth quarter
of 2005.
PART
II -
OTHER INFORMATION
ITEM
5. MARKET
FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our
common shares are listed on the American Stock Exchange under the trading symbol
“AGT” and on the Toronto Stock Exchange under the trading symbol “APG.” As of
March 24, 2006, 121,396,859 common shares were outstanding, and we
had 1,750 shareholders of record. On March 24, 2006, the closing price per
share for our common shares as reported by the American Stock Exchange was
$0.62
and as reported by the Toronto Stock Exchange was Cdn$0.69.
The
following table sets forth, for the periods indicated, the reported high and
low
market closing prices per share of our common shares:
|
|
American
Stock
Exchange
|
|
Toronto
Stock
Exchange
|
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
|
|
($)
|
|
(Cdn$)
|
|
2005
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
0.81
|
|
$
|
0.45
|
|
$
|
0.96
|
|
$
|
0.54
|
|
Second
Quarter
|
|
|
0.47
|
|
|
0.26
|
|
|
0.56
|
|
|
0.30
|
|
Third
Quarter
|
|
|
0.38
|
|
|
0.22
|
|
|
0.44
|
|
|
0.27
|
|
Fourth
Quarter
|
|
|
0.32
|
|
|
0.16
|
|
|
0.37
|
|
|
0.18
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
|
2.61
|
|
|
1.80
|
|
|
3.30
|
|
|
2.40
|
|
Second
Quarter
|
|
|
2.11
|
|
|
1.25
|
|
|
2.76
|
|
|
1.72
|
|
Third
Quarter
|
|
|
1.41
|
|
|
0.54
|
|
|
1.85
|
|
|
0.67
|
|
Fourth
Quarter
|
|
|
1.05
|
|
|
0.60
|
|
|
1.25
|
|
|
0.72
|
|
We
have
not declared or paid cash dividends on our common shares since our inception
and
we expect for the foreseeable future to retain all of our earnings from
operations for use in expanding and developing our business. Future dividend
decisions will consider our then current business results, cash requirements
and
financial condition.
ITEM
6. SELECTED
FINANCIAL DATA
The
following table sets forth selected historical consolidated financial data
for
Apollo Gold Corporation (formerly Pursuit) as of December 31, 2005, 2004, 2003,
2002 and 2001, derived from our audited financial statements. The financial
information for the year ended December 31, 2002 differs significantly from
the
financial information for prior years as a result of the June 2002 acquisition
of Nevoro. Financial information for 2001 and prior years is the historical
financial information of Pursuit. On June 25, 2002, Pursuit acquired Nevoro
and
its wholly-owned subsidiary Apollo Gold, Inc.; accordingly, the statement of
operations of the Company for the year ended December 31, 2002, includes the
results of Pursuit for the year ended December 31, 2002, and Nevoro for the
period from June 25, 2002 through December 31, 2002. Subsequent to June 25,
2002, substantially all of the gold mining and exploration business conducted
by
the Company consists of the gold mining and exploration operations of Apollo.
The data set forth below should be read in conjunction with, and is qualified
in
its entirety by reference to, our financial statements and notes thereto
included elsewhere in this Annual Report Form 10-K and with “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.”
Summary
of Financial Condition
|
|
Years
Ended December 31,
($
U.S. dollars in thousands, except share data)
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
Statements
of Operations Data -
Cdn
GAAP
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
on sales of minerals
|
|
$
|
43,254
|
|
$
|
38,254
|
|
$
|
30,858
|
|
$
|
-
|
|
$
|
-
|
|
Direct
Operating Costs
|
|
|
48,357
|
|
|
52,473
|
|
|
34,184
|
|
|
12,159
|
|
|
-
|
|
Depreciation and Amortization
|
|
|
2,551
|
|
|
2,640
|
|
|
6,135
|
|
|
-
|
|
|
-
|
|
Exploration
and Development
|
|
|
918
|
|
|
1,051
|
|
|
2,117
|
|
|
451
|
|
|
94
|
|
Operating
Loss
|
|
|
(17,638
|
)
|
|
(26,592
|
)
|
|
(17,105
|
)
|
|
(15,811
|
)
|
|
(533
|
)
|
Loss
from Continuing Operations
|
|
|
(15,961
|
)
|
|
(27,295
|
)
|
|
(15,790
|
)
|
|
(15,585
|
)
|
|
(454
|
)
|
(Loss)
Income from Discontinued Operations
|
|
|
(6,247
|
)
|
|
(3,712
|
)
|
|
1,700
|
|
|
405
|
|
|
-
|
|
Net
Loss
|
|
|
(22,208
|
)
|
|
(31,007
|
)
|
|
(14,090
|
)
|
|
(15,180
|
)
|
|
(454
|
)
|
Net
Income (Loss) per share, basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
|
(0.16
|
)
|
|
(0.34
|
)
|
|
(0.29
|
)
|
|
(0.81
|
)
|
|
(0.54
|
)
|
Discontinued
Operations
|
|
|
(0.06
|
)
|
|
(0.05
|
)
|
|
0.03
|
|
|
0.02
|
|
|
-
|
|
Total
|
|
$
|
(0.22
|
)
|
$
|
(0.39
|
)
|
$
|
(0.26
|
)
|
$
|
(0.79
|
)
|
|
(0.54
|
)
|
Weighted
Average number of shares outstanding
|
|
|
101,811,291
|
|
|
78,716,042
|
|
|
54,536,679
|
|
|
19,297,668
|
|
|
834,124
|
|
Balance
Sheet Data - Cdn GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
62,545
|
|
$
|
97,635
|
|
$
|
96,577
|
|
$
|
66,361
|
|
$
|
112
|
|
Total
Shareholders’ Equity
|
|
|
32,441
|
|
|
47,221
|
|
|
57,857
|
|
|
29,685
|
|
|
(28
|
)
|
Summary
of Financial Condition
|
|
Years
Ended December 31,
($
U.S. dollars in thousands, except share data)
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
Statements
of Operations Data -
U.S. GAAP
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
on sales of minerals
|
|
$
|
43,254
|
|
$
|
38,254
|
|
$
|
30,858
|
|
$
|
-
|
|
$
|
-
|
|
Direct Operating Costs
|
|
|
48,357
|
|
|
52,473
|
|
|
34,184
|
|
|
12,159
|
|
|
-
|
|
Depreciation
and Amortization
|
|
|
1,963
|
|
|
1,945
|
|
|
6,222
|
|
|
-
|
|
|
-
|
|
Exploration
and Development
|
|
|
6,051
|
|
|
11,456
|
|
|
5,760
|
|
|
451
|
|
|
94
|
|
Operating
Loss
|
|
|
(22,183
|
)
|
|
(36,302
|
)
|
|
(22,574
|
)
|
|
(23,871
|
)
|
|
(587
|
)
|
Loss
from Continuing Operations
|
|
|
(19,826
|
)
|
|
(38,792
|
)
|
|
(21,021
|
)
|
|
(44,320
|
)
|
|
(508
|
)
|
Income
(Loss) from Discontinued Operations
|
|
|
(4,907
|
)
|
|
308
|
|
|
(1,395
|
)
|
|
(1,860
|
)
|
|
-
|
|
Net
Loss
|
|
|
(24,733
|
)
|
|
(38,484
|
)
|
|
(22,416
|
)
|
|
(46,180
|
)
|
|
(508
|
)
|
Net
Income (Loss) per share, basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
|
(0.19
|
)
|
|
(0.49
|
)
|
|
(0.38
|
)
|
|
(2.30
|
)
|
|
(0.61
|
)
|
Discontinued
Operations
|
|
|
(0.05
|
)
|
|
-
|
|
|
(0.03
|
)
|
|
(0.09
|
)
|
|
-
|
|
Total
|
|
$
|
(0.24
|
)
|
$
|
(0.49
|
)
|
$
|
(0.41
|
)
|
$
|
(2.39
|
)
|
$
|
(0.61
|
)
|
Weighted
Average number of shares outstanding
|
|
|
101,811,291
|
|
|
78,716,042
|
|
|
54,536,679
|
|
|
19,297,668
|
|
|
834,124
|
|
Balance
Sheet Data - U.S. GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
39,331
|
|
$
|
77,749
|
|
$
|
87,391
|
|
$
|
60,905
|
|
$
|
58
|
|
Total
Shareholders’ Equity
|
|
|
7,714
|
|
|
25,014
|
|
|
43,311
|
|
|
21,726
|
|
|
(82
|
)
|
Summary
Operational Statistics
|
|
Year
Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Production
Summary
|
|
|
|
|
|
|
|
Gold
ounces
|
|
|
44,099
|
|
|
33,743
|
|
|
44,124
|
|
Silver
ounces
|
|
|
524,722
|
|
|
970,751
|
|
|
411,216
|
|
Lead
pounds
|
|
|
10,428,061
|
|
|
10,064,265
|
|
|
10,843,184
|
|
Zinc
pounds
|
|
|
22,380,136
|
|
|
26,222,805
|
|
|
21,792,452
|
|
Cash
Cost Per Ounce
|
|
|
|
|
|
|
|
|
|
|
Cash
Operating Cost/oz
|
|
$
|
529.36
|
|
$
|
797.91
|
|
$
|
432.42
|
|
Total
Cash Cost/oz
|
|
$
|
562.96
|
|
$
|
838.54
|
|
$
|
456.96
|
|
Total
Production Cost/oz
|
|
$
|
617.77
|
|
$
|
913.43
|
|
$
|
595.66
|
|
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.
This
information differs from measures of performance determined in accordance with
Canadian and U.S. GAAP 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
7 “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.
ITEM
7. 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 generally accepted accounting
principles in Canada (“Canadian GAAP”). For a reconciliation to generally
accepted accounting principles in the U.S. (“U.S. GAAP”), see Note 20 to the
attached consolidated financial statements. Unless stated otherwise, all dollar
amounts are reported in U.S. dollars.
In
this
Annual Report on Form 10-K, the terms “cash operating cost”, “total cash cost”
and “total production cost” are non-GAAP financial measures and are used on a
per ounce of gold sold basis. Cash operating cost is equivalent to direct
operating cost for the period as found on the Consolidated Statements of
Operations, less production royalties expenses and mining taxes but includes
by-product credits for payable silver, lead and zinc production. Total cash
cost
is equivalent to cash operating cost plus production royalties and mining taxes.
Total production cost is equivalent to total cash cost plus non-cash costs
including depreciation and amortization.
The
Montana Tunnels’ results of operations have been restated for all periods
presented as at and for the year ended December 31, 2004 and earlier to
reflect a change in accounting policy with respect to stripping costs (see
Critical Accounting Policies below).
Additionally,
certain of the comparative figures have been reclassified to conform with the
2005 presentation. In particular, the results of operations of the Florida
Canyon Mine and the Standard Mine for all periods presented have been classified
as discontinued operations (see Note 4 to our Consolidated Financial Statements)
and therefore the table below reflects Montana Tunnels statistics
only.
RECONCILIATION
OF CASH OPERATING AND TOTAL PRODUCTION COSTS PER OUNCE
|
|
Year
Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
($
in thousands, except per ounce data)
|
|
Gold
Ounces Sold
|
|
|
44,099
|
|
|
33,743
|
|
|
44,124
|
|
Direct
Operating Costs
|
|
$
|
48,357
|
|
$
|
52,473
|
|
$
|
34,184
|
|
Less:
Mining and Property Taxes
|
|
|
1,482
|
|
|
1,371
|
|
|
1,083
|
|
By-Product
Credits
|
|
|
23,531
|
|
|
24,178
|
|
|
14,021
|
|
Cash
Operating Cost
|
|
|
23,344
|
|
|
26,924
|
|
|
19,080
|
|
Cash
Operating Cost per Ounce
|
|
|
529
|
|
|
798
|
|
|
432
|
|
Cash
Operating Cost
|
|
|
23,344
|
|
|
26,924
|
|
|
19,080
|
|
Add:
Mining and Property Taxes
|
|
|
1,482
|
|
|
1,371
|
|
|
1,083
|
|
Total
Cash Cost
|
|
|
24,826
|
|
|
28,295
|
|
|
20,163
|
|
Total
Cash Cost per Ounce
|
|
|
563
|
|
|
838
|
|
|
457
|
|
Total
Cash Cost
|
|
|
24,826
|
|
|
28,295
|
|
|
20,163
|
|
Add:
Depreciation & Amortization
|
|
|
2,417
|
|
|
2,527
|
|
|
6,120
|
|
Total
Production Cost
|
|
|
27,243
|
|
|
30,822
|
|
|
26,283
|
|
Total
Production Cost per Ounce
|
|
|
618
|
|
|
913
|
|
|
596
|
|
We
have
included cash operating cost, total cash cost and total production 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 Canadian and U.S. GAAP
and
should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with Canadian and U.S. 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.
BACKGROUND
AND RECENT DEVELOPMENTS
We
are
principally engaged in the exploration, development and mining of gold. We
own
and operate the Montana Tunnels mine, an open pit mine and mill, located near
Helena, Montana, currently processing ore from stockpiled material and producing
gold doré and lead-gold and zinc-gold concentrates. We have a development
property, the Black Fox project, which is located near the township of Matheson
in the Province of Ontario, Canada. We also own Mexican subsidiaries which
own
or have the right to acquire concessions of the Huizopa exploration property
located in the Sierra Madre gold belt in Chihuahua, Mexico. We also own the
Diamond Hill mine, currently under care and maintenance, also located in the
state of Montana. In March 2006, the Company adopted a plan to dispose of
Montana Tunnels Mining, Inc., which owns the Montana Tunnels and Diamond
Hill mines.
On
November 18, 2005, we sold our Nevada Assets to Jipangu Inc. (“Jipangu”), a
Delaware corporation and wholly owned subsidiary of Jipangu International Inc.,
a Japanese corporation, for $14.0 million. The Nevada Assets consisted of the
Florida Canyon Mine, the Standard Mine, and four exploration properties. The
Florida Canyon Mine is an open pit heap leach operation located in the State
of
Nevada; the Standard Mine is an open pit heap leach operation situated 8
kilometers south of the Florida Canyon Mine, which shares common facilities
such
as warehousing, administration and the gold recovery plant with the Florida
Canyon Mine; and the four exploration properties are located near the Florida
Canyon Mine.
Upon
closing of the sale of the Nevada Assets on November 18, 2005, $11.0 million
of
the $14.0 million was deposited as substitute collateral for the Apollo $8.73
million 12% Series 2004-B secured convertible debentures, which were previously
secured by the Nevada Assets. In January 2006, after meeting certain conditions,
Apollo replaced the $11.0 million cash collateral with its Black Fox property
as
security for the convertible debentures, which resulted in additional funds
being available to the Company.
In
addition, we entered into a subscription agreement with Jipangu for a $3.5
million private placement pursuant to which Jipangu purchased 11,650,000 equity
units priced at Cdn$0.35 per unit with each unit consisting of one of our common
shares and 0.17167 of a warrant, with each whole warrant exercisable for two
years at Cdn$0.39 for one of our common shares. The private placement closed
on
January 26, 2006 .
In
2005,
gold production of 44,099 ounces was lower than expected and total cash costs
of
$563 per ounce were higher than expected, primarily due to the operational
problems at the Montana Tunnels mine throughout the year. Open pit mining
activity was suspended on October 21, 2005, for safety reasons due to
increased wall activity on the eastern side of the open pit. With help from
third party outside geotechnical consultants, we evaluated a number of different
remediation options aimed at pit wall stabilization for the remaining life
of
the mine. Management reviewed the alternatives and believes the best alternative
would require the removal of approximately 4.6 million tons of material,
unloading the pit walls and stabilizing the ramp system. We estimated that
this
remediation effort would require approximately $12 million. Since the open
pit
mine operations were suspended, the mill has been processing ore from stockpiled
material and producing gold doré and lead-gold and zinc-gold
concentrates. Although the mine is not cash positive, the revenue generated
does pay for the variable cost of production and contributes to the fixed costs
of the mine. On January 31, 2006, we gave a Workers Adjustment and
Retraining Notification (“WARN”) Act Notice to all hourly and salaried Montana
Tunnels, Inc. employees. The WARN Act requires companies to give employees
60
days’ notice prior to a plant shutdown or mass layoff. We now expect to postpone
a mass layoff until late April 2006 as we continue to mill low grade stockpiled
ore. In
March
2006 the Company adopted a plan to dispose of the Montana Tunnels
mine.
In
2005
and prior periods, we deferred or accrued stripping costs incurred during
production, as appropriate, and charged these costs to operations on the basis
of the estimated average stripping ratio for Montana Tunnels. Commencing in
the
second quarter of 2005, we changed our accounting policy with respect to
stripping costs to be consistent with the consensus reached by the Emerging
Issues Task Force (“EITF”), on the basis that the consensus results in a more
reliable, relevant and consistent application of GAAP. This change has been
applied retrospectively by restating prior periods.
During
2005, at Black Fox, 160 underground holes totaling 34,456 meters plus 51 surface
holes totaling 9,813 meters were drilled, bringing the total number of
underground holes to 370 (75,521 meters) and surface holes to 449 (135,712
meters) giving a total number of 819 holes (211,233 meters). Throughout 2005,
we
continued to work on obtaining permitting for a combined open pit and
underground mine and an on site mill with a capacity of 1,500 tonnes per day.
We
expect to publish updated reserve estimates in April 2006 and a Canadian
National Instrument 43-101 (“NI 43-101) within 45 days of publishing the
updated reserves. In addition, we expect to complete the feasibility study
by
the end of 2006.
BUSINESS
STRATEGY AND DEVELOPMENT
2006
Forecasted Highlights:
Following
the sale of the Nevada Assets, we have three remaining properties: the Montana
Tunnels mine, the Black Fox project and the Huizopa project. Below is a summary
of our expectations for these three properties in 2006.
Montana
Tunnels mine
- Open
pit mining activity was suspended on October 21, 2005. Currently the mill
continues to operate, processing low grade stockpiled ore and is expected
to continue milling through the end of April 2006. In March 2006 we
adopted a plan to dispose of Montana Tunnels Mining, Inc., which owns the
Montana Tunnels and Diamond Hill mines.
Black
Fox project
- The
Company's focus is on developing our Black Fox project. We expect to publish
updated reserves in April 2006 and issue an NI 43-101 report within 45 days
of publishing the reserves, showing both open pit and underground reserves.
We
expect that the NI 43-101 report will reflect an increase from the 2004 reserves
previously reported. We also expect to complete a feasibility study by the
end
of 2006. Estimated expenditures at Black Fox for 2006 are $3.1 million.
Additionally, we will continue to evaluate financing opportunities in order
to
extend the drilling program at Black Fox given that the mineralization is still
open along strike and at depth.
Huizopa
project
- During
2006, our focus at Huizopa will be to advance the exploration phase of the
project. Specifically, we expect to continue mapping, trenching, sampling and
conducting geophysical studies on the property including the selection of
several primary targets for drill sites and the commencement of a drilling
program. The cost of the project is expected to be approximately $2.3
million for the year 2006.
APOLLO
GOLD CORPORATION
Results
of Operations Year Ended December 31, 2005 Compared to Year Ended December
31,
2004
Revenue
from the Sale of Minerals from Continuing Operations (Montana
Tunnels).
Revenues
from continuing operations for the year ended December 31, 2005 increased 13.1%
to $43.3 million from $38.3 million for the year ended December 31, 2004,
primarily due to higher gold production at Montana Tunnels and higher metals
prices.
Revenues
from gold for the year ended December 31, 2005 increased 40.1% to $19.7 million
from $14.1 million for the year ended December 31, 2004. The average price
received for gold for the years ended December 31, 2005 and 2004 was $447 and
$417 per ounce, respectively.
Revenues
from silver, zinc and lead for the year ended December 31, 2005 decreased 2.7%
to $23.5 million from $24.2 million during 2004.
For
the
year ended December 31, 2005, 46% of our revenue was derived from sales of
gold
and 54% from sales of silver, zinc and lead, compared to 37% from sales of
gold
and 63% from sales of silver, zinc and lead for 2004.
Gold
production increased 30.7% to 44,099 ounces for the year ended December 31,
2005
from 33,743 ounces in 2004. Most of this production was derived from modeled
and
unmodeled “fringe” ores mined from the open pit through October 2005. As a
result of pit wall instability, open pit mining operations were suspended mid
October 2005 and subsequent metal production was from processing lower grade
stockpiled ore. See
Item
2 “Description of Properties - Montana Tunnels Mine” for further
information.
Operating
Expenses.
Direct
Operating Costs.
Direct
operating costs for the year ended December 31, 2005 decreased 7.8% to $48.4
million from $52.5 million for the year ended December 31, 2004, primarily
due
to moving 62% more tons of waste and ore in 2004 than in 2005. These amounts
include mining and processing costs, as well as smelting and refining charges.
Total cash cost per ounce for the year ended December 31, 2005 decreased 36.9%
to $563 from $838 for the year ended December 31, 2004. Although the total
cash
cost per ounce was lower than in 2004, it was higher than expected due to
remediation expenses related to pit wall instability throughout the year, which
eventually led to the suspension of mining in the open pit in mid October 2005.
Additionally, higher fuel, energy and commodity prices contributed to the higher
than expected costs, with fuel prices peaking at $2.56 per gallon during
2005.
Depreciation
and Amortization.
Depreciation and amortization expenses remained at $2.6 million for the year
ended December 31, 2005, the same as in 2004.
General
and Administrative Expenses.
General
and administrative expenses for the year ended December 31, 2005 increased
6.9%
to $7.6 million from $7.1 million for the year ended December 31, 2004,
primarily due to increased legal and accounting expenses incurred in connection
with our financing transactions, exchange listing fees, the cost of our
Sarbanes-Oxley efforts for the year, as well as the accrual for the costs
related to the severance paid to the four departed executive officers and to
the
amended agreements of the three remaining officers.
Stock-based
Compensation.
In the
year ended December 31, 2005, we also incurred stock-based compensation of
$597,000 resulting from the issuance of stock options to our employees. This
compares to $767,000 in 2004.
Accretion
Expense.
In the
year ended December 31, 2005, we accrued accretion expense of $0.9 million,
relating to accrued site closure costs at our Montana Tunnels mine as compared
to $0.8 million in 2004.
Exploration
and Business Development.
The cost
of exploration, consisting of drilling and related expenses, totaled $0.9
million and $1.1 million for the years ended December 31, 2005 and 2004,
respectively. Costs incurred at Black Fox for drilling and development were
capitalized under Canadian GAAP.
Total
Operating Expenses.
As a
result of these expense components, our operating expenses for the year ended
December 31, 2005 decreased 6.1% to $60.9 million from $64.8 million for the
year ended December 31, 2004, primarily due to a decrease in costs during the
fourth quarter 2005 as a result of suspending open pit mining at Montana Tunnels
in October 2005. The decrease in operating expenses were partially offset by
increased general and administrative expenses.
Interest
Income and Interest Expense.
We
realized interest income of $397,000 during the year ended December 31, 2005
compared with $313,000 for the year ended December 31, 2004. We incurred
interest expense of $2,533,000 during 2005 and $252,000 during 2004. The
increase in interest expense is due to accretion on the convertible debentures,
which were issued in November of 2004.
Foreign
Exchange (Loss/Gain).
We
realized foreign exchange losses of $35,000 and $770,000 during the years ended
2005 and 2004, respectively, from cash balances not held in United States
dollars. This decrease is a result of having lower cash balances in Canadian
dollars in 2005 than in 2004.
Loss
from Continuing Operations.
Loss
from
continuing operations for the year ended December 31, 2005 decreased 41.5%
to
$16.0 million from $27.3 million in 2004. The main factors contributing to
the
loss were the lower than expected revenues as a result of the mining problems
related to the wall instability and the higher costs of commodities such as
fuel, energy and tires. The decreased loss in 2005 compared to 2004 was due
to
the high cost of mining in 2004 as a result of moving 34 million tons of waste
and ore compared to 21 million tons in 2005.
Loss
from Discontinued Operations.
On
November 18, 2005, the Company sold its Nevada Assets to Jipangu. The Nevada
Assets were therefore classified as discontinued operations. We incurred a
loss
from these discontinued operations of $6.2 million for the year ended December
31, 2005 as compared to a loss of $3.7 million for 2004.
Net
Loss for the Year.
Based
on
these factors, we incurred a net loss of $22.2 million, or $0.22 per share,
for
the year ended December 31, 2005, as compared to a loss of $31.0 million, or
$0.39 per share, for the year ended December 31, 2004.
Results
of Operations
Year
Ended December 31, 2004 Compared to Year Ended December 31,
2003
Revenue
from the Sale of Minerals from Continuing Operations. (Montana
Tunnels)
Revenues
from continuing operations for the year ended December 31, 2004 increased 24.0%
to $38.3 million from $30.9 million for the year ended December 31, 2003,
primarily due to higher metal prices offset by lower production due to lower
milling grades at Montana Tunnels.
Revenues
for gold for the year ended December 31, 2004 decreased 16.4%
to
$14.1 million from $16.8 million in 2003. The average price received for gold
for the years ended December 31, 2004 and 2003 was $417 and $382 per ounce,
respectively. The increase revenue from higher metal prices was offset by lower
ounces of gold being sold in 2004.
Gold
production for the year ended December 31, 2004 decreased 23.5% to 33,743 ounces
from 44,124 ounces for the year ended December 31, 2003, primarily due to lower
milling grades at Montana Tunnels, which reduced our gold and total metal
production.
Revenues
for silver, zinc and lead for the year ended December 31, 2004 increased 72.4%
to $24.2 million from $14.0 million in 2003.
For
the
year ended December 31, 2004, approximately 37% of our revenue was derived
from
sales of gold and 63% was derived from sales of silver, zinc and lead, compared
to 55% derived from sales of gold and 45% derived from sales of silver, zinc
and
lead for the year ended December 31, 2003.
Operating
Expenses.
Direct
Operating Costs.
Direct
operating costs for the year ended December 31, 2004 increased 53.5% to $52.5
million from $34.2 million for the year ended December 31, 2003. These amounts
include mining and processing costs, as well as smelting and refining charges.
The higher direct operating costs in 2004 reflect higher fuel and commodity
prices and a full operational year at Montana Tunnels.
Depreciation
and Amortization. Depreciation
and amortization expenses for the year ended December 31, 2004 decreased 57.0%
to $2.6 million from $6.1 million for 2003, primarily due to amortization of
stripping costs.
General
and Administrative Expenses.
General
and administrative expenses for the year ended December 31, 2004 increased
52.5%
to $7.1 million from $4.7 million in 2003, primarily due to an increase in
legal
and accounting expenses, incurred in connection with our financing transactions,
exchange listing fees and costs related to Sarbanes-Oxley
compliance.
Stock-based
Compensation.
For the
year ended December 31, 2004, stock-based compensation increased 104.0% to
$767,000 from $376,000 for the year ended December 31, 2003, primarily due
to an
increase in the number of stock options granted to our employees.
Accretion
Expense.
Accrued
accretion expense for the year ended December 31, 2004 increased 64.0% to
$820,000 from $500,000, primarily due to accrued site closure costs at our
Montana Tunnels mine. This expense represents our estimation of the fair value
of the increase in our site closure and reclamation costs, which we updated
in
the last quarter of 2004.
Exploration
and Business Development.
Exploration and development, consisting of drilling and related expenses, for
the year ended December 31, 2004 decreased 50.4% to $1.1 million from $2.1
million for the year ended December 31, 2003.
Total
Operating Expenses.
As a
result of these expense components, our operating expenses for the year ended
December 31, 2004 increased 35.2% to $64.8 million from $48.0 million for the
year ended December 31, 2003.
Interest
Income and Interest Expense.
We
realized interest income of $313,000 during the year ended December 31, 2004.
We
incurred interest expense of $252,000 in 2004, primarily for equipment leases
and a bridge loan. We realized interest income in 2003 of $213,000 and interest
expense of $205,000.
Foreign
Exchange (Loss/Gain).
We
realized foreign exchange losses of $0.8 million in 2004, but a gain of $1.3
million in 2003, from cash balances not held in United States
dollars.
Loss
from Continuing Operations.
Loss
from
continuing operations for the year ended December 31, 2004 increased 72.9%
to
$27.3 million from $15.8 million for the year ended December 31, 2003, mainly
as
a result of the higher stripping ratio at Montana Tunnels combined with the
higher costs of fuel, tires and other related commodities.
Loss
from Discontinued Operations.
Revenues
from the Florida Canyon mine for the year ended December 31, 2004 decreased
26.4% to $26.5 million from $36.0 million for the year ended December 31, 2003.
Gold production at the Florida Canyon mine for the year ended December 31,
2004
decreased 28.2% to 73,082 ounces from 101,811 ounces for the year ended December
31, 2003, primarily due to the curtailment of mining activities in August 2004.
Discontinued operations incurred a loss of $3.7 million for the year ended
December 31, 2004 as compared to income of $1.7 million for the year ended
December 31, 2003.
Net Loss for the Year.
Based
on
these factors, we incurred a net loss of $31.0 million, or $0.39 per share,
for
the year ended December 31, 2004, as compared to a net loss of $14.1 million,
or
$0.26 per share, for the year ended December 31, 2003.
Summary
of Quarterly Results (Unaudited)
|
|
2005
Quarter Ended In
|
|
2004
Quarter Ended In
|
|
|
|
Dec(1)
|
|
Sept(2)
|
|
June(3)
|
|
March(4)
|
|
Dec(5)
|
|
Sept(6)
|
|
June(7)
|
|
March
|
|
|
|
($
in thousands, except per share and total cash cost per ounce
data)
|
|
Revenue
from the sale of
minerals
from continuing
operations
|
|
$
|
6,990
|
|
$
|
13,351
|
|
$
|
10,581
|
|
$
|
12,332
|
|
$
|
12,712
|
|
$
|
7,393
|
|
$
|
6,525
|
|
$
|
11,624
|
|
Operating
loss
|
|
|
(5,999
|
)
|
|
(2,935
|
)
|
|
(4,538
|
)
|
|
(4,166
|
)
|
|
(4,266
|
)
|
|
(8,377
|
)
|
|
(9,317
|
)
|
|
(4,632
|
)
|
Loss
from continuing
operations
for the period
|
|
|
(3,955
|
)
|
|
(3,614
|
)
|
|
(4,961
|
)
|
|
(3,431
|
)
|
|
(4,550
|
)
|
|
(8,476
|
)
|
|
(9,553
|
)
|
|
(4,716
|
)
|
Loss
from continuing
operations
per share, basic
and
diluted
|
|
|
(0.04
|
)
|
|
(0.04
|
)
|
|
(0.05
|
)
|
|
(0.04
|
)
|
|
(0.06
|
)
|
|
(0.11
|
)
|
|
(0.12
|
)
|
|
(0.06
|
)
|
Gold
production in ounces -
Montana
Tunnels
|
|
|
5,026
|
|
|
14,104
|
|
|
12,324
|
|
|
12,645
|
|
|
12,090
|
|
|
4,967
|
|
|
5,903
|
|
|
10,783
|
|
Total
cash cost per ounce -
Montana
Tunnels
|
|
$
|
762
|
|
$
|
513
|
|
$
|
590
|
|
$
|
472
|
|
$
|
446
|
|
$
|
1,465
|
|
$
|
1,548
|
|
$
|
604
|
|
(1) Open
pit
mining suspended in mid October. Continued milling low grade ore
stockpiles.
(2) Milled
tonnage was reduced due to ramp problems and a mill two-week shutdown in
July.
(3) Production
delays due to periodic ramp closures caused by excessive rainfall.
(4) Severe
weather and unusually low water level in the tailings dam caused lower than
expected tonnage throughput.
(5) Milling
throughput at Montana Tunnels was 17,500 tons per day.
(6) Montana
Tunnels mine continued to operate in the transition zone between mineralization
and the actual ore reserve.
(7) Milling
capacity increased to 15,000 tons per day.
Financial
Condition and Liquidity
To
date,
we have funded our operations primarily through issuances of debt and equity
securities, the sale of the Nevada Assets and sale of surplus assets. At
December 31, 2005, we had cash of $0.1 million, compared to cash and short-term
investments of $6.9 million at December 31, 2004. The decrease in cash from
December 31, 2004 is primarily the result of operating cash outflows of $11.3
million and investing activities of $1.4 million. The cash outflows were
offset in part by proceeds of $5.9 million from sales of our common shares.
At
March 1, 2006, we had cash and short-term investments of $7.5 million, which
includes the $11.0 million released in January 2006 from the restricted cash
account held at December 31, 2005 as collateral security for the convertible
debenture and the $3.5 million private placement by Jipangu in January 2006,
less the payments of $2.6 million made to the lien holders of Black Fox as
per
Note 15(d) of the attached "Notes to Consolidated Financial
Statements".
In
2005,
cash provided by investing activities totaled $1.4 million. Proceeds from
the sale of the Nevada Assets were $14.0 million, proceeds from the sale of
spare property, plant and equipment added a further $4.5 million and
discontinued operations an additional $1.0 million. Capital expenditures were
$5.5 million, of which $5.3 million were for the further development of the
Black Fox project. In addition, $12.7 million was held as restricted
cash, $1.7 million of which was for the Montana Tunnels reclamation liability
and the balance of $11.0 million as cash collateral security for the $8.8
million convertible debentures. Restricted cash of $11.0 million was released
January 2006. For further details, see Note 21 of the “Notes to the Consolidated
Financial Statements”.
During
the year ended December 31, 2005, financing activities provided $3.2 million
in
cash, from (a) completing in January 2005 the second tranche of a registered
offering of 4,199,998 units with an issue price of $0.75 for proceeds of $2.8
million, net of expenses of $0.3 million and fair value of broker’s compensation
warrants of $0.2 million and (b) completing in June, 2005, the sale to Jipangu
of 10,000,000 common shares at $0.32 per share, proceeds from which amounted
to
$3.2 million, net of expenses of $32,000. During 2005, $0.8 million in equipment
leases were paid off and discontinued operations accounted for a further cash
outflow of $2.0 million mainly in the form of payment of equipment leases prior
to the sale of the Nevada Assets to Jipangu.
Our
current funds are not sufficient to fund our projected 2006 expenditures of
$3.1 million at Black Fox and $2.3 million for exploration at Huizopa, as
well as the Montana Tunnels mine. In March 2006, the Company adopted a plan
to
sell Montana
Tunnels Mining, Inc., which owns the Montana Tunnels and Diamond Hill mines,
the
proceeds from which, together with our cash on hand, would provide us with
sufficient liquidity to complete all planned activities
for 2006. If
we do
not sell Montana Tunnels Mining, Inc., we expect to seek alternative
financing solutions, which may include entering
into a joint venture with respect to the mine, selling debt or equity
securities, or selling the Montana Tunnels assets. Sales
of
debt or equity securities may include Canadian flow-through financing to
further fund a portion of our Black Fox exploration activities.
Our
ability to raise capital is highly dependent upon the commercial viability
of
our projects and the associated prices of the metals we produce. Because of
the
significant impact that changes in the prices of gold and silver have on
our financial condition, declines in these metals prices may negatively impact
short-term liquidity and our ability to raise additional funding for long-term
projects. In the event that cash balances decline to a level that cannot support
our operations, our management will defer certain planned capital expenditures
and exploration activities as needed to conserve cash for operations. There
can
be no assurance that we will be successful in generating adequate funding for
planned capital expenditures, environmental remediation and reclamation
expenditures and for exploration expenditures.
Table
of Contractual Obligations
|
|
Payment
Due by Period
|
|
Contractual
Obligations
(as
of December 31, 2005)
|
|
Total
|
|
Less
Than
1 Year
|
|
1-3
Years
|
|
3-5
Years
|
|
More
than
5
Years
|
|
|
|
(Thousands)
|
|
Long-term
debt (convertible debenture)
|
|
$
|
8,756
|
|
$
|
-
|
|
$
|
8,756
|
|
$
|
-
|
|
$
|
-
|
|
Interest
on long-term debt (convertible debenture)
|
|
|
2,073
|
|
|
1,058
|
|
|
1,015
|
|
|
-
|
|
|
-
|
|
Capital
lease obligations
|
|
|
171
|
|
|
92
|
|
|
79
|
|
|
-
|
|
|
-
|
|
Operating
lease obligations
|
|
|
316
|
|
|
193
|
|
|
123
|
|
|
-
|
|
|
-
|
|
Purchase
obligations
|
|
|
62
|
|
|
21
|
|
|
41
|
|
|
-
|
|
|
-
|
|
Notes
payable
|
|
|
671
|
|
|
596
|
|
|
75
|
|
|
-
|
|
|
-
|
|
Other
long-term liabilities reflected on the balance sheet (1)
|
|
|
18,291
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
18,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Other
long-term liabilities represent asset retirement obligations. Asset
retirement obligations include several estimates about future reclamation
costs, mining schedules, timing of the performance of reclamation
work and
the quantity of ore reserves which in turn determine the ultimate
closure
date, which in turn impacts the discounted amounts of future asset
retirement liabilities. The discounted value of these projected
cash flows
is recorded as “Accrued site closure costs” of $12.6 million on the
balance sheet of as of December 31, 2005. The amount shown above
is
undiscounted to show full expected cash requirements. As of December
31,
2005, restricted cash of $5.5 million has been placed in trust
as security
relating to the asset retirement
obligation.
|
Off
Balance Sheet Arrangements
We
have a
contingent liability at our Black Fox property in the form of a pre-production
royalty payment. This payment is Cdn$3.0 million (approximately $2.6 million)
and it is part of the original purchase price of the property. This payment
was
made in January 2006 to release the existing lien in connection with pledging
the Company’s Black Fox property to the convertible debenture
holders.
Environmental
Compliance
Our
current and future exploration and development activities, as well as our future
mining and processing operations, are subject to various federal, state and
local laws and regulations in the countries in which we conduct our activities.
These laws and regulations govern the protection of the environment,
prospecting, development, production, taxes, labor standards, occupational
health, mine safety, toxic substances and other matters. We expect to be able
to
comply with those laws and do not believe that compliance will have a material
adverse effect on our competitive position. We intend to obtain all licenses
and
permits required by all applicable regulatory agencies in connection with our
mining operations and exploration activities. We intend to maintain standards
of
environmental compliance consistent with regulatory requirements.
As
of
December 31, 2005, we have accrued $12.6 million related to reclamation,
severance and other closure requirements at Montana Tunnels, an increase of
$0.9
million from December 31, 2004. This liability is covered by a combination
of
surety bonds, restricted cash and property totaling $17.0 million at December
31, 2005. We have accrued what management believes is the present value of
our
best estimate of the liability as of December 31, 2005; however, it is possible
that our obligation may change in the near or long term depending on a number
of
factors.
CRITICAL
ACCOUNTING POLICIES
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make a variety of estimates and
assumptions that affect (i) the reported amounts of assets and liabilities
and
disclosure of contingent assets and liabilities as of the date of the financial
statements and (ii) the reported amounts of revenues and expenses during the
reporting periods covered by the financial statements.
Our
management routinely makes judgments and estimates about the effect of matters
that are inherently uncertain. As the number of variables and assumptions
affecting the future resolution of the uncertainties increase, these judgments
become even more subjective and complex. We have identified certain accounting
policies that we believe are most important to the portrayal of our current
financial condition and results of operations. Our significant accounting
policies are disclosed in Note 3 to the Consolidated Financial Statements
included in this Annual Report on Form 10-K.
Revenue
Recognition
Sales
of
metals products sold directly to smelters are recorded when title and risk
of
loss transfer to the smelter at current spot metals prices. We must estimate
the
price at which our metals will be sold in reporting our profitability and cash
flow. Recorded values are adjusted monthly until final settlement. Sales of
metal in products tolled, rather than sold to smelters, are recorded at
contractual amounts when title and risk of loss transfer to the
buyer.
Stripping
Costs
On
March
30, 2005, the Financial Accounting Standard Board (“FASB”) ratified the
consensus of the Emerging Issues Task Force (“EITF”) Issue 04-06 that stripping
costs incurred during the production phase of a mine are variable production
costs that should be included in the costs of the inventory produced during
the
period that the stripping costs are incurred.
In
2004
and prior periods, Apollo deferred or accrued stripping costs incurred during
production, as appropriate, and charged these costs to operations on the basis
of the estimated average stripping ratio for Montana Tunnels. Commencing in
the
second quarter of 2005, Apollo changed its accounting policy under Canadian
GAAP
and U.S. GAAP with respect to stripping costs to be consistent with the
consensus reached by the EITF, on the basis that the consensus results in a
more
reliable, relevant and consistent application of GAAP. This change has been
applied retrospectively by restating prior periods. The effect of this change
was to increase the deficit at January 1, 2003 by $12,129,000 and to increase
the net loss for the years ended December 31, 2004 and 2003 by $12,818,000
($0.16 per share) and $11,904,000 ($0.22 per share), respectively.
Depreciation
and Depletion
Depreciation
is based on the estimated useful lives of the assets and is computed using
straight-line and unit-of-production methods. Depletion is computed using the
unit-of-production method. The units-of-production method under Canadian GAAP
is
based on proven and probable ore reserves and a portion of resources expected
to
be converted to reserves based on past results. As discussed above, our
estimates of proven and probable ore reserves and resources may change, possibly
in the near term, resulting in changes to depreciation, depletion and
amortization.
Impairment
of Long-Lived Assets
We
review
the net carrying value of all facilities, including idle facilities, on a
periodic basis. We estimate the net realizable value of each property based
on
the estimated undiscounted future cash flows that will be generated from
operations at each property, the estimated salvage value of the surface plant
and equipment and the value associated with property interests. These estimates
of undiscounted future cash flows are dependent upon the estimates of metal
to
be recovered from proven and probable ore reserves and mineral resources
expected to be converted into mineral reserves (see discussion above), future
production cost estimates and future metals price estimates over the estimated
remaining mine life. If undiscounted cash flows are less than the carrying
value
of a property, an impairment loss is recognized based upon the estimated
expected future cash flows from the property discounted at an interest rate
commensurate with the risk involved.
Environmental
Matters
When
it
is probable that costs associated with environmental remediation obligations
will be incurred and they are reasonably estimable, we accrue such costs at
the
most likely estimate. Accruals for estimated losses from environmental
remediation obligations generally are recognized no later than completion of
the
remedial feasibility study for such facility and are charged to provisions
for
closed operations and environmental matters. We periodically review our accrued
liabilities for such remediation costs as evidence becomes available indicating
that our remediation liability has potentially changed. Costs of future
expenditures for environmental remediation are not discounted to their present
value unless subject to a contractually obligated fixed payment schedule. Such
costs are based on our current estimate of amounts that are expected to be
incurred when the remediation work is performed within current laws and
regulations. Recoveries of environmental remediation costs from other parties
are recorded as assets when their receipt is deemed probable.
RELATED
PARTY TRANSACTIONS
The
Company had the following related party transactions for the three years ended
December 31, 2005, 2004 and 2003, respectively.
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Thousands)
|
|
Legal
fees paid to two law firms, a partner of each firm is a director
of the
Company
|
|
$
|
335
|
|
$
|
549
|
|
$
|
795
|
|
Consulting
services paid to a relative of an officer and director of the
Company
|
|
|
18
|
|
|
6
|
|
|
64
|
|
These
transactions are in the normal course of business and are measured at the
exchange amount which is the consideration established and agreed to by the
related parties.
ITEM
7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our
exposure to market risk includes, but is not limited to, the following risks:
changes in interest rates on our investment portfolio, changes in foreign
currency exchange rates and commodity price fluctuations.
Interest
Rate Risk
We
currently have minimal debt and thus no material interest rate exposure related
to debt. When appropriate, we invest excess cash in short-term debt instruments
of the U.S. and Canadian governments and their agencies on a fixed interest
rate
basis. Over time, the rates received on such investments may fluctuate with
changes in economic conditions. As a result, our investment income may fall
short of expectations during periods of lower interest rates. We estimate that
given the cash balances expected during 2006, a one percent change in interest
rates would result in a $100,000 change in interest income. We may in the future
actively manage our exposure to interest rate risk.
Foreign
Currency Exchange Rate Risk
The
price
of gold is denominated in U.S. dollars and the majority of our revenues and
expenses are denominated in U.S. dollars. To the extent there are fluctuations
in local currency exchange rates against the dollar, the devaluation of a local
currency is generally economically neutral or beneficial to the operation
because local salaries and supplies will decrease against the U.S. dollar
revenue stream.
Commodity
Price Risk
We
are
engaged in gold mining and related activities, including exploration,
extraction, processing and reclamation. Gold is our primary product and, as
a
result, changes in the price of gold could significantly affect our results
of
operations and cash flows. We have in the past purchased puts/calls and we
may
in the future more actively manage our exposure through hedging
programs.
ITEM
8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
The
following Consolidated Financial Statements of Apollo Gold Corporation, Report
of Independent Registered Chartered Accountants, and Comments by Independent
Registered Chartered Accountants on Canada-United States of America Reporting
Differences are filed as part of this Item 8 and are included in this Form
10-K.
|
|
Page
|
|
Report
of Independent Registered Chartered Accountants
|
|
|
F-2
|
|
Comments
by Independent Registered Chartered Accountants on Canada-United
States of
America
Reporting Differences
|
|
|
F-3
|
|
Consolidated
Balance Sheets as of December 31, 2005 and 2004
|
|
|
F-4
|
|
Consolidated
Statements of Operations for the Years Ended December 31, 2005,
2004,
and
2003
|
|
|
F-5
|
|
Consolidated
Statements of Shareholders’ Equity for the Years Ended December 31, 2005,
2004, and
2003
|
|
|
F-6
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2005, 2004,
and
2003
|
|
|
F-7
|
|
Notes
to the Consolidated Financial Statements
|
|
|
F-8
|
|
ITEM
9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There
have been no disagreements with Deloitte & Touche LLP, our independent
registered chartered accountants, regarding any matter of accounting principles
or practices or financial statement disclosure.
ITEM
9A. CONTROLS
AND PROCEDURES
Disclosure
Controls and Procedures
Apollo
maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports that we file or submit
under
the Exchange Act is recorded, processed, summarized and reported within the
time
periods specified in the SEC’s rules and forms, and that such information is
accumulated and communicated to Apollo’s management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required financial disclosure.
As
of the
end of the period covered by this report, we carried out an evaluation, under
the supervision of our management, including the Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of
our
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b)
under
the Exchange Act. Based upon, and as of the date of this evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were not effective, because of the material weaknesses
discussed below. In light of the material weaknesses described below, we
performed additional analysis and other post-closing procedures to ensure our
consolidated financial statements were prepared in accordance with generally
accepted accounting principles. Accordingly, management believes that the
financial statements included in this report fairly present in all material
respects our financial condition, results of operations and cash flows for
the
periods presented.
We
identified a material weakness for the year ended December 31, 2004. A
material weakness is a significant deficiency, or combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. We lacked appropriate review of non-routine or complex accounting
matters, related accounting entries, and appropriate documentation, disclosure
and application of Canadian and U.S. GAAP, primarily due to a lack of sufficient
personnel with a level of technical accounting expertise commensurate with
our
reporting requirements.
The
following actions were taken in 2005 to remediate this material weakness. We
established a Financial Disclosure Policy Committee to review all non-routine
accounting matters and disclosure and application of Canadian and U.S. GAAP.
We
added additional technical accounting expertise to the accounting staff. We
implemented formal policies addressing the internal controls over non-routine
or
complex accounting matters, accounting entries, appropriate documentation,
and
disclosures. However, in January 2006 a major restructuring and streamlining
at
the corporate office significantly changed the design and structure of the
internal controls and procedures at the corporate level. As of this date our
management has not had sufficient time to evaluate these controls and therefore
believes this material weakness still exists.
Changes
in Internal Control
Related
to the reduction in staffing at the Montana Tunnels mine in mid October 2005,
our controls at that location are not operating as previously designed related
to segregation of duties over procurement, inventory control and accounting
duties. Corporate management has increased its involvement with day-to-day
oversight and management of the Montana Tunnels mine, but as of this date,
management has not had sufficient time to evaluate these controls and therefore
believe the change in controls is significant enough to be reported as a
material weakness. In an effort to address this material weakness, staffing
requirements and other changes in control are being evaluated as the future
operational requirements of the Montana Tunnels mine is being
determined.
We
intend
to continue to monitor our internal controls, and if further improvements or
enhancements are identified, we will take steps to implement such improvements
or enhancements. As a result of the changes disclosed above, there were changes
in our internal control over financial reporting, which have materially
affected, or are reasonably likely to materially affect, such internal
controls.
Sarbanes-Oxley
Act Section 404 Internal Control Reporting Requirements
ITEM
9B. OTHER
INFORMATION
None.
PART
III
ITEM
10. DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information
regarding directors of Apollo is incorporated by reference to the section
entitled “Proposal #1 - Election of Directors” in our definitive proxy statement
to be filed with the Securities and Exchange Commission pursuant to Regulation
14A in connection with the 2006 annual meeting of shareholders (the “Proxy
Statement”). Reference is made to the information set forth under the section
entitled “Executive Officers” in the Proxy Statement which information is
incorporated by reference in this Annual Report on Form 10-K.
ITEM
11. EXECUTIVE
COMPENSATION
Reference
is made to the information set forth under the section entitled “Compensation
Table for Named Executive Officers” in the Proxy Statement, which information is
incorporated by reference in this Annual Report on Form 10-K.
ITEM
12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference
is made to the information set forth under the section entitled “Beneficial
Ownership Table” in the Proxy Statement, which information is incorporated by
reference in this Annual Report on Form 10-K.
ITEM
13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Reference
is made to the information contained under the section entitled “Interests of
Insiders and Others in Material Transactions” contained in the Proxy Statement,
which information is incorporated by reference in this Annual Report on Form
10-K.
ITEM
14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
Reference
is made to the information contained under the section entitled “Report of the
Audit and Finance Committee” contained in the Proxy Statement, which information
is incorporated by reference in this Annual Report on Form 10-K.
PART
IV
ITEM
15. EXHIBITS,
FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents
filed as part of this Annual Report on Form 10-K or incorporated by
reference:
(1) Our
consolidated financial statements are listed on the “Index to Financial
Statements” on Page F-1 to this report.
(2) Financial
Statement Schedules (omitted because they are either not required, are not
applicable, or the required information is disclosed in the Notes to the
Consolidated Financial Statements or related notes).
(3) The
following exhibits are filed with this Annual Report on Form 10-K or
incorporated by reference.
1.1
|
|
Underwriting
Agreement between Apollo Gold Corporation and Regent Mercantile
Bancorp,
Inc., filed with the SEC on October 25, 2004, as Exhibit 1.1 to the
Current Report on Form 8-K.
|
|
|
|
3.1
|
|
Certificate
of Continuance filed May 28, 2003, filed with the SEC on June 23,
2003, as
Exhibit 3.12 to the Registration Statement on Form 10 (File No.
001-31593).
|
|
|
|
3.2
|
|
By-Laws
of the Registrant, as amended to date, filed with the SEC on June
23,
2003, as Exhibit 3.13 to the Registration Statement on Form 10 (File
No. 001-31593).
|
|
|
|
4.1
|
|
Sample
Certificate of Common Shares of the Registrant, filed with the
SEC on June
23, 2003, as Exhibit 4.1 to the Registration Statement on Form 10
(File No. 001-31593).
|
|
|
|
4.2
|
|
Compensation
Warrant to Purchase Common Shares of Apollo Gold Corporation issued
by
Apollo Gold Corporation to Regent Mercantile Bancorp Inc. on October
19,
2004, filed with the SEC on October 25, 2004, as Exhibit 4.2 to the
Current Report on Form 8-K.
|
|
|
|
4.3
|
|
Compensation
Option to Purchase Compensation Warrants of Apollo Gold Corporation
issued
by Apollo Gold Corporation to Regent Mercantile Bancorp Inc., dated
November 4, 2004, filed with the SEC on November 9, 2004, as
Exhibit 4.6 to the Current Report on Form 8-K.
|
|
|
|
4.4
|
|
Form
Amendment to Warrants to Purchase Common Shares dated November
4, 2004,
filed with the SEC on January 13, 2006 as Exhibit 4.1 to the Current
Report on Form 8-K.
|
|
|
|
4.5
|
|
Subscription
Agreement by and among Apollo Gold Corporation and certain investors,
dated December 31, 2004, filed with the SEC on January 5, 2005
as
Exhibit 4.1 to the Current Report on Form 8-K.
|
|
|
|
4.6
|
|
Form
of Registration Rights Agreement by and among Apollo Gold Corporation
and
certain investors, dated December 31, 2004, filed with the SEC
on January
5, 2005 as Exhibit 4.2 to the Current Report on Form
8-K.
|
|
|
|
4.7
|
|
Subscription
Details Dated June 30, 2005, by and between Apollo Gold Corporation
and
BMO Nesbitt Burns Inc., filed with the SEC on August 9, 2005 as
Exhibit
4.3 to the Quarterly Report on Form 10-Q.
|
|
|
|
4.8
|
|
Subscription
for Shares dated June 1, 2005, by and between Apollo Gold Corporation
and
Jipangu Inc. filed with the SEC on August 9, 2005 as Exhibit 4.1
to the
Quarterly Report on Form 10-Q.
|
|
|
|
4.9
|
|
Amendment
No. 1 to Registration Rights Agreement dated June 1, 2005, by and
between
Apollo Gold Corporation and Jipangu Inc. dated January 25, 2006,
amending
the Registration Rights Agreement dated June 1, 2005, filed with
the SEC
on August 9, 2005 as Exhibit 4.2 to the Quarterly Report on Form
10-Q,
filed with the SEC on January 26, 2006 as Exhibit 4.1 to the Current
Report on Form 8-K.
|
|
|
|
4.10
|
|
Side
Letter by Jipangu Inc. dated January 18, 2006 and accepted by Apollo
Gold
Corporation on January 25, 2006 with an effective date of January
18,
2006, amending the Apollo Gold Subscription Agreement for Units
dated
October 17, 2005, filed with the SEC on October 28, 2005 as Exhibit
4.1 to
the Current Report on Form 8-K, filed with the SEC on January 26,
2006 as
Exhibit 4.2 to the Current Report on Form 8-K.
|
|
|
|
4.11
|
|
Amendment
No. 1 to Registration Rights Agreement dated October 17, 2005,
by and
between Apollo Gold Corporation and Jipangu Inc. dated January
25, 2006,
amending the Registration Rights Agreement dated October 17, 2005,
filed
with the SEC on October 28, 2005 as Exhibit 4.2 to the Current
Report on
Form 8-K, filed with the SEC on January 26, 2006 as Exhibit 4.3
to the
Current Report on Form 8-K.
|
10.1
|
|
Amended
and Restated Employment Agreement dated May, 2003, by and between
Apollo
Gold Corporation and R. David Russell, filed with the SEC on June
23,
2003, as Exhibit 10.1 to the Registration Statement on Form 10 (File
No. 001-31593).
|
|
|
|
10.2
|
|
Amended
and Restated Employment Agreement dated May, 2003, by and between
Apollo
Gold Corporation and Richard F. Nanna, Vice-President, filed with
the SEC
on June 23, 2003, as Exhibit 10.2 to the Registration Statement on
Form 10 (File No. 001-31593).
|
|
|
|
10.3
|
|
Employment
Agreement between Apollo Gold Corporation and Melvyn Williams,
effective
as of February 16, 2004, as amended, filed with the SEC on September
24,
2004 as Exhibit 10.3 to the Current Report on Form
8-K.
|
|
|
|
10.4
|
|
Form
of Amendment No. 1 to Amended and Restated Employment Agreement,
dated
January 23, 2006, by and between Apollo Gold Corporation and each
of R.
David Russell, Melvyn Williams and Richard F. Nanna, filed with
the SEC on
January 27, 2006 as Exhibit 10.2 to the Current Report on Form
8-K.
|
|
|
|
10.5
|
|
Form
of Severance Agreement and Release, dated February 18, 2006, by
and
between Apollo Gold Corporation and each of Donald W. Vagstad,
Donald O.
Miller, David K. Young and James T. O’Neil, filed with the SEC on January
27, 2006 as Exhibit 10.1 to the Current Report on Form
8-K.
|
|
|
|
10.6
|
|
Agency
Agreement between Apollo Gold Corporation and Regent Mercantile
Bancorp
Inc., dated November 4, 2004, filed with the SEC on November 9,
2004 as
Exhibit 1.1 to the Current Report on Form 8-K.
|
|
|
|
10.7
|
|
Trust
Indenture by and among Apollo Gold Corporation; Apollo Gold, Inc.;
and The
Canada Trust Company, dated November 4, 2004, filed with the SEC
on
November 9, 2004 as Exhibit 4.2 to the Current Report Form
8-K.
|
|
|
|
10.8
|
|
General
Security Agreement by Apollo Gold Corporation as Debtor in favor
of The
Canada Trust Company, dated as of January 4, 2006, filed with the
SEC on
January 13, 2006 as Exhibit 10.1 to the Current Report on Form
8-K.
|
|
|
|
10.9
|
|
First
Supplemental Indenture to the Trust Indenture dated December 13,
2004, by
and among Apollo Gold Corporation, Apollo Gold, Inc., and The Canada
Trust
Company, filed with the SEC on January 13, 2006 as Exhibit 10.3 to
the Current Report on Form 8-K.
|
|
|
|
10.10
|
|
Letter
from Apollo Gold Corporation to the Debentureholders of the Series
2004-B
Convertible Secured Debentures, dated December 19, 2005, filed
with the
SEC on January 13, 2006 as Exhibit 10.4 to the Current Report on
Form
8-K.
|
|
|
|
10.11
|
|
Stock
Purchase Agreement among Jipangu Inc., Jipangu International Inc.,
Apollo
Gold, Inc. and Apollo Gold Corporation made as of October 17, 2005,
filed
with the SEC on October 28, 2005 as Exhibit 10.1 to the Current
Report on
Form 8-K.
|
|
|
|
10.12
|
|
Promissory
Note by Apollo Gold Corporation as Maker and Jipangu Inc. as Holder,
dated
October 17, 2005, filed with the SEC on October 28, 2005 as Exhibit
10.2
to the Current Report on Form 8-K.
|
|
|
|
10.13
|
|
Apollo
Gold Corporation Plan of Arrangement Stock Option Incentive Plan,
filed
with the SEC on June 23, 2003, as Exhibit 10.7 to the Registration
Statement on Form 10 (File No. 001-31593).
|
|
|
|
10.14
|
|
Apollo
Gold Corporation Stock Option Incentive Plan, filed with the SEC
on June
23, 2003, as Exhibit 10.8 to the Registration Statement on Form 10
(File No. 001-31593).
|
|
|
|
10.15
|
|
Form
of Stock Option Agreement used for Apollo Gold Corporation Stock
Option
Incentive Plan, filed with the SEC on June 23, 2003, as Exhibit 10.9
to the Registration Statement on Form 10 (File No.
001-31593).
|
|
|
|
10.16
|
|
Term
Bonding Agreement dated August 1, 2002 among National Fire Insurance
Company of Hartford, Apollo Gold Corporation, Apollo Gold, Inc.
and
Montana Tunnels Mining, Inc., filed with the SEC on June 23, 2003,
as
Exhibit 10.11 to the Registration Statement on Form 10 (File No.
001-31593).
|
|
|
|
10.17
|
|
Apollo
Gold, Inc. and Affiliated Companies Company Retirement Plan (Employee
Savings Plan) , filed with the SEC on June 23, 2003, as Exhibit 10.12
to the Registration Statement on Form 10 (File No.
001-31593).
|
|
|
|
10.18
|
|
Form
of Indemnification Agreement, dated various dates, between Apollo
Gold
Corporation and each of R. David Russell, Melvyn Williams, Richard
F.
Nanna, David K. Young, James T. O’Neil, Jr., Donald O. Miller, G. Michael
Hobart, W.S. Vaughan, Charles E. Stott, G.W. Thompson, Robert A.
Watts,
Gerald J. Schissler, Timothy M. Janke, Becky Corigliano, R. Lee
Chapman,
and Wade W. Bristol, filed with the SEC on September 24, 2004 as
Exhibit
10.1 to the Current Report on Form 8-K.
|
|
|
|
10.19
|
|
Form
of Indemnification Agreement, dated various dates, by and among
Apollo
Gold, Inc.; Apollo Gold Exploration, Inc.; Apollo Gold Finance
Inc.;
Florida Canyon Mining, Inc.; Standard Gold Mining, Inc. and each
of Donald
W. Vagstad, Wade W. Bristol, R. Lee Chapman, Becky Corigliano,
Timothy M.
Janke, Gerald J. Schissler, G.W.Thompson, and Robert A. Watts,
filed with
the SEC on September 24, 2004 as Exhibit 10.2 to the Current Report
on
Form 8-K.
|
|
|
|
10.20
|
|
Form
of Amended and Restated Indemnification Agreement, dated November
18,
2005, by and among Apollo Gold, Inc.;Apollo Gold Finance, Inc.;
Montana
Tunnels Mining, Inc. and each of R. David Russell, Melvyn Williams,
David
K. Young, Donald O. Miller, James T. O’Neil, Jr., G. Michael Hobart, W.S.
Vaughan, and Charles Stott.*
|
|
|
|
21.1
|
|
List
of subsidiaries of the Registrant.*
|
|
|
|
23.1
|
|
Consent
of Deloitte & Touche LLP*
|
|
|
|
23.2
|
|
Consent
of Mine Development Associates*
|
|
|
|
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 and Chief Financial Officer pursuant
to Section
906 of the Sarbanes-Oxley Act*
|
*
Filed
herewith.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed March 31, 2006
on
its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
APOLLO
GOLD
CORPORATION |
|
|
|
|
By: |
/s/ R.
DAVID
RUSSELL |
|
R.
David Russell |
|
President
and
Chief Executive Officer |
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has
been
signed by the following persons on behalf of the Registrant, in the capacities
and on the dates indicated.
Signature
|
Title
|
Date
|
/s/
R. DAVID RUSSELL
|
President
and Chief Executive Officer, and Director (Principal Executive
Officer)
|
March
31, 2006
|
R.
David Russell
|
|
|
|
|
/s/
CHARLES E. STOTT
|
Chairman
of the Board of Directors
|
March
31, 2006
|
Charles
E. Stott
|
|
|
|
|
|
/s/
G. MICHAEL HOBART
|
Director
|
March
31, 2006
|
G.
Michael Hobart
|
|
|
|
|
|
/s/
ROBERT W. BABENSEE
|
Director
|
March
31, 2006
|
Robert
W. Babensee
|
|
|
|
|
|
/s/
W.S. VAUGHAN
|
Director
|
March
31, 2006
|
W.S.
Vaughan
|
|
|
|
|
|
/s/
RICHARD P. GRAFF
|
Director
|
March
31, 2006
|
Richard
P. Graff
|
|
|
|
|
|
/s/
MELVYN WILLIAMS
|
Chief
Financial Officer and Senior Vice President - Finance and Corporate
Development (Principal Financial and Accounting Officer)
|
March
31, 2006
|
Melvyn
Williams
|
|
|
|
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
Report
of Independent Registered Chartered Accountants
|
|
|
F-2
|
|
Comments
by Independent Registered Chartered Accountants on Canada-United
States of
America
Reporting
Differences
|
|
|
F-3
|
|
Consolidated
Balance Sheets as of December 31, 2005 and 2004
|
|
|
F-4
|
|
Consolidated
Statements of Operations for the Years Ended December 31, 2005, 2004,
and
2003
|
|
|
F-5
|
|
Consolidated
Statements of Shareholders’ Equity for the Years Ended December 31, 2005,
2004,
and
2003
|
|
|
F-6
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2005, 2004,
and
2003
|
|
|
F-7
|
|
Notes
to the Consolidated Financial Statements
|
|
|
F-8
|
|
REPORT
OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
To
the
Shareholders of
Apollo
Gold Corporation
We
have
audited the consolidated balance sheets of Apollo Gold Corporation (the
“Company”) as at December 31, 2005 and 2004, and the consolidated statements of
operations, shareholders’ equity, and cash flows for each of the years in the
three year period ended December 31, 2005. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with Canadian generally accepted auditing
standards and the standards of the Public Company Accounting Oversight Board
(United States). These standards require that we plan and perform the audit
to
obtain reasonable assurance about whether the financial statements are free
of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In
our
opinion, these consolidated financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 2005 and
2004, and the results of its operations and its cash flows for each of the
years
in the three year period ended December 31, 2005 in accordance with Canadian
generally accepted accounting principles.
The
Company is not required to have, nor were we engaged to perform, an audit of
its
internal control over financial reporting. Our audits included consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion.
|
|
|
|
/s/ Deloitte
& Touche LLP |
|
|
|
Independent
Registered Chartered Accountants |
|
|
|
Vancouver,
British
Columbia, Canada March 30, 2006 |
|
|
|
COMMENTS
BY INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS ON CANADA-UNITED STATES OF
AMERICA REPORTING DIFFERENCES
The
standards of the Public Company Accounting Oversight Board (United States)
require the addition of an explanatory paragraph when the financial statements
are affected by conditions and events that cast substantial doubt on the
Company’s ability to continue as a going concern, such as those described in
Note 1 to the consolidated financial statements. Although we conducted our
audits in accordance with both Canadian generally accepted auditing standards
and the standards of the Public Company Accounting Oversight Board (United
States), our report to the shareholders dated March 30, 2006 is expressed in
accordance with Canadian reporting standards which do not permit a reference
to
such conditions and events in the report of the independent registered chartered
accountants when these are adequately disclosed in the consolidated financial
statements.
The
standards of the Public Company Accounting Oversight Board (United States)
require the addition of an explanatory paragraph (following the opinion
paragraph) when there are changes in accounting principles that have a material
effect on the comparability of the Company’s consolidated financial statements,
such as the change described in Note 3 (h) to the consolidated financial
statements. Our report to the shareholders, dated March 30, 2006, is expressed
in accordance with Canadian reporting standards which do not require a reference
to such changes in accounting principles in the report of the independent
registered chartered accountants when the change is properly accounted for
and
adequately disclosed in the consolidated financial statements.
|
|
|
|
/s/ Deloitte
& Touche LLP |
|
|
|
Independent
Registered Chartered Accountants |
|
|
|
Vancouver,
British
Columbia, Canada March 30, 2006 |
|
|
|
APOLLO
GOLD CORPORATION
CONSOLIDATED
BALANCE SHEETS
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
(Restated
-
Note
3(h))
|
|
|
|
|
|
ASSETS
|
|
(In
thousands of
|
|
CURRENT
|
|
U.S.
Dollars)
|
|
Cash
and cash equivalents (Note 1)
|
|
$
|
127
|
|
$
|
6,886
|
|
Accounts
receivable
|
|
|
2,638
|
|
|
2,963
|
|
Prepaids
|
|
|
400
|
|
|
109
|
|
Inventories
(Note 5)
|
|
|
1,708
|
|
|
2,192
|
|
Current
assets related to discontinued operations (Note 4)
|
|
|
-
|
|
|
10,510
|
|
Total
current assets
|
|
|
4,873
|
|
|
22,660
|
|
Property,
plant and equipment (Note 6)
|
|
|
40,045
|
|
|
37,599
|
|
Restricted
certificates of deposit (Note 7)
|
|
|
17,043
|
|
|
4,371
|
|
Deferred
financing costs (Note 9)
|
|
|
584
|
|
|
901
|
|
Non-current
assets related to discontinued operations (Note 4)
|
|
|
-
|
|
|
32,104
|
|
TOTAL
ASSETS
|
|
$
|
62,545
|
|
$
|
97,635
|
|
LIABILITIES
|
|
|
|
|
|
|
|
CURRENT
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
7,185
|
|
$
|
6,007
|
|
Accrued
liabilities
|
|
|
1,841
|
|
|
1,795
|
|
Notes
payable (Note 8)
|
|
|
596
|
|
|
789
|
|
Property
and mining taxes payable
|
|
|
1,172
|
|
|
1,070
|
|
Current
liabilities related to discontinued operations (Note 4)
|
|
|
-
|
|
|
8,224
|
|
Total
current liabilities
|
|
|
10,794
|
|
|
17,885
|
|
Notes
payable (Note 8)
|
|
|
75
|
|
|
423
|
|
Convertible
debenture (Note 9)
|
|
|
6,601
|
|
|
5,538
|
|
Accrued
site closure costs (Note 11)
|
|
|
12,634
|
|
|
11,753
|
|
Non-current
liabilities related to discontinued operations (Note 4)
|
|
|
-
|
|
|
14,815
|
|
TOTAL
LIABILITIES
|
|
|
30,104
|
|
|
50,414
|
|
|
|
|
|
|
|
|
|
Continuing
operations (Note 1)
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 15)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
Share
capital (Note 12)
|
|
|
148,295
|
|
|
141,795
|
|
Issuable
common shares
|
|
|
231
|
|
|
231
|
|
Equity
component of convertible debentures (Note 9)
|
|
|
1,809
|
|
|
1,815
|
|
Note
warrants (Note 9)
|
|
|
781
|
|
|
781
|
|
Contributed
surplus (Note 12)
|
|
|
10,561
|
|
|
9,627
|
|
Deficit
|
|
|
(129,236
|
)
|
|
(107,028
|
)
|
TOTAL
SHAREHOLDERS’ EQUITY
|
|
|
32,441
|
|
|
47,221
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$
|
62,545
|
|
$
|
97,635
|
|
|
|
|
|
APPROVED
ON BEHALF
OF THE BOARD |
|
|
|
|
|
/s/ Charles
E. Stott |
|
Charles
E. Stott, Director |
|
|
|
|
|
|
|
|
/s/ Richard
P. Graff |
|
Richard
P. Graff, Director |
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
APOLLO
GOLD CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
Year
Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
(Restated
-
Note
3(h))
|
|
(Restated
-
Note
3(h))
|
|
|
|
|
|
|
|
(In
thousands of U.S. dollars, except
for
share and per share amounts)
|
|
REVENUE
|
|
|
|
|
|
|
|
Revenue
from sale of minerals
|
|
$
|
43,254
|
|
$
|
38,254
|
|
$
|
30,858
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
Direct
operating costs
|
|
|
48,357
|
|
|
52,473
|
|
|
34,184
|
|
Depreciation
and amortization
|
|
|
2,551
|
|
|
2,640
|
|
|
6,135
|
|
General
and administrative expenses
|
|
|
7,588
|
|
|
7,095
|
|
|
4,651
|
|
Stock-based
compensation
|
|
|
597
|
|
|
767
|
|
|
376
|
|
Accretion
expense - accrued site closures costs
|
|
|
881
|
|
|
820
|
|
|
500
|
|
Exploration
and business development
|
|
|
918
|
|
|
1,051
|
|
|
2,117
|
|
|
|
|
60,892
|
|
|
64,846
|
|
|
47,963
|
|
OPERATING
LOSS
|
|
|
(17,638
|
)
|
|
(26,592
|
)
|
|
(17,105
|
)
|
OTHER
INCOME (EXPENSES)
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
397
|
|
|
313
|
|
|
213
|
|
Interest
expense
|
|
|
(2,533
|
)
|
|
(252
|
)
|
|
(205
|
)
|
Gain
on sale of property, plant and equipment
|
|
|
3,848
|
|
|
6
|
|
|
76
|
|
Foreign
exchange (loss) gain and other
|
|
|
(35
|
)
|
|
(770
|
)
|
|
1,231
|
|
LOSS
FROM CONTINUING OPERATIONS FOR THE
YEAR
|
|
|
(15,961
|
)
|
|
(27,295
|
)
|
|
(15,790
|
)
|
(LOSS)
INCOME FROM DISCONTINUED
OPERATIONS
FOR THE YEAR (Note 4)
|
|
|
(6,247
|
)
|
|
(3,712
|
)
|
|
1,700
|
|
NET
LOSS FOR THE YEAR
|
|
$
|
(22,208
|
)
|
$
|
(31,007
|
)
|
$
|
(14,090
|
)
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
AND DILUTED NET LOSS PER SHARE FROM:
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
(0.16
|
)
|
$
|
(0.34
|
)
|
$
|
(0.29
|
)
|
Discontinued
operations
|
|
|
(0.06
|
)
|
|
(0.05
|
)
|
|
0.03
|
|
|
|
$
|
(0.22
|
)
|
$
|
(0.39
|
)
|
$
|
(0.26
|
)
|
BASIC
AND DILUTED WEIGHTED-AVERAGE
NUMBER
OF SHARES OUTSTANDING
|
|
|
101,811,291
|
|
|
78,716,042
|
|
|
54,536,679
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
APOLLO
GOLD CORPORATION
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
|
|
Share
Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Shares
|
|
|
Amount
|
|
|
|
|
|
Equity
Component of Convertible
Debentures
|
|
|
Special Warrants
and Note Warrant
|
|
|
Contributed
Surplus
|
|
|
Deficit
|
|
|
Total
|
|
|
|
(In
thousands of U.S. dollars, except for number of
shares)
|
|
Balance,
December 31, 2002
|
|
40,190,874
|
|
$
|
72,206
|
|
$
|
231
|
|
$
|
-
|
|
$
|
6,305
|
|
$
|
7,023
|
|
$
|
(56,080
|
)
|
$
|
29,685
|
|
Shares
issued for cash (Note
12(c))
|
|
24,432,300
|
|
|
37,314
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
388
|
|
|
-
|
|
|
37,702
|
|
Conversion
of special warrants
|
|
6,000,000
|
|
|
6,305
|
|
|
-
|
|
|
-
|
|
|
(6,305
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Warrants
exercised
|
|
2,381,500
|
|
|
3,810
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,810
|
|
Options
exercised
|
|
158,616
|
|
|
127
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
127
|
|
Nevoro
acquisition, senior
executive share compensation
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
376
|
|
|
-
|
|
|
376
|
|
Shares
issued to supplier
|
|
50,000
|
|
|
113
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
113
|
|
Shares
issued for land
|
|
61,500
|
|
|
134
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
134
|
|
Fiscal
2002 stock-based compensation
issued in 2003
|
|
265,000
|
|
|
615
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(615
|
)
|
|
-
|
|
|
-
|
|
Net
loss
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(14,090
|
)
|
|
(14,090
|
)
|
Balance,
December 31, 2003, as
previously reported
|
|
73,539,790
|
|
|
120,624
|
|
|
231
|
|
|
-
|
|
|
-
|
|
|
7,172
|
|
|
(70,170
|
)
|
|
57,857
|
|
Cumulative
effect of change
in accounting policy (Note 3(n))
|
|
-
|
|
|
257
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5,594
|
|
|
(5,851
|
)
|
|
-
|
|
Adjusted
balance, December
31, 2003
|
|
73,539,790
|
|
|
120,881
|
|
|
231
|
|
|
-
|
|
|
-
|
|
|
12,766
|
|
|
(76,021
|
)
|
|
57,857
|
|
Units
issued for cash (Note
12(b)(ii))
|
|
8,299,999
|
|
|
4,873
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
622
|
|
|
-
|
|
|
5,495
|
|
Conversion
of special warrants
(Note 12(b)(i))
|
|
2,326,666
|
|
|
1,449
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
50
|
|
|
-
|
|
|
1,499
|
|
Flow-through
common shares
(Note 12(b)(iii))
|
|
714,285
|
|
|
515
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
515
|
|
Warrants
exercised
|
|
5,399,848
|
|
|
12,695
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,083
|
)
|
|
-
|
|
|
8,612
|
|
Options
exercised
|
|
399,054
|
|
|
966
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(647
|
)
|
|
-
|
|
|
319
|
|
Shares
reacquired and cancelled
|
|
(20,500
|
)
|
|
(48
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(48
|
)
|
Shares
issued for Huizopa
interest (Note 12 (b)(v))
|
|
48,978
|
|
|
88
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
88
|
|
Shares
issued for 2003 stock-based
compensation
|
|
265,000
|
|
|
376
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(376
|
)
|
|
-
|
|
|
-
|
|
Bridge
loan compensation
warrants
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
275
|
|
|
-
|
|
|
275
|
|
Equity
component of convertible
debentures
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,815
|
|
|
-
|
|
|
63
|
|
|
-
|
|
|
1,878
|
|
Note
warrant
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
781
|
|
|
27
|
|
|
-
|
|
|
808
|
|
Debenture
compensation
warrants
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
163
|
|
|
-
|
|
|
163
|
|
Stock-based
compensation
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
767
|
|
|
-
|
|
|
767
|
|
Net
loss
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(31,007
|
)
|
|
(31,007
|
)
|
Balance,
December 31, 2004
|
|
90,973,120
|
|
|
141,795
|
|
|
231
|
|
|
1,815
|
|
|
781
|
|
|
9,627
|
|
|
(107,028
|
)
|
|
47,221
|
|
Units
issued for cash (Note
12(a)(i))
|
|
4,199,998
|
|
|
2,587
|
|
|
-
|
|
|
-
|
|
|
- |
|
|
194 |
|
|
-
|
|
|
2,781
|
|
Shares
issued for increase in Huizopa interest (Note 12(a)(ii))
|
|
1,000,000
|
|
|
410
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
410
|
|
Shares
issued for cash (Note 12(a)(iii))
|
|
10,000,000
|
|
|
3,183
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,183
|
|
Conversion
of convertible debentures
|
|
33,333
|
|
|
23
|
|
|
-
|
|
|
(6
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
17
|
|
Engagement
fee shares and warrants (Note 12(a)(iv))
|
|
350,000
|
|
|
100
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
143
|
|
|
-
|
|
|
243
|
|
Completion
fee shares (Note 12(a)(v))
|
|
900,000
|
|
|
197
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
197
|
|
Stock-based
compensation
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
597
|
|
|
-
|
|
|
597
|
|
Net
loss
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(22,208
|
)
|
|
(22,208
|
)
|
Balance,
December 31, 2005
|
|
107,456,451
|
|
$
|
148,295
|
|
$
|
231
|
|
$
|
1,809
|
|
$
|
781
|
|
$
|
10,561
|
|
$
|
(129,236
|
)
|
$
|
32,441
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
APOLLO
GOLD CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Year
Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
(Restated
-
Note
3(h))
|
|
(Restated
-
Note
3(h))
|
|
|
|
(In
thousands of U.S. dollars)
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
|
Loss
from continuing operations for the year
|
|
$
|
(15,961
|
)
|
$
|
(27,295
|
)
|
$
|
(15,790
|
)
|
Items
not affecting cash:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,551
|
|
|
2,640
|
|
|
6,135
|
|
Amortization
of deferred financing costs
|
|
|
319
|
|
|
53
|
|
|
-
|
|
Stock-based
compensation
|
|
|
597
|
|
|
767
|
|
|
376
|
|
Accretion
expense - accrued site closure costs
|
|
|
881
|
|
|
820
|
|
|
500
|
|
Accretion
expense - convertible debenture, net of interest paid
|
|
|
1,085
|
|
|
|
)
|
|
-
|
|
Gain
on sale of property, plant and equipment
|
|
|
(3,848
|
)
|
|
(6
|
)
|
|
(76
|
)
|
Reclamation
and closure costs and other
|
|
|
372
|
|
|
6
|
|
|
(180
|
)
|
Bridge
loan compensation warrants
|
|
|
-
|
|
|
275
|
|
|
-
|
|
Net
change in non-cash operating working capital items (Note
17)
|
|
|
1,845
|
|
|
3,423
|
|
|
(1,094
|
)
|
Discontinued
operations
|
|
|
848
|
|
|
(1,299
|
)
|
|
6,999
|
|
Net
cash used in operating activities
|
|
|
(11,311
|
)
|
|
(20,708
|
)
|
|
(
3,130
|
)
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment expenditures
|
|
|
(5,487
|
)
|
|
(13,018
|
)
|
|
(8,518
|
)
|
Short-term
investments
|
|
|
-
|
|
|
5,855
|
|
|
(5,855
|
)
|
Proceeds
from disposal of property, plant and equipment
|
|
|
4,526
|
|
|
-
|
|
|
339
|
|
Restricted
certificate of deposit and other assets
|
|
|
(12,671
|
)
|
|
(1,286
|
)
|
|
(1,320
|
)
|
Proceeds
from disposition of discontinued operations
|
|
|
14,000
|
|
|
-
|
|
|
-
|
|
Discontinued
operations
|
|
|
1,022
|
|
|
(9,587
|
)
|
|
(3,260
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
1,390
|
|
|
(18,036
|
)
|
|
(18,614
|
)
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Proceeds
on issuance of shares
|
|
|
5,944
|
|
|
6,994
|
|
|
37,702
|
|
Proceeds
from exercise of warrants and options
|
|
|
-
|
|
|
8,931
|
|
|
3,937
|
|
Proceeds
from bridge loan
|
|
|
-
|
|
|
3,000
|
|
|
-
|
|
Repayment
of bridge loan
|
|
|
-
|
|
|
(3,000
|
)
|
|
-
|
|
Acquisition
and cancellation of shares
|
|
|
-
|
|
|
(48
|
)
|
|
-
|
|
Issuance
of flow-through common shares
|
|
|
-
|
|
|
515
|
|
|
-
|
|
Proceeds
on issuance of convertible debentures, net
|
|
|
-
|
|
|
7,525
|
|
|
-
|
|
Proceeds
from notes payable
|
|
|
-
|
|
|
-
|
|
|
1,259
|
|
Payments
of notes payable
|
|
|
(752
|
)
|
|
(1,478
|
)
|
|
(1,293
|
)
|
Discontinued
operations
|
|
|
(2,030
|
)
|
|
(2,641
|
)
|
|
(2,435
|
)
|
Net
cash provided by financing activities
|
|
|
3,162
|
|
|
19,798
|
|
|
39,170
|
|
NET
(DECREASE) INCREASE IN CASH
|
|
|
(6,759
|
)
|
|
(18,946
|
)
|
|
17,426
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
6,886
|
|
|
25,832
|
|
|
8,406
|
|
CASH
AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
127
|
|
$
|
6,886
|
|
$
|
25,832
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
1,204
|
|
$
|
560
|
|
$
|
544
|
|
Income
taxes paid
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
During
the year ended December 31, 2005 the Company issued 1,000,000 shares to Argonaut
Mines LLC (“Argonaut”) in connection with the increase of the Huizopa interest
in Mexico. Share capital and property, plant and equipment both increased by
$410 as a result of this transaction. Also, holders of the convertible
debentures converted $25 face value for common shares. The convertible debenture
decreased by $17, share capital increased by $23 and equity component of
convertible debentures decreased by $6 as a result of this conversion.
Additionally, the Company issued 1,250,000 shares and 1,250,000 warrants as
broker compensation related to the disposition of the discontinued operations,
resulting in an increase in share capital of $297 and contributed surplus of
$143 and selling expenses of $440.
During
the years ended December 31, 2005, 2004 and 2003, property, plant and equipment
totaling $211, $19 and $1,500, respectively, was acquired under capital lease
obligations.
During
the year ended December 31, 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. Property, plant and equipment totaling $340 was acquired under
a
capital lease arrangement.
During
the year ended December 31, 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.
The
accompanying notes are an integral part of these consolidated financial
statements.
APOLLO
GOLD CORPORATION
Notes
to the Consolidated Financial Statements
Years
ended December 31, 2005, 2004 and 2003
(stated
in United States dollars; tabular amounts in thousands)
1. CONTINUING
OPERATIONS
These
consolidated financial statements are prepared on the basis of a going concern
which assumes that Apollo Gold Corporation (“Apollo” or the “Company”) will
realize its assets and discharge its liabilities in the normal course of
business for the foreseeable future. To date the Company has funded its
operations through issuance of debt and equity securities, the sale of the
Nevada assets plus the sale of other surplus assets. The Company’s ability to
continue as a going concern is dependent on its ability to generate
cash flow from the sale of Montana Tunnels and/or continue to issue debt
and equity securities.
At
the
Montana Tunnels mine open pit mining was suspended on October 21, 2005.
Currently the mill continues to operate, processing low grade stockpiled
ore and
is expected to continue milling through the end of April 2006. In March
2006, the Company adopted a plan to dispose of Montana Tunnels Mining
Inc., which owns the Montana Tunnels and Diamond Hill mines.
The
Company estimates that with its year
end
cash balance, plus the $11.0 million released in January 2006 from the
restricted cash account held at December 31, 2005 as collateral security for
the
convertible debenture and the $3.5 million private placement by Jipangu Inc.
(“Jipangu”) in January 2006, it will not have sufficient funds to finance the
current work programs at the Black Fox Project and the Huizopa exploration
project (the "Huizopa Project"), as well as corporate overhead. Therefore,
the
Company is exploring financing opportunities to further develop and construct
the Black Fox Project and continue our exploration program at the Huizopa
Project. In addition, Apollo may raise funds from the sale of debt or
equity securities which may include Canadian flow-through financing to further
fund a portion of its Canadian exploration activities. The
availability, amount, terms and timing of this financing are not certain at
this
time.
If
the
Company is unable to sell the Montana Tunnels mine or secure additional
financing and therefore be unable to continue as a going concern, then material
adjustments would be required to the carrying value of assets and liabilities
and balance sheet classifications used.
2. NATURE
OF OPERATIONS
Apollo
is
engaged in gold mining including extraction, processing refining and the
production of other co-product metals, as well as related activities including
exploration and development. The Company currently owns and operates the Montana
Tunnels mine, an open pit mine and mill, producing gold doré and lead-gold
and
zinc-gold concentrates, located in the State of Montana. Mining in the open
pit
was suspended in mid October due to pit wall instability. Since the open pit
mine operations were suspended, the mill has been processing lead-gold and
concentrates from low grade ore stockpiles. The Company also owns the Diamond
Hill Mine, currently under care and maintenance, also located in the State
of
Montana. In March 2006 the Company held out the Montana Tunnels mine for sale,
which includes the Diamond Hill mine.
Apollo
has a development property, the Black Fox Project, which is located near the
Township of Matheson in the Province of Ontario, Canada. Apollo also owns
Mexican subsidiaries which own or have the right to acquire concessions at
the
Huizopa Project, located in the Sierra Madre gold belt in Chihuahua,
Mexico.
APOLLO
GOLD CORPORATION
Notes
to the Consolidated Financial Statements -
(Continued)
3. SIGNIFICANT
ACCOUNTING POLICIES
The
consolidated financial statements of Apollo are prepared by management in
accordance with Canadian generally accepted accounting principles (“Canadian
GAAP”) and except as described in Note 20, conform in all material respects with
accounting principles generally accepted in the United States (“U.S. GAAP”). The
principal accounting policies followed by the Company, which have been
consistently applied, are summarized as follows:
(a) Principles
of consolidation
The
financial statements of entities which are controlled by the Company through
voting equity interests, referred to as subsidiaries, are consolidated.
All intercompany balances and transactions are eliminated upon
consolidation. Variable Interest Entities (“VIEs”), which include, but are
not limited to, special purpose entities, trusts, partnerships, and other legal
structure, as defined by the Accounting Standards Board in Accounting Guideline
(“AcG”) 15, “Consolidation of Variable Interest Entities” (“AcG-15”), are
entities in which equity investors do not have the characteristics of a
“controlling financial interest” or there is not sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support. VIEs are subject to consolidation by the primary beneficiary who
will absorb the majority of the entities’ expected losses and/or expected
residual returns. The Company did not hold any Variable Interest
Entities as at December 31, 2005.
(b) Measurement
uncertainties
The
preparation of financial statements in conformity with Canadian GAAP requires
the Company’s management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements.
Significant estimates used herein include those relating to gold and other
metal
prices, recoverable proven and probable reserves, available resources, available
operating capital and required reclamation costs. These estimates each affect
management’s evaluation of asset impairment and the recorded balances of
property, plant and equipment, reclamation and site closure costs and the future
tax asset valuation allowance. It is reasonably possible that actual results
could differ in the near term from those and other estimates used in preparing
these financial statements and such differences could be material.
(c) Foreign
currency transactions
Transactions
denominated in Canadian dollars have been translated into U.S. dollars at the
approximate rate of exchange prevailing at the time of the transaction. Monetary
assets and liabilities denominated in foreign currencies have been translated
into U.S. dollars at the year-end exchange rate. Exchange gains and losses
are
included in operating results.
(d) Cash
and
cash equivalents
Cash
and
cash equivalents are comprised of cash, term deposits and treasury bills. The
original maturity dates of term deposits and treasury bills is not in excess
of
90 days.
APOLLO
GOLD CORPORATION
Notes
to the Consolidated Financial Statements -
(Continued)
3. SIGNIFICANT
ACCOUNTING POLICIES (continued)
(e) Inventories
Metals
inventories are stated at the lower of cost and net realizable value determined
by using the first-in, first-out method. Materials and supplies at the mine
sites are valued at the lower of direct cost of acquisition and replacement
cost.
(f) Property,
plant and equipment
Mine
development costs are capitalized after proven and probable reserves have been
identified. Amortization is calculated using the units-of-production method
over
the expected life of the operation based on the estimated recoverable gold
equivalent ounces or value of metals over proven and probable reserves and
a
portion of resources expected to be converted to reserves based on past
results.
Buildings
and equipment are recorded at acquisition cost and amortized over the remaining
reserves of the mine site on a units-of-production basis. Equipment that is
mobile is amortized on a straight-line basis over the estimated useful life
of
the equipment of five to ten years. Costs relating to repair and maintenance
costs are expensed as incurred.
Financing
and acquisition costs including interest and fees are capitalized on the basis
of expenditures incurred for the acquisition of assets and mineralized
properties and related development activities. Capitalization ceases when the
asset or property is substantially complete and ready to produce at commercial
rates.
(g) Mineral
rights
Mineral
rights include the cost of obtaining unpatented and patented United States
of
America mining claims and the cost of acquisition of properties. Significant
payments related to the acquisition of land and mineral rights are capitalized.
If a mineable ore body is discovered, such costs are amortized when production
begins using the units-of-production method based on proven and probable
reserves. If no mineable ore body is discovered or such rights are otherwise
determined to have no value, such costs are expensed in the period in which
it
is determined the property has no future economic value.
(h) Stripping
costs
On
March
30, 2005, the Financial Accounting Standard Board (“FASB”) ratified the
consensus of the Emerging Issues Task Force (“EITF”) Issue 04-06 that stripping
costs incurred during the production phase of a mine are variable production
costs that should be included in the costs of the inventory produced during
the
period that the stripping costs are incurred.
In
2004
and prior periods, Apollo deferred or accrued stripping costs incurred during
production, as appropriate, and charged these costs to operations on the basis
of the estimated average stripping ratio for Montana Tunnels. Commencing in
the
second quarter of 2005, Apollo changed its accounting policy under Canadian
GAAP
and U.S. GAAP with respect to stripping costs to be consistent with the
consensus reached by the EITF, on the basis that the consensus results in a
more
reliable, relevant and consistent application of GAAP. This change has been
applied retrospectively by restating prior periods. The effect of this change
was to increase the deficit at January 1, 2003 by $12,129,000 and to increase
the net loss for the years ended December 31, 2004 and 2003 by $12,818,000
($0.16 per share) and $11,904,000 ($0.22 per share), respectively.
APOLLO
GOLD CORPORATION
Notes
to the Consolidated Financial Statements -
(Continued)
3. SIGNIFICANT
ACCOUNTING POLICIES (continued)
(i) Exploration
expenditures
Exploration
expenditures are expensed as incurred during the reporting period.
(j) Property
evaluations
The
Company evaluates the carrying amounts of its mining properties and related
buildings, plant and equipment when events or changes in circumstances indicate
that the carrying amount may not be recoverable. Annually, or if the Company
has
reason to believe that an impairment may exist, estimated future undiscounted
cash flows are prepared using estimated recoverable ounces of gold (considering
current proven and probable reserves and mineral resources expected to be
converted into mineral reserves) and corresponding co-product credits along
with
estimated future metals prices and estimated operating and capital costs. The
inclusion of mineral resources is based on various circumstances, including
but
not limited to the existence and nature of known mineralization, location of
the
property, results of recent drilling and analysis to demonstrate the ore is
commercially recoverable. The future cash flows cover the known ore reserve
at
the time. If the future undiscounted cash flows are less than the
carrying
value of the assets, the assets will be written down to fair value and the
write-off charged to earnings in the current period.
(k) Reclamation
and closure costs
The
Company recognizes liabilities for statutory, contractual or legal obligations
associated with the retirement of property, plant and equipment, when those
obligations result from the acquisition, construction, development or normal
operation of the assets. Initially, a liability for an asset retirement
obligation is recognized at its fair value in the period in which it is
incurred. Upon initial recognition of the liability, the corresponding asset
retirement cost is added to the carrying amount of that asset and the cost
is
amortized as an expense over the economic life of the related asset. Following
the initial recognition of the asset retirement obligation, the carrying amount
of the liability is increased for the passage of time and adjusted for changes
to the amount or timing of the underlying cash flows needed to settle the
obligation.
The
present value of the reclamation liabilities may be subject to change based
on
management’s current estimates, changes in remediation technology or changes to
the applicable laws and regulations by regulatory authorities, which affects
the
ultimate cost of remediation and reclamation.
(l) Revenue
recognition
Revenue
from the sale of gold and co-products is recognized when the following
conditions are met: persuasive evidence of an arrangement exists; delivery
has
occurred in accordance with the terms of the arrangement; the price is fixed
or
determinable and collectability is reasonably assured. Revenue for gold bullion
is recognized at the time of delivery and transfer of title to counter-parties.
Revenue for lead and zinc concentrates is determined by contract as legal title
to the concentrate transfers and include provisional pricing arrangements
accounted for as an embedded derivative instrument under SFAS No. 133,
Accounting
for Derivative Instruments and Hedging Activities,
as
amended.
APOLLO
GOLD CORPORATION
Notes
to the Consolidated Financial Statements -
(Continued)
3. SIGNIFICANT
ACCOUNTING POLICIES (continued)
(m) Commodity
contracts
The
Company entered into hedging contracts for gold involving the use of
combinations of put and call options. These options had common notional amounts
and maturity dates and were designated in combination as hedges of future gold
sales on the basis that they generated offsetting cash flows. No premium was
received with respect to these options.
Providing
that the criteria for an effective hedge are met, gains and losses on the
contracts are deferred and recognized in revenue at the time of the sale of
the
designated future gold production. If the criteria are not met these contracts
will be marked to market each period.
(n) Stock
incentive plans
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
|
)
|
(o) Income
taxes
The
Company accounts for income taxes whereby future income tax assets and
liabilities are computed based on differences between the carrying amount of
assets and liabilities on the balance sheet and their corresponding tax values
using the enacted income tax rates at each balance sheet date. Future income
tax
assets also result from unused loss carryforwards and other deductions. The
valuation of future income tax assets is reviewed annually and adjusted, if
necessary, by use of a valuation allowance to reflect the estimated realizable
amount. Although the Company has tax loss carryforwards (see Note 13), there
is
uncertainty as to utilization prior to their expiry. Accordingly, the future
income tax asset amounts have been fully offset by an uncertainty
provision.
(p) Loss
per
share
The
basic
loss per share is computed by dividing the net loss by the weighted average
number of common shares outstanding during the year. The fully diluted loss
per
share reflects the potential dilution of common share equivalents, such as
outstanding stock options and share purchase warrants, in the
APOLLO
GOLD CORPORATION
Notes
to the Consolidated Financial Statements -
(Continued)
3. SIGNIFICANT
ACCOUNTING POLICIES (continued)
weighted
average number of common shares outstanding during the year, if dilutive. For
this purpose, the “treasury stock method” is used for the assumed proceeds upon
the exercise of stock options and warrants that are used to purchase common
shares at the average market price during the year.
(q) Comparative
figures
Certain
of the prior year’s figures have been reclassified to conform to the current
year’s presentation. In particular, the assets and liabilities of the
discontinued operations (Note 4) as at December 31, 2004 and their results
of
operations and cash flows for the years ended December 31, 2004 and 2003 have
been reclassified as discontinued operations.
4. DISCONTINUED
OPERATIONS
On
November 18, 2005, the Company sold its Nevada properties (“the Nevada Assets”)
to Jipangu for $14.0 million in cash, resulting in the Company recording a
total
impairment of $8.7 million. The Nevada Assets include the Florida Canyon Mine,
an open pit heap leach operation located in the State of Nevada; the Standard
Mine, an open pit heap leach operation situated 8 kilometers south of the
Florida Canyon Mine; and four exploration properties located near the Florida
Canyon Mine.
The
following tables present summarized financial information related to
discontinued operations:
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
ASSETS
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
-
|
|
$
|
61
|
|
Broken
ore on leach pad - current
|
|
|
-
|
|
|
8,960
|
|
Other
non-cash current assets
|
|
|
-
|
|
|
1,489
|
|
Current
assets related to discontinued operations
|
|
|
-
|
|
|
10,510
|
|
Broken
ore on leach pad - long-term
|
|
|
-
|
|
|
4,824
|
|
Property,
plant and equipment
|
|
|
-
|
|
|
20,945
|
|
Restricted
certificate of deposit
|
|
|
-
|
|
|
4,995
|
|
Deferred
loss on commodity contracts (Note 14)
|
|
|
-
|
|
|
1,340
|
|
Non-current
assets related to discontinued operations
|
|
|
-
|
|
|
32,104
|
|
Total
assets related to discontinued operations
|
|
|
-
|
|
|
42,614
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Current
liabilities related to discontinued operations
|
|
|
-
|
|
|
8,224
|
|
Notes
payable
|
|
|
-
|
|
|
376
|
|
Accrued
site closure costs
|
|
|
-
|
|
|
14,439
|
|
Non-current
liabilities related to discontinued operations
|
|
|
-
|
|
|
14,815
|
|
Total
liabilities related to discontinued operations
|
|
|
-
|
|
|
23,039
|
|
Net
assets related to discontinued operations
|
|
$
|
-
|
|
$
|
19,575
|
|
APOLLO
GOLD CORPORATION
Notes
to the Consolidated Financial Statements -
(Continued)
4. DISCONTINUED
OPERATIONS (continued)
|
|
Year
Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Revenue
from sale of minerals
|
|
$
|
18,591
|
|
$
|
26,487
|
|
$
|
35,983
|
|
Direct
operating costs
|
|
|
17,375
|
|
|
26,190
|
|
|
28,535
|
|
Depreciation
and amortization
|
|
|
867
|
|
|
2,581
|
|
|
3,731
|
|
Accretion
expense
|
|
|
898
|
|
|
598
|
|
|
780
|
|
Royalty
expenses
|
|
|
267
|
|
|
669
|
|
|
898
|
|
Exploration
and business development
|
|
|
218
|
|
|
-
|
|
|
-
|
|
Impairment
|
|
|
8,724
|
|
|
-
|
|
|
-
|
|
|
|
|
28,349
|
|
|
30,038
|
|
|
33,944
|
|
Operating
(loss) income
|
|
|
(9,758
|
)
|
|
(3,551
|
)
|
|
2,039
|
|
Interest
expense
|
|
|
(74
|
)
|
|
(216
|
)
|
|
(339
|
)
|
Gain
on sale of property, plant and equipment and
other
|
|
|
3,547
|
|
|
(177
|
)
|
|
-
|
|
Realized
and unrealized gain on commodity
contracts
(Note 14)
|
|
|
38
|
|
|
232
|
|
|
-
|
|
(Loss)
income from discontinued operations
|
|
$
|
(6,247
|
)
|
$
|
(3,712
|
)
|
$
|
1,700
|
|
5. INVENTORIES
Inventories
consist of:
|
|
2005
|
|
2004
|
|
Concentrate
inventory
|
|
$
|
94
|
|
$
|
729
|
|
Doré
inventory
|
|
|
14
|
|
|
45
|
|
Materials
and supplies
|
|
|
1,600
|
|
|
1,418
|
|
|
|
$
|
1,708
|
|
$
|
2,192
|
|
6. PROPERTY,
PLANT AND EQUIPMENT
The
components of property, plant and equipment at December 31 are as
follows:
|
|
2005
|
|
2004
|
|
|
|
Cost
|
|
Accumulated
Depreciation
|
|
Net
Book
Value
|
|
Net
Book
Value
|
|
Mine
assets
|
|
|
|
|
|
|
|
|
|
Building,
plant and equipment
|
|
$
|
8,919
|
|
$
|
3,163
|
|
$
|
5,756
|
|
$
|
7,738
|
|
Mining
properties and development costs
|
|
|
31,497
|
|
|
2,663
|
|
|
28,834
|
|
|
24,406
|
|
|
|
|
40,416
|
|
|
5,826
|
|
|
34,590
|
|
|
32,144
|
|
Mineral
rights
|
|
|
5,455
|
|
|
-
|
|
|
5,455
|
|
|
5,455
|
|
Total
property, plant and equipment
|
|
$
|
45,871
|
|
$
|
5,826
|
|
$
|
40,045
|
|
$
|
37,599
|
|
APOLLO
GOLD CORPORATION
Notes
to the Consolidated Financial Statements -
(Continued)
7. RESTRICTED
CERTIFICATES OF DEPOSIT
As
at
December 31 restricted certificates of deposit are as follows:
|
|
2005
|
|
2004
|
|
Restricted
certificate of deposit - Site closure obligation - Montana Tunnels
(a)
|
|
$
|
5,465
|
|
$
|
3,810
|
|
Restricted
certificate of deposit - Site closure obligation - Black
Fox
|
|
|
581
|
|
|
561
|
|
Restricted
certificate of deposit - Convertible Debenture (b)
|
|
|
10,997
|
|
|
-
|
|
|
|
$
|
17,043
|
|
$
|
4,371
|
|
(a) Restricted
certificate of deposit - Site closure obligation - Montana Tunnels
The
restricted certificate of deposit represents cash that has been placed in trust
as security to the State of Montana relating to the Company’s site closure
obligations (see Note 11).
The
Company has entered into an agreement with CNA, an insurer, to complete the
bonding requirements at MTMI. CNA committed to an approximate $15 million
15-year term bonding facility which is not cancelable, unless MTMI fails to
meet
its requirements under the arrangement. The agreement obligates MTMI to make
current payments of $150,000 monthly until the balance in the trust account
is
equal to the penal sum of the CNA bond. The monthly payments are adjusted
annually in August of each year and are dependent upon the average gold price
for the previous twelve months. At December 31, 2005, the restricted certificate
of deposit for bonding requirements at Montana Tunnels is $5.5 million (2004
-
$3.8 million). In March 2006, the Company adopted a plan to dispose of
MTMI.
(b) Restricted
certificate of deposit - Convertible Debenture
The
restricted certificate of deposit - convertible debenture represents cash that
has been placed in trust with The Canada Trust Company as security for the
convertible debenture (Note 9). This restriction was released on January 8,
2006
(Note 21(a)).
8. NOTES
PAYABLE
The
notes
payable are secured by a fixed charge on certain machinery and equipment and
bear interest at various rates between 2.76% and 7.5%, (2004 - 2.76% and 7.5%)
and are repayable as follows at December 31, 2005:
2006
|
|
$
|
596
|
|
2007
|
|
|
75
|
|
Total
notes payable
|
|
|
671
|
|
Less
current portion
|
|
|
(596
|
)
|
Total
long-term obligations
|
|
$
|
75
|
|
9. CONVERTIBLE
DEBENTURE
On
November 4, 2004 the Company completed a $10.5 million offering consisting
of
$8.8 million special notes and $1.7 million special warrants (Note 12 (b)(i)).
These special notes were converted into $8.8 million convertible secured
debentures (the “Debentures”) and 5,253,750 warrants (the “Note Warrants”). The
Debentures mature on December 16, 2007 and bear interest at a rate of 12%
per annum, payable quarterly in arrears beginning on December 31, 2004. The
Note
Warrants
APOLLO
GOLD CORPORATION
Notes
to the Consolidated Financial Statements -
(Continued)
9. CONVERTIBLE
DEBENTURE (continued)
expire
on November 4, 2007 and are each exercisable for one common share of the
Company at a price of $0.40 per common share, except as noted (Note
21(a)).
The
Debentures are convertible, at the option of the holder, at any time prior
to
maturity or five days prior to redemption into common shares of the Company
at a
price of $0.75 per common share. Since redemption can be made either by cash
or
by common shares at the option of the Company, the Debentures are classified
as
a compound financial instrument for accounting purposes.
The
value
of the Debentures is comprised of a $5.6 million fair value of the Debentures,
$2.2 million fair value of the holder’s option to convert the principal balance
into common shares, and $0.9 million fair value of the Note Warrants. These
components have been measured at their respective fair values on the date that
the Debentures and Note Warrants were issued. The $5.6 million fair value of
the
Debentures is classified as a liability and the $3.1 million combined fair
value
of the conversion option and Note Warrants have been classified in shareholders’
equity. Over the three-year term of the Debentures, the fair value of the
Debentures are accreted to their face value. The periodic accretion of the
Debentures is charged to accretion expense. For the year ended December 31,
2005, the Company recorded accretion of $2.1 million (2004 - $71,000) related
to
the Debentures as a charge to accretion expense with a corresponding credit
to
the liability component of the Debentures.
The
Company incurred equity issuance costs of $0.4 million and deferred financing
costs of $0.8 million. Deferred financing costs are amortized over the term
of
the Debenture. During 2005 and 2004, $319,000 and $53,000, respectively, of
deferred financing costs were charged to operations.
In
addition, the agents were granted 1,167,500 warrants as additional compensation
in connection with the issuance of the Debentures. Each warrant entitles the
holder to acquire one share at a price of $0.80 per share until November 4,
2006. In the event that the weighted average trading price of the Company’s
shares on the TSX is more that $2.00 for 20 consecutive trading days, the
Company has the right to cause the exercise of the warrants into shares. The
fair value of these compensation warrants of $0.3 million is comprised of
$91,000 equity issuance costs and $0.2 million deferred financing costs to
be
amortized over the term of the Debenture.
On
October 7, 2004, the Company completed a bridge loan facility for $3.0 million,
which was repaid in full from the proceeds of this offering. In connection
with
this bridge loan the agents were granted 1,000,000 compensation warrants with
an
exercise price of $0.80 expiring October 7, 2006. The fair value of these
warrants of $0.3 million is treated as a financing cost.
10. EMPLOYEE
BENEFIT PLAN
The
Company maintains a defined contribution 401(k) plan for all U.S. employees.
Employees have the right to invest up to 25% of their respective earnings up
to
the statutory limits. All U.S. employees are eligible to participate on the
first of the following month after their date of hire. In the past, the Company
matched 100% of the first 6% invested. Due to cash constraints, the Company
match was discontinued on September 10, 2004. The vesting schedule is two
years.
The
amounts charged to earnings for the Company’s defined contribution plan totaled
nil, $338,000 and $449,000 for the years ended December 31, 2005, 2004 and
2003,
respectively.
APOLLO
GOLD CORPORATION
Notes
to the Consolidated Financial Statements -
(Continued)
11. ACCRUED
SITE CLOSURE COSTS
All
of
the Company’s operations are subject to reclamation and closure requirements.
Although the ultimate amount of site restoration costs is uncertain, on a
regular basis, the Company monitors these costs and together with third party
engineers prepares internal estimates to evaluate their bonding requirements.
The estimates prepared by management are then reconciled with the requirements
of the state and federal officials.
At
December 31, 2005, the accrued site closure liability amounted to $12.6 million
(2004 - $11.8 million). This liability is based on a third party engineer
report. The liability is covered by a combination of surety bonds, a restricted
certificate of deposit and property which in aggregate are valued at
approximately $17.0 million.
In
view
of the uncertainties concerning future removal and site restoration costs,
as
well as the applicable laws and legislations, the ultimate costs to the Company
could differ materially from the amounts estimated by management. Future
changes, if any, due to their nature and unpredictability, could have a material
impact and would be reflected prospectively, as a change in accounting
estimate.
The
following table summarizes the effect to the Company’s accrued site closure
costs:
Balance,
December 31, 2002
|
|
$
|
8,679
|
|
Accretion
|
|
|
500
|
|
Expenditures
|
|
|
(31
|
)
|
Balance,
December 31, 2003
|
|
|
9,148
|
|
Accretion
|
|
|
820
|
|
Increase
in reclamation assets
|
|
|
1,785
|
|
Balance,
December 31, 2004
|
|
|
11,753
|
|
Accretion
|
|
|
881
|
|
Balance,
December 31, 2005
|
|
$
|
12,634
|
|
|
|
|
|
|
The
Company has estimated that the total obligations associated with the retirement
of the Montana Tunnels mine at December 31, 2005 are $18.3 million. The $12.6
million (2004 - $11.8 million) fair value of these obligations is determined
using a 7.5% credit adjusted risk-free discount rate and expected payment of
obligations over fifteen years.
12. SHARE
CAPITAL
(a) Shares
issued in 2005
(i) On
January 7, 2005, the Company completed the second tranche of a private placement
of 4,199,998 units with a purchase price of $0.75 for net proceeds of $2.8
million, net of expenses of $0.3 million and fair value of broker’s compensation
warrants of $0.2 million. Each unit is comprised of one common share of the
Company and 0.75 share purchase warrant, with each whole share purchase warrant
exercisable into one common share of the Company for two years at an exercise
price of $1.00 per share. In connection with the first and second tranches,
1,250,000 broker compensation warrants were issued. (See Note 12(d) for a
description of the broker compensation warrants.)
APOLLO
GOLD CORPORATION
Notes
to the Consolidated Financial Statements -
(Continued)
12. SHARE
CAPITAL (continued)
(ii) During
2005, the Company increased its interest in the Huizopa Project with Argonaut.
In consideration for such increase, the Company issued shares with a value
of
$410,000 which were recorded as property, plant and equipment within the balance
sheet. Following this arrangement, the Company’s Mexican subsidiary owns
Argonaut’s former subsidiary which has a contractual interest in two of the
concessions at the Huizopa Project. The Company no longer has any earn-in
requirement for the project, although it will still be responsible for the
underlying payments to the landowner of the project, and the payments and
performance or obligations required to maintain those concessions.
(iii) On
June
3, 2005, the Company completed the issuance to Jipangu of 10,000,000 common
shares at $0.32 (Cdn$0.40) per share for proceeds of $3.2 million, net of
expense of $32,000.
(iv) The
Company issued to BMO Nesbitt Burns Inc. (“BMO”) on June 30, 2005, as an
engagement fee to act as a financial adviser to the Company with respect to
the
sale of the Nevada Assets, 350,000 common shares of the Company and 1,250,000
common share purchase warrants of the Company, with each warrant immediately
exercisable into one common share of the company at an exercise price of
Cdn$0.40 and an expiry date of June 30, 2007.
The
1,250,000
common share purchase warrants were fair valued using an option pricing model
with the following assumptions: no dividends are paid, a volatility of the
Company’s share price of 78%, an expected life of the warrants of two years, and
an annual risk-free rate of 3.6%.
(v) On
November 30, 2005, the Company issued 900,000 common shares to BMO at $0.22
(Cdn$0.26) per share, as a completion fee related to the closing of the sale
of
the Nevada Assets.
(b) Shares
issued in 2004
(i) On
November 4, 2004, in connection with the offering of Special Notes (Note 9),
the
Company issued 2,326,666 special warrants for proceeds of $1.4 million, net
of
expenses of $0.2 million and fair value of agent’s warrants of $50,000. Each
special warrant was converted at no additional cost into one share and 0.6
share
purchase warrant entitling the purchase of one share of the Company for three
years at a price of $0.80 per share.
In
connection with this offering, the agent received a commission of 6.5% of gross
proceeds plus 232,667 compensation warrants, each warrant entitling the purchase
of one share of the Company for two years at $0.80 per share.
(ii) On
December 31, 2004, the Company completed the first tranche of a private
placement for 8,299,999 units with an exercise price of $0.75 for proceeds
of
$4.9 million, net of expenses of $0.7 million and fair value of underwriter’s
units of $0.6 million. Each unit is convertible at no additional cost into
one
common share of the Company and 0.75 share purchase warrant with each whole
share purchase warrant entitling the purchase of one share of the Company for
two years at a price of $1.00 per share. In connection with this offering,
830,000 underwriter’s units were issued with the same terms as described
above.
(iii) On
December 31, 2004, under a private placement financing, the Company issued
714,285 flow-through common shares, for aggregate proceeds of $0.5
million.
APOLLO
GOLD CORPORATION
Notes
to the Consolidated Financial Statements -
(Continued)
12. SHARE
CAPITAL (continued)
(iv) Using
the
fair value based method of stock-based compensation, share issuance costs of
$50,000 and $0.6 million were recognized for the compensation warrants and
broker units. These amounts were determined using an option pricing model with
the following weighted average assumptions: no dividends were paid, a volatility
of the Company’s share price of 64%, and an expected life of the warrants of two
years and annual risk-free rate of 3.48%.
(v) The
Company issued 48,978 shares in part consideration to meet the earn-in
requirements of the Huizopa joint venture agreement with Argonaut Mines
LLC.
(c) Shares
issued in 2003
(i) On
September 26, 2003, the Company issued 22,300,000 shares for proceeds of $37.2
million, net of agent’s commissions of $2.2 million, expenses of $0.7 million
and fair value of agent’s warrants of $0.4 million.
(ii) On
October 27, 2003, the agents exercised their over-allotment option and the
Company issued a further 2,132,300 shares for proceeds of $3.7 million, net
of
expenses of $0.2 million and fair value of agent’s warrants of
$35,000.
(iii) The
Company granted the agents 732,969 agent’s warrants with an exercise price of
$1.67 (Cdn$2.25) per warrant in connection with this issuance. These agent’s
warrants expired in 2005. Using the fair value based method for stock-based
compensation, share issuance costs of $0.4 million were recognized. This amount
was determined using an option pricing model assuming no dividends were paid,
a
volatility of the Company’s share price of 53%, an expected life of the warrants
of two years, and annual risk-free rate of 3.50%.
(d) Warrants
The
following summarizes outstanding warrants as at December 31, 2005:
Date
Issued
|
|
Number
of Warrants
|
|
Number
of Shares
|
|
Exercise
Price
|
|
Expiry
Date
|
|
|
|
|
|
|
|
Exercisable
in US$
|
|
|
|
October
19, 2004
|
|
|
1,000,000
|
|
|
1,000,000
|
|
$
|
0.80
|
|
|
October
19, 2006
|
|
November
4, 2004
|
|
|
1,400,133
|
|
|
1,400,133
|
|
|
0.80
|
|
|
November
4, 2006
|
|
December
31, 2004
|
|
|
6,224,999
|
|
|
6,224,999
|
|
|
1.00
|
|
|
December
31, 2006
|
|
November
4, 2004
|
|
|
5,253,600
|
|
|
5,253,600
|
|
|
0.80
|
|
|
November
4, 2007
|
|
November
4, 2004
|
|
|
1,396,000
|
|
|
1,396,000
|
|
|
0.80
|
|
|
November
4, 2007
|
|
January
7, 2005
|
|
|
3,149,998
|
|
|
3,149,998
|
|
|
1.00
|
|
|
January
7, 2007
|
|
|
|
|
18,424,730
|
|
|
18,424,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
in Cdn$
|
|
|
|
|
December
23, 2002
|
|
|
3,000,000
|
|
|
3,000,000
|
|
|
Cdn$
3.25
|
|
|
December
23, 2006
|
|
June
30, 2005
|
|
|
1,250,000
|
|
|
1,250,000
|
|
|
Cdn$
0.40
|
|
|
June
30, 2007
|
|
|
|
|
4,250,000
|
|
|
4,250,000
|
|
|
|
|
|
|
|
|
|
|
22,674,730
|
|
|
22,674,730
|
|
|
|
|
|
|
|
In
addition, 1,250,000 broker compensation warrants were issued and were
immediately exercisable on January 7, 2005. The broker compensation
warrants were issued in connection with the first and second
APOLLO
GOLD CORPORATION
Notes
to the Consolidated Financial Statements -
(Continued)
12. SHARE
CAPITAL (continued)
tranches
of the private placement described in Note 12(a)(i). Each broker
compensation warrant is exercisable at $0.75 into one common share of the
Company and 0.75 of a share purchase warrant, with each whole share purchase
warrant exercisable into one common share of the Company at $1.00 per common
share. The broker compensation warrants expire on January 7, 2007. The
share purchase warrants are exercisable for two years from the date of issue.
(e) Options
A
summary
of information concerning outstanding stock options at December 31, 2005 is
as
follows:
|
|
Fixed
Stock Options
|
|
Performance-based
Stock
Options
|
|
|
|
Number
of
Common
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Number
of
Common
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Balances,
December 31, 2002
|
|
|
-
|
|
$
|
-
|
|
|
2,780,412
|
|
$
|
0.80
|
|
Options
granted
|
|
|
2,039,100
|
|
|
2.20
|
|
|
-
|
|
|
-
|
|
Options
exercised
|
|
|
-
|
|
|
-
|
|
|
(158,616
|
)
|
|
0.80
|
|
Options
cancelled
|
|
|
(151,800
|
)
|
|
2.24
|
|
|
(121,642
|
)
|
|
0.80
|
|
Balances,
December 31, 2003
|
|
|
1,887,300
|
|
|
2.20
|
|
|
2,500,154
|
|
|
0.80
|
|
Options
granted
|
|
|
689,300
|
|
|
1.84
|
|
|
-
|
|
|
-
|
|
Options
exercised
|
|
|
-
|
|
|
-
|
|
|
(399,054
|
)
|
|
0.80
|
|
Options
cancelled
|
|
|
(380,300
|
)
|
|
2.22
|
|
|
(196,344
|
)
|
|
0.80
|
|
Balances,
December 31, 2004
|
|
|
2,196,300
|
|
|
2.10
|
|
|
1,904,756
|
|
|
0.80
|
|
Options
granted
|
|
|
3,039,700
|
|
|
0.58
|
|
|
-
|
|
|
-
|
|
Options
cancelled
|
|
|
(1,361,900
|
)
|
|
1.42
|
|
|
(110,174
|
)
|
|
0.80
|
|
Balances,
December 31, 2005
|
|
|
3,874,100
|
|
$
|
1.15
|
|
|
1,794,582
|
|
$
|
0.80
|
|
(i) Fixed
stock option plan
The
Company has a stock option plan that provides for the granting of options to
directors, officers, employees and service providers of the
Company.
The
following table summarizes information concerning outstanding and exercisable
fixed stock options at December 31, 2005:
APOLLO
GOLD CORPORATION
Notes
to the Consolidated Financial Statements -
(Continued)
12. SHARE
CAPITAL (continued)
Options
Outstanding
|
|
Options
Exercisable
|
|
Number
Outstanding
|
|
Expiry
Date
|
|
Weighted
Average
Exercise
Price
per Share
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
per Share
|
|
969,800
|
|
|
February
18, 2013
|
|
$
|
2.24
|
|
|
969,800
|
|
$
|
2.24
|
|
2,600
|
|
|
March
28, 2013
|
|
|
2.34
|
|
|
2,600
|
|
|
2.34
|
|
100,000
|
|
|
November
13, 2013
|
|
|
1.67
|
|
|
100,000
|
|
|
1.67
|
|
271,600
|
|
|
March
10, 2014
|
|
|
2.05
|
|
|
135,800
|
|
|
2.05
|
|
125,000
|
|
|
May
19, 2014
|
|
|
1.44
|
|
|
62,500
|
|
|
1.44
|
|
26,600
|
|
|
August
10, 2014
|
|
|
0.95
|
|
|
13,300
|
|
|
0.95
|
|
1,878,500
|
|
|
March
10, 2015
|
|
|
0.65
|
|
|
-
|
|
|
-
|
|
100,000
|
|
|
April
6, 2015
|
|
|
0.39
|
|
|
-
|
|
|
-
|
|
100,000
|
|
|
August
4, 2015
|
|
|
0.27
|
|
|
-
|
|
|
-
|
|
300,000
|
|
|
December
12, 2015
|
|
|
0.20
|
|
|
-
|
|
|
-
|
|
3,874,100
|
|
|
|
|
$
|
1.15
|
|
|
1,284,000
|
|
$
|
2.12
|
|
(ii) Performance-based
stock option plan
In
2002,
2,780,412 performance-based options with an expiry date of June 25, 2007 were
granted to certain directors, officers and employees, and were subject to
reduction if certain performance criteria were not met. In fiscal 2003, the
balance of the options vested based upon the established fiscal 2003 performance
criteria. As of December 31, 2005 there are 1,794,582 performance-based stock
options outstanding.
(f) 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:
|
|
2005
|
|
2004
|
|
2003
|
|
Risk
free interest rate
|
|
|
3.669
|
%
|
|
3.141
|
%
|
|
3.534
|
%
|
Dividend
yield
|
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
Volatility
|
|
|
73
|
%
|
|
57
|
%
|
|
75
|
%
|
Expected
life in years
|
|
|
5
|
|
|
5
|
|
|
5
|
|
As
the
Company has selected the retroactive without restatement method for reporting
the change in accounting policy related to stock compensation expense (Note
3
(n)), 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.
|
|
2003
|
|
Net
loss
|
|
|
|
As
reported
|
|
$
|
(14,090
|
)
|
Compensatory
fair value of options
|
|
|
(3,871
|
)
|
Pro
forma
|
|
$
|
(17,961
|
)
|
Basic
and diluted net loss per share
|
|
|
|
|
As
reported
|
|
$
|
(0.26
|
)
|
Pro
forma
|
|
|
(0.33
|
)
|
The
weighted average grant-date fair value of stock options granted
during 2005 was $0.36.
APOLLO
GOLD CORPORATION
Notes
to the Consolidated Financial Statements -
(Continued)
13. INCOME
TAXES
The
Company did not record a provision or benefit for income taxes for the periods
ended December 31, 2005, 2004 and 2003, due to the availability of net operating
loss carryforwards and the uncertainty of their future realization.
The
provision for income taxes reported differs from the amounts computed by
applying the cumulative Canadian federal and provincial income tax rates
to the
loss before tax provision due to the following:
|
|
2005
|
|
2004
|
|
2003
|
|
Statutory
tax rate
|
|
|
34.90
|
%
|
|
35.62
|
%
|
|
37.62
|
%
|
Recovery
of income taxes computed at standard rates
|
|
$
|
5,570
|
|
$
|
9,722
|
|
$
|
5,940
|
|
Higher
(lower) foreign tax rates
|
|
|
817
|
|
|
150
|
|
|
(425
|
)
|
Tax
losses not recognized in the period that the benefit arose
|
|
|
(6,387
|
)
|
|
(9,872
|
)
|
|
(5,515
|
)
|
|
|
$ |
- |
|
$
|
-
|
|
$
|
-
|
|
The
tax
effects of temporary differences that would give rise to significant portions
of
the future tax assets and future tax liabilities at December 31, were as
follows:
|
|
2005
|
|
2004
|
|
Future
income tax assets
|
|
|
|
|
|
Net
operating losses carried forward
|
|
$
|
46,385
|
|
$
|
37,676
|
|
Exploration
and development expenses
|
|
|
829
|
|
|
1,871
|
|
Property,
plant and equipment
|
|
|
2,672 |
|
|
10,082 |
|
Accrued
site closure costs
|
|
|
4,587
|
|
|
4,251
|
|
Other
|
|
|
5,676
|
|
|
2,542
|
|
|
|
|
60,149
|
|
|
56,422
|
|
Less:
Valuation allowance
|
|
|
(60,149
|
)
|
|
(56,422
|
)
|
Net
future income tax assets
|
|
$ |
- |
|
$
|
-
|
|
Utilization
of the net operating losses carried forward and the foreign exploration and
development expenses are subject to limitations. The Company has placed a full
valuation allowance on its excess tax assets due to a lack of past taxable
profits. It does not believe significant income tax obligations will occur
in
the near future. At December 31, 2005, the Company has the following unused
tax
losses available for tax purposes:
Country
|
|
Amount
|
|
Expiry
|
|
Canada
|
|
$
|
14,738
|
|
|
2006-2015
|
|
United
States
|
|
|
113,600
|
|
|
2011-2025
|
|
APOLLO
GOLD CORPORATION
Notes
to the Consolidated Financial Statements -
(Continued)
14. FINANCIAL
INSTRUMENTS AND RISK MANAGEMENT
(a) Market
risk
Due
to
the nature of the precious metals market, the Company is not dependent on a
significant customer to provide a market for its refined gold and silver.
However, if the Company had to change the smelters to which zinc and lead
concentrates are shipped, the additional transportation costs could be
considerable. Although it is possible that the Company could be directly
affected by weaknesses in the metals processing business, the Company
periodically monitors the financial condition of its customers.
Accounts
receivable at December 31, 2005 are due from two customers.
(b) The
estimated fair value of the Company’s financial instruments was as
follows:
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Cash
and cash equivalents
|
|
$
|
127
|
|
$
|
127
|
|
$
|
6,886
|
|
$
|
6,886
|
|
Accounts
receivable
|
|
|
2,638
|
|
|
2,638
|
|
|
2,963
|
|
|
2,963
|
|
Accounts
payable
|
|
|
7,185
|
|
|
7,185
|
|
|
6,007
|
|
|
6,007
|
|
Accrued
liabilities
|
|
|
1,841
|
|
|
1,841
|
|
|
1,795
|
|
|
1,795
|
|
Notes
payable and other liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
596
|
|
|
596
|
|
|
789
|
|
|
789
|
|
Non-current
|
|
|
75
|
|
|
75
|
|
|
423
|
|
|
423
|
|
Convertible
debenture
|
|
|
6,601
|
|
|
6,601
|
|
|
5,538
|
|
|
5,538
|
|
The
fair
value of notes payable was determined using the discounted cash flows at
prevailing market rates. The fair value of the Company’s other financial
instruments was estimated to approximate their carrying value due primarily
to
the immediate or short-term maturity of these financial
instruments.
(c) Commodity
contracts
In
2003
the Company entered into commodity 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. The contracts gave 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 continued through April
25, 2005 with a put option strike price of $295 per ounce and a call option
strike price of $345 per ounce. As at December 31, 2005 there were no ounces
remaining on these contracts.
15. COMMITMENTS
AND CONTINGENCIES
(a) Royalties
The
Company’s properties are subject to royalty obligations based on minerals
produced from the properties. The Montana Tunnels and Black Fox Project reserves
are not subject to a royalty obligation. Royalty obligations for the Huizopa
Project arise upon mine production.
APOLLO
GOLD CORPORATION
Notes
to the Consolidated Financial Statements -
(Continued)
15. COMMITMENTS
AND CONTINGENCIES (continued)
(b) 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.
(c) 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.
(d) Black
Fox
Project
An
additional $2.6 million (Cdn$3.0 million) was due to the original owners to
purchase the Black Fox Project property free and clear of all encumbrances.
This
payment was made in January 2006 as more fully described in Note
21(a).
(e) Huizopa
Project
If
the
Company wishes to maintain the exploration and exploitation rights for the
“Rosa” and “Donna” concessions, both located in the Municipality of Madera,
Chihuahua, Mexico, then it will be required to pay $0.1 million in April 2006,
$0.1 million in April 2007 and $1.5 million in October 2007. These concessions
represent approximately 17% of the Huizopa property.
(f)
Indemnification
obligations
The
Company is subject to certain indemnification obligations to Jipangu relating
to
the sale of the Nevada Assets. At this time, the Company is unable to predict
what cost there will be, if any, related to such indemnification
obligations.
(g) Potential Sale of Montana
Tunnels Mining, Inc.
The
Company has employed the services of a merchant bank to assist with the sale
of
Montana Tunnels Mining, Inc., the successful sale of which would result in
the
payment of a success fee to the bank.
APOLLO
GOLD CORPORATION
Notes
to the Consolidated Financial Statements -
(Continued)
16.
LEASE COMMITMENTS
Minimum
lease payments under capital and non-cancelable operating leases and the present
value of net minimum payments at December 31, 2005 were as follows:
|
|
Capital
Leases
|
|
Operating
Leases
|
|
2006
|
|
$
|
92
|
|
$
|
193
|
|
2007
|
|
|
37
|
|
|
97
|
|
2008
|
|
|
28
|
|
|
26
|
|
2009
|
|
|
14
|
|
|
-
|
|
Total
|
|
|
171
|
|
$
|
316
|
|
Less
imputed interest
|
|
|
15
|
|
|
|
|
Total
present value of minimum capital lease payments
|
|
|
156
|
|
|
|
|
Less
current portion of capital lease obligations
|
|
|
82
|
|
|
|
|
Long-term
capital lease obligations
|
|
$
|
74
|
|
|
|
|
Rent
expense under non-cancelable operating leases was $71,000, $81,000 and $87,000
for 2005, 2004 and 2003, respectively. The current portion of the capital lease
obligations is included in current portion of notes payable and the long-term
portion is included in long-term portion of notes payable in the consolidated
balance sheets.
17. NET
CHANGE IN NON-CASH OPERATING WORKING CAPITAL ITEMS
|
|
2005
|
|
2004
|
|
2003
|
|
(Increase)
decrease in:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
325
|
|
$
|
898
|
|
$
|
(1,656
|
)
|
Prepaids
|
|
|
(291
|
)
|
|
165
|
|
|
(25
|
)
|
Inventories
|
|
|
484
|
|
|
(552
|
)
|
|
(133
|
)
|
Increase
(decrease) in:
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
1,178
|
|
|
2,564
|
|
|
28
|
|
Accrued
liabilities
|
|
|
45
|
|
|
224
|
|
|
550
|
|
Property
and mining taxes payable
|
|
|
104
|
|
|
124
|
|
|
142
|
|
|
|
$
|
1,845
|
|
$
|
3,423
|
|
$
|
(1,094
|
)
|
18. RELATED
PARTY TRANSACTIONS
The
Company had the following related party transactions during each of the years
in
the three-year period ended December 31, 2005:
|
|
2005
|
|
2004
|
|
2003
|
|
Legal
fees paid to two law firms, a partner of each firm is a director
of the
Company
|
|
$
|
335
|
|
$
|
549
|
|
$
|
795
|
|
Consulting
services paid to a relative of an officer and director of the
Company
|
|
|
18
|
|
|
6
|
|
|
64
|
|
These
transactions are in the normal course of business and are measured at the
exchange amount which is the consideration established and agreed to by the
related parties.
APOLLO
GOLD CORPORATION
Notes
to the Consolidated Financial Statements -
(Continued)
19. SEGMENTED
INFORMATION
Amounts
as at December 31, 2005 are as follows:
|
|
Montana
Tunnels
|
|
Black
Fox
|
|
Corporate
and
Other
|
|
Total
|
|
Cash
and cash equivalents
|
|
$
|
8
|
|
$
|
15
|
|
$
|
104
|
|
$
|
127
|
|
Other
non-cash current assets
|
|
|
4,218
|
|
|
100
|
|
|
428
|
|
|
4,746
|
|
|
|
|
4,226
|
|
|
115
|
|
|
532
|
|
|
4,873
|
|
Property,
plant and equipment
|
|
|
13,917
|
|
|
24,794
|
|
|
1,334
|
|
|
40,045
|
|
Restricted
certificates of deposit
|
|
|
5,465
|
|
|
581
|
|
|
10,997
|
|
|
17,043
|
|
Deferred
financing costs
|
|
|
-
|
|
|
-
|
|
|
584
|
|
|
584
|
|
Total
assets
|
|
$
|
23,608
|
|
$
|
25,490
|
|
$
|
13,447
|
|
$
|
62,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
5,444
|
|
$
|
221
|
|
$
|
5,129
|
|
$
|
10,794
|
|
Notes
payable and convertible debenture
|
|
|
-
|
|
|
66
|
|
|
6,610
|
|
|
6,676
|
|
Accrued
site closure costs
|
|
|
12,634
|
|
|
-
|
|
|
-
|
|
|
12,634
|
|
Total
liabilities
|
|
$
|
18,078
|
|
$
|
287
|
|
$
|
11,739
|
|
$
|
30,104
|
|
Amounts
as at December 31, 2004 are as follows:
|
|
Montana
Tunnels
|
|
Black
Fox
|
|
Corporate
and
Other
|
|
Total
|
|
Cash
and cash equivalents
|
|
$
|
(260
|
)
|
$
|
53
|
|
$
|
7,093
|
|
$
|
6,886
|
|
Other
non-cash current assets
|
|
|
4,985
|
|
|
151
|
|
|
128
|
|
|
5,264
|
|
|
|
|
4,725
|
|
|
204
|
|
|
7,221
|
|
|
12,150
|
|
Property,
plant and equipment
|
|
|
17,239
|
|
|
19,560
|
|
|
800
|
|
|
37,599
|
|
Restricted
certificate of deposit
|
|
|
3,794
|
|
|
562
|
|
|
15
|
|
|
4,371
|
|
Deferred
financing costs
|
|
|
-
|
|
|
-
|
|
|
901
|
|
|
901
|
|
Total
assets
|
|
$
|
25,758
|
|
$
|
20,326
|
|
$
|
8,937
|
|
$
|
55,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
6,943
|
|
$
|
481
|
|
$
|
2,237
|
|
$
|
9,661
|
|
Notes
payable and convertible debenture
|
|
|
423
|
|
|
-
|
|
|
5,538
|
|
|
5,961
|
|
Accrued
site closure costs
|
|
|
11,753
|
|
|
-
|
|
|
-
|
|
|
11,753
|
|
Total
liabilities
|
|
$
|
19,119
|
|
$
|
481
|
|
$
|
7,775
|
|
$
|
27,375
|
|
APOLLO
GOLD CORPORATION
Notes
to the Consolidated Financial Statements -
(Continued)
19. SEGMENTED
INFORMATION (continued)
Amounts
for the years ended December 31, 2005, 2004 and 2003 are as
follows:
|
|
Year
Ended December 31, 2005
|
|
|
|
Montana
Tunnels
|
|
Black
Fox
|
|
Corporate
and
Other
|
|
Total
|
|
Revenue
from sale of minerals
|
|
$
|
43,254
|
|
$
|
-
|
|
$
|
-
|
|
$
|
43,254
|
|
Direct
operating costs
|
|
|
48,357
|
|
|
-
|
|
|
-
|
|
|
48,357
|
|
Depreciation
and amortization
|
|
|
2,417
|
|
|
-
|
|
|
134
|
|
|
2,551
|
|
General
and administrative expenses
|
|
|
-
|
|
|
-
|
|
|
7,588
|
|
|
7,588
|
|
Stock-based
compensation
|
|
|
-
|
|
|
-
|
|
|
597
|
|
|
597
|
|
Accrued
site closure costs - accretion expense
|
|
|
881
|
|
|
-
|
|
|
-
|
|
|
881
|
|
Exploration
and business development
|
|
|
-
|
|
|
-
|
|
|
918
|
|
|
918
|
|
|
|
|
51,655
|
|
|
-
|
|
|
9,237
|
|
|
60,892
|
|
Operating
loss
|
|
|
(8,401
|
)
|
|
-
|
|
|
(9,237
|
)
|
|
(17,638
|
)
|
Interest
income
|
|
|
126
|
|
|
-
|
|
|
271
|
|
|
397
|
|
Interest
expense
|
|
|
(64
|
)
|
|
-
|
|
|
(2,469
|
)
|
|
(2,533
|
)
|
Gain
(loss) on sale of property, plant and
equipment
and other
|
|
|
3,865
|
|
|
-
|
|
|
(52
|
)
|
|
3,813
|
|
Loss
from continuing operations
|
|
$
|
(4,474
|
)
|
$
|
-
|
|
$
|
(11,487
|
)
|
$
|
(15,961
|
)
|
Investing
activities
Property,
plant and equipment expenditures
|
|
$
|
97
|
|
$
|
5,290
|
|
$
|
721
|
|
$
|
6,108
|
|
|
|
Year
Ended December 31, 2004
|
|
|
|
Montana
Tunnels
|
|
Black
Fox
|
|
Corporate
and
Other
|
|
Total
|
|
Revenue
from sale of minerals
|
|
$
|
38,254
|
|
$
|
-
|
|
$
|
-
|
|
$
|
38,254
|
|
Direct
operating costs
|
|
|
52,473
|
|
|
-
|
|
|
-
|
|
|
52,473
|
|
Depreciation
and amortization
|
|
|
2,527
|
|
|
-
|
|
|
113
|
|
|
2,640
|
|
General
and administrative expenses
|
|
|
-
|
|
|
-
|
|
|
7,095
|
|
|
7,095
|
|
Stock-based
compensation
|
|
|
-
|
|
|
-
|
|
|
767
|
|
|
767
|
|
Accrued
site closure costs - accretion expense
|
|
|
820
|
|
|
-
|
|
|
-
|
|
|
820
|
|
Exploration
and business development
|
|
|
-
|
|
|
-
|
|
|
1,051
|
|
|
1,051
|
|
|
|
|
55,820
|
|
|
-
|
|
|
9,026
|
|
|
64,846
|
|
Operating
loss
|
|
|
(17,566
|
)
|
|
-
|
|
|
(9,026
|
)
|
|
(26,592
|
)
|
Interest
income
|
|
|
27
|
|
|
-
|
|
|
286
|
|
|
313
|
|
Interest
expense
|
|
|
(141
|
)
|
|
-
|
|
|
(111
|
)
|
|
(252
|
)
|
Foreign
exchange loss and other
|
|
|
(111
|
)
|
|
-
|
|
|
(653
|
)
|
|
(764
|
)
|
Loss
from continuing operations
|
|
$
|
(17,791
|
)
|
$
|
-
|
|
$
|
(9,504
|
)
|
$
|
(27,295
|
)
|
Investing
activities
Property,
plant and equipment expenditures
|
|
$
|
4,207
|
|
$
|
10,646
|
|
$
|
394
|
|
$
|
15,247
|
|
APOLLO
GOLD CORPORATION
Notes
to the Consolidated Financial Statements -
(Continued)
19. SEGMENTED
INFORMATION (continued)
|
|
Year
Ended December 31, 2003
|
|
|
|
Montana
Tunnels
|
|
Black
Fox
|
|
Corporate
and
Other
|
|
Total
|
|
Revenue
from sale of minerals
|
|
$
|
30,858
|
|
$
|
-
|
|
$
|
-
|
|
$
|
30,858
|
|
Direct
operating costs
|
|
|
34,184
|
|
|
-
|
|
|
-
|
|
|
34,184
|
|
Depreciation
and amortization
|
|
|
6,120
|
|
|
-
|
|
|
15
|
|
|
6,135
|
|
General
and administrative expenses
|
|
|
-
|
|
|
-
|
|
|
4,651
|
|
|
4,651
|
|
Stock-based
compensation
|
|
|
-
|
|
|
-
|
|
|
376
|
|
|
376
|
|
Accrued
site closure costs - accretion expense
|
|
|
500
|
|
|
-
|
|
|
-
|
|
|
500
|
|
Exploration
and business development
|
|
|
-
|
|
|
1,553
|
|
|
564
|
|
|
2,117
|
|
|
|
|
40,804
|
|
|
1,553
|
|
|
5,606
|
|
|
47,963
|
|
Operating
loss
|
|
|
(9,946
|
)
|
|
(1,553
|
)
|
|
(5,606
|
)
|
|
(17,105
|
)
|
Interest
income
|
|
|
14
|
|
|
-
|
|
|
199
|
|
|
213
|
|
Interest
expense
|
|
|
(152
|
)
|
|
-
|
|
|
(53
|
)
|
|
(205
|
)
|
Foreign
exchange (loss) gain and other
|
|
|
-
|
|
|
(271
|
)
|
|
1,578
|
|
|
1,307
|
|
Loss
from continuing operations
|
|
$
|
(10,084
|
)
|
$
|
(1,824
|
)
|
$
|
(3,882
|
)
|
$
|
(15,790
|
)
|
Investing
activities
Property,
plant and equipment expenditures
|
|
$
|
4,184
|
|
$
|
3,937
|
|
$
|
531
|
|
$
|
8,652
|
|
20. DIFFERENCES
BETWEEN CANADIAN AND U.S. GAAP
The
Company prepares its consolidated financial statements in accordance with
Canadian GAAP. 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 U.S. Securities and Exchange
Commission for the years ended December 31, 2005, 2004 and 2003.
Material
variances between financial statement items under Canadian GAAP and the amounts
determined under U.S. GAAP are as follows:
APOLLO
GOLD CORPORATION
Notes
to the Consolidated Financial Statements -
(Continued)
20. DIFFERENCES
BETWEEN CANADIAN AND U.S. GAAP (continued)
Consolidated
Balance Sheets as at December 31, 2005 and 2004
|
|
Property
Plant
and
Equipment
|
|
Deferred
Financing
|
|
Convertible
Debenture
|
|
Share
Capital
|
|
Equity
Component
of
Convertible
Debentures
|
|
Contributed
Surplus
|
|
Deficit
|
|
As
at December 31, 2005,
Canadian
GAAP
|
|
$
|
40,045
|
|
$
|
584
|
|
$
|
6,601
|
|
$
|
148,295
|
|
$
|
1,809
|
|
$
|
10,561
|
|
$
|
(129,236
|
)
|
Impairment
of property, plant and equipment,
and
change in depreciation and amortization(b)
|
|
|
(4,260
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,260
|
)
|
Black
Fox development costs(c)
|
|
|
(19,181
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(19,181
|
)
|
Convertible
debenture(d)(i)
|
|
|
-
|
|
|
227
|
|
|
1,512
|
|
|
(1
|
)
|
|
(1,809
|
)
|
|
123
|
|
|
401
|
|
Convertible
debenture(d)(ii)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
20,675
|
|
|
(20,675
|
)
|
Flow-through
common shares(f)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(238
|
)
|
|
-
|
|
|
-
|
|
|
238
|
|
As
at December 31, 2005, U.S. GAAP
|
|
$
|
16,604
|
|
$
|
811
|
|
$
|
8,113
|
|
$
|
148,056
|
|
$
|
-
|
|
$
|
31,359
|
|
$
|
(172,713
|
)
|
|
|
Property
Plant
and
Equipment
|
|
Non-Current
Assets Related to Discontinued Operations
|
|
Deferred
Financing
|
|
Convertible
Debenture
|
|
Share
Capital
|
|
Equity
Component
of
Convertible
Debentures
|
|
Contributed
Surplus
|
|
Deficit
|
|
As
at December 31, 2004, Canadian GAAP
|
|
$
|
37,599
|
|
$
|
32,104
|
|
$
|
901
|
|
$
|
5,538
|
|
$
|
141,795
|
|
$
|
1,815
|
|
$
|
9,627
|
|
$
|
(107,028
|
)
|
Impairment
of property, plant and equipment,
and
change in depreciation and amortization(b)
|
|
|
(4,848
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,848
|
)
|
Black
Fox development costs(c)
|
|
|
(14,048
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(14,048
|
)
|
Convertible
debenture(d)(i)
|
|
|
-
|
|
|
-
|
|
|
350
|
|
|
2,321
|
|
|
-
|
|
|
(1,815
|
)
|
|
123
|
|
|
(279
|
)
|
Convertible
debenture(d)(ii)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
20,675
|
|
|
(20,675
|
)
|
Commodity
contracts(e)
|
|
|
-
|
|
|
(1,340
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,340
|
)
|
Flow-through
common shares(f)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(238
|
)
|
|
-
|
|
|
-
|
|
|
238
|
|
As
at December 31, 2004, U.S. GAAP
|
|
$
|
18,703
|
|
$
|
30,764
|
|
$
|
1,251
|
|
$
|
7,859
|
|
$
|
141,557
|
|
$
|
-
|
|
$
|
30,425
|
|
$
|
(147,980
|
)
|
APOLLO
GOLD CORPORATION
Notes
to the Consolidated Financial Statements -
(Continued)
20. DIFFERENCES
BETWEEN CANADIAN AND U.S. GAAP (continued)
Under
U.S. GAAP, the net loss and net loss per share would be adjusted as
follows:
|
|
2005
|
|
2004
|
|
2003
|
|
Loss
from continuing operations for the year ended December 31,
based
on Canadian GAAP
|
|
$
|
(15,961
|
)
|
$
|
(27,295
|
)
|
$
|
(15,790
|
)
|
Cumulative
effect of change in accounting policy (a)
|
|
|
-
|
|
|
(1,508
|
)
|
|
-
|
|
Stock-based
compensation (a)
|
|
|
-
|
|
|
-
|
|
|
(1,739
|
)
|
Change
in depreciation of property, plant and equipment (b)
|
|
|
588
|
|
|
695
|
|
|
(87
|
)
|
Black
Fox development costs (c)
|
|
|
(5,133
|
)
|
|
(10,405
|
)
|
|
(3,643
|
)
|
Convertible
debenture ((d)(i))
|
|
|
680
|
|
|
(279
|
)
|
|
-
|
|
Flow-through
shares premium paid in excess of market value (f)
|
|
|
-
|
|
|
-
|
|
|
238
|
|
Loss
from continuing operations for the year based on U.S. GAAP
|
|
|
(19,826
|
)
|
|
(38,792
|
)
|
|
(21,021
|
)
|
(Loss)
income from discontinued operations for the year based on
Canadian
GAAP
|
|
|
(6,247
|
)
|
|
(3,712
|
)
|
|
1,700
|
|
Commodity
contract gains (loss) (e)
|
|
|
1,340
|
|
|
4,020
|
|
|
(3,095
|
)
|
Standard
Mine development costs
|
|
|
(980
|
)
|
|
-
|
|
|
-
|
|
Impairment
|
|
|
980
|
|
|
-
|
|
|
-
|
|
(Loss)
income from discontinued operations for the year based on U.S.
GAAP
|
|
|
(4,907
|
)
|
|
308
|
|
|
(1,395
|
)
|
Net
loss for the year based on U.S. GAAP
|
|
$
|
(24,733
|
)
|
$
|
(38,484
|
)
|
$
|
(22,416
|
)
|
Comprehensive
loss
|
|
$
|
(24,733
|
)
|
$
|
(38,484
|
)
|
$
|
(22,416
|
)
|
Basic
and diluted loss per share in accordance with U.S. GAAP:
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
(0.19
|
)
|
$
|
(0.49
|
)
|
$
|
(0.38
|
)
|
Discontinued
operations
|
|
|
(0.05
|
)
|
|
0.00
|
|
|
(0.03
|
)
|
Net
loss per share - U.S. GAAP basic and diluted
|
|
$
|
(0.24
|
)
|
$
|
(0.49
|
)
|
$
|
(0.41
|
)
|
(a) Stock-based
compensation
Under
Canadian GAAP, effective January 1, 2004, the Company adopted the amended
recommendations of CICA Handbook Section 3870 (Note 3 (n)). Under U.S. GAAP,
effective January 1, 2004, the Company adopted the modified prospective method
of accounting for stock-based compensation recommended in Statement of Financial
Accounting Standards (“SFAS”) No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosure (“SFAS
148”) resulting in a cumulative effect of change in accounting policy of $1.5
million. 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 periods.
|
|
2005
|
|
2004
|
|
2003
|
|
Net
loss based on U.S. GAAP
|
|
$
|
(24,733
|
)
|
$
|
(38,484
|
)
|
$
|
(22,416
|
)
|
Stock
option expense as reported
|
|
|
597
|
|
|
767
|
|
|
2,115
|
|
Pro
forma stock option expense
|
|
|
(597
|
)
|
|
(767
|
)
|
|
(4,247
|
)
|
Net
loss - pro forma
|
|
$
|
(24,733
|
)
|
$
|
(38,484
|
)
|
$
|
(24,548
|
)
|
Net
loss per share
|
|
$
|
(0.24
|
)
|
$
|
(0.49
|
)
|
$
|
(0.41
|
)
|
Stock
option expense as reported, per share
|
|
|
0.01
|
|
|
0.01
|
|
|
0.04
|
|
Pro
forma stock option expense, per share
|
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
(0.08
|
)
|
Net
loss per share, basic - pro forma
|
|
$
|
(0.24
|
)
|
$
|
(0.49
|
)
|
$
|
(0.45
|
)
|
APOLLO
GOLD CORPORATION
Notes
to the Consolidated Financial Statements -
(Continued)
20. DIFFERENCES
BETWEEN CANADIAN AND U.S. GAAP (continued)
(b) Impairment
of property, plant and equipment
Under
Canadian GAAP, write-downs for impairment of property, plant and equipment
are
determined using current proven and probable reserves and mineral resources
expected to be converted into mineral reserves. In 2002, under U.S. GAAP,
write-downs were determined using current proven and probable reserves.
Accordingly, for U.S. GAAP purposes, an impairment of property, plant and
equipment and an adjustment to the related depreciation has been
recorded.
(c) 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 $19.2 million has been recorded as at December 31,
2005.
(d) Convertible
debenture
(i) Under
Canadian GAAP, the convertible debentures were recorded as a compound financial
instrument including detachable note warrants (Note 9). On issuance in November
2004, under U.S. GAAP, the detachable note warrant is similarly treated as
an
equity instrument with the remainder of the convertible debentures treated
as a
liability. Further, under U.S. GAAP, the beneficial conversion feature
determined using the effective conversion price based on the proceeds allocated
to the convertible debenture in accordance with EITF 00-27, “Application of
Issue No. 98-5 to Certain Convertible Instruments”, is allocated to contributed
surplus. This discount on the debenture is recognized as additional interest
expense immediately as the debt is convertible at the date of issuance. Canadian
GAAP does not require the recognition of any beneficial conversion
feature.
(ii) Under
Canadian GAAP, the convertible debentures were 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 was allocated to contributed surplus and the Company recognized
debenture issuance costs of $20.7 million. Canadian GAAP does not require the
recognition of any beneficial conversion feature.
(e) Non-current
assets related to discontinued operations (Commodity contracts)
Prior
to
January 1, 2004, under U.S. GAAP, unrealized gains and losses on the put and
call option contracts were recorded in the statement of operations. As of
January 1, 2004, the Company adopted the provisions of CICA Accounting Guideline
13, Hedging
Relationships and
unrealized gains and losses on these contracts are now recorded in the statement
of operations under Canadian GAAP.
APOLLO
GOLD CORPORATION
Notes
to the Consolidated Financial Statements -
(Continued)
20. DIFFERENCES
BETWEEN CANADIAN AND U.S. GAAP (continued)
(f) Flow-through
common shares
Under
Canadian income tax legislation, a company is permitted to issue shares whereby
the Company agrees to incur qualifying expenditures and renounce the related
income tax deductions to the investors. The Company has accounted for the issue
of flow-through shares using the deferral method in accordance with Canadian
GAAP. At the time of issue, the funds received are recorded as share capital.
For U.S. GAAP, the premium over (discount from) market value is credited
(debited) to other liabilities (deferred costs) and included in income as the
qualifying expenditures are made.
Also,
notwithstanding whether there is a specific requirement to segregate the funds,
the flow-through funds which are unexpended at the consolidated balance sheet
dates are considered to be restricted and are not considered to be cash or
cash
equivalents under U.S. GAAP. As at December 31, 2005, unexpended flow-through
funds were $0.2 million (December 31, 2004 - $0.6 million).
(g) Comprehensive
income
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 component of comprehensive loss is the net loss for the
period.
(h)
Statement of cash flows
Under
Canadian GAAP, mining development costs at the Black Fox Project are included
in
cash flows from investing activities in the consolidated statements of cash
flows. Under U.S. GAAP, these expenditures are included in cash flows from
operating activities. Accordingly, under U.S. GAAP, the consolidated statements
of cash flows for the years ended December 31, 2005, 2004 and 2003 would
reflect
an increase in cash provided by investing activities of $5.1 million, $10.4
million and $3.6 million, respectively, and a corresponding decrease in cash
used in operating activities.
(i) Recently
issued accounting pronouncements
In
March
2005, the Emerging Issues Committee issued EITF 04-3, Mining Assets - Impairment
and Business Combinations, which states that an entity should include Value
Beyond Proven and Probable Reserves and Resources (“VBPP”) in the value
allocated to mining assets in a purchase price allocation to the extent that
a
market participant would include VBPP in determining the fair value of the
assets. EITF 04-3 also states that an entity should include the effects of
anticipated fluctuations in the future market price of minerals in determining
the fair value of mining assets in a purchase price allocation in a manner
that
is consistent with the expectations of marketplace participants. In addition,
EITF 04-3 states that an entity should include the cash flows associated with
VBPP as well as the effects of anticipated fluctuations in the market price
of
minerals in estimates of future cash flows (both undiscounted and discounted)
used for determining whether a mining asset is impaired. Management does not
expect that the adoption of this Statement will have a material impact on the
Company’s financial position or results of operations.
In
November 2005, the FASB issued FASB Staff Position (FSP) FAS 115-1 and FAS
124-1
- The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments. This FSP addresses the determination as to when an investment
is
considered impaired, whether that impairment is other than temporary, and the
measurement of an impairment loss. This FSP also includes accounting
considerations subsequent to the recognition of an other-than-temporary
impairment and requires certain disclosures about unrealized losses that have
not been recognized as other-than-temporary impairments. The guidance in FSP
FAS
115-1 and FAS 124-1 is applicable to reporting period beginning after December
15, 2005. Management does not expect the adoption of this FSP to have a material
effect on the Company’s consolidated financial position and results of
operations.
APOLLO
GOLD CORPORATION
Notes
to the Consolidated Financial Statements -
(Continued)
20. DIFFERENCES
BETWEEN CANADIAN AND U.S. GAAP (continued)
In
December 2004, the FASB issued SFAS No. 123 (R) - Share-Based Payment, which
replaces SFAS No. 123 -Accounting for Stock-Based Compensation, and supersedes
APB Opinion No. 25 - Accounting for Stock Issued to Employees. In March 2005,
the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
No. 107 - Share-Based Payment, which provides interpretive guidance related
to
SFAS No. 123 (R). SFAS No. 123 (R) requires compensation costs related to
share-based payment transactions to be recognized in the financial statements.
With limited exceptions, the amount of compensation cost is measured based
on
the grant-date fair value of the equity or liability instruments issued. SFAS
No. 123 (R) requires liability awards to be re-measured each reporting period
and compensation costs to be recognized over the period that an employee
provides service in exchange for the award. Management plans to adopt this
statement on the modified prospective basis beginning January 1, 2006, and
does
not expect adoption of this statement to have a material effect on the Company’s
consolidated financial position and results of operations. Subsequent to
adoption of this statement, share-based benefits will be valued at fair value
using the Black-Scholes option pricing model for option grants and the grant
date fair market value for stock awards. Compensation amounts so determined
will
be expensed over the applicable vesting period.
In
March
2005, the FASB issued FIN 47, “Accounting for Conditional Asset Retirement
Obligation - an interpretation of FASB 143”. FIN 47 provides guidance that an
entity must record a liability even if the obligation is conditional upon the
occurrence of a future event (e.g. plant shutdown), unless it is not possible
to
make a reasonable estimate of the obligation. It also provides criteria for
determining when an asset retirement obligation may be estimated reasonably.
The
interpretation is effective no later than the end of fiscal years ending after
December 15, 2005. Retroactive application for interim financial information
is
permitted but not required. The Company has adopted this standard which did
not
have a significant impact on its results of operations.
In
May
2005, the FASB issued FAS 154 - Accounting Changes and Error Corrections, a
replacement of APB Opinion 20 and FASB Statement 3. This Statement of changes
the requirements for the accounting for and reporting a change in accounting
principle and applies to all voluntary changes in accounting principle. It
also
applies to changes required by an accounting pronouncement in the unusual
instance that the pronouncement does not include specific transition provisions.
The Statement is effective for accounting changes made in fiscal years beginning
after December 15, 2005. Management does not expect the adoption of this
Statement to have a material effect on the Company’s consolidated financial
position and results of operations.
The
FASB
issued FAS 153 - Exchanges of Non-monetary Assets, an amendment of APB Opinion
29. This Statement amends Opinion 29 to eliminate the exception for non-monetary
exchanges of similar productive assets and replaces it with a general exception
for exchanges of non-monetary assets that do not have commercial substance.
A
non-monetary exchange has commercial substance if the future cash flows of
the
entity are expected to change significantly as a result of the exchange. The
Statement is effective for fiscal periods beginning after June 15, 2005.
Management does not expect the adoption of this Statement to have a material
effect on the Company’s consolidated financial position and results of
operations.
APOLLO
GOLD CORPORATION
Notes
to the Consolidated Financial Statements -
(Continued)
20. DIFFERENCES
BETWEEN CANADIAN AND U.S. GAAP (continued)
In
November 2005, the FASB concluded that in their proposed Accounting for
Uncertain Tax Positions - an Interpretation of FASB Statement No. 109, a benefit
recognition model with a two-step approach would be used, with a
more-likely-than-not recognition criterion and a best estimate measure
attribute. The first step is to evaluate the tax position for recognition by
determining if the weight of available evidence indicates it is
more-likely-than-not, based solely on the technical merits, that the position
will be sustained on audit, including resolution of related appeals or
litigation processes, if any. The second step is to measure the appropriate
amount of the benefit to recognize, which will be measured using the best
estimate of the amount that will be sustained. The tax position should be
derecognized when it is no longer more-likely-than-not of being sustained.
In
January 2006, the FASB concluded that the final Interpretation will be effective
as of the beginning of the first annual period beginning after December 31,
2006. The Company is currently evaluating the implications of this
Interpretation.
In
February 2006, the FASB issued FAS 155 Accounting for Certain Hybrid Financial
Instruments - an amendment of FASB Statements No. 133 and 140. This Statement
resolves issues addressed in Statement 133 Implementation Issue No. D1,
“Application of Statement 133 to Beneficial Interests in Securitized Financial
Assets.” This Statement:
•
Permits
fair value remeasurement for any hybrid financial instrument that contains
an
embedded derivative that otherwise would require bifurcation;
•
Clarifies which interest-only strips and principal-only strips are not subject
to the requirements of Statement 133;
•
Establishes a requirement to evaluate interests in securitized financial assets
to identify interests that are freestanding derivatives or that are hybrid
financial instruments that contain an embedded derivative requiring
bifurcation;
•
Clarifies that concentrations of credit risk in the form of subordination are
not embedded derivatives;
•
Amends
Statement 140 to eliminate the prohibition on a qualifying special-purpose
entity from holding a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial
instrument.
This
Statement is effective for all financial instruments acquired or issued after
the beginning of fiscal years that begin after September 15, 2006. The Company
is currently evaluating the implications of this Statement.
21. SUBSEQUENT
EVENTS
(a) Security
of convertible debenture
Effective
January 6, 2006, Apollo pledged the Company’s Black Fox Property to The Canada
Trust Company (“the Secured Party”) as substitute collateral for the Debentures
(Note 9), which were previously secured by $11.0 million restricted cash (Note
7). The Secured Party is the trustee for the holders of the Debentures. In
connection with this transaction, $2.6 million (Cdn$3.0 million) was used to
release an existing lien over the Black Fox Property, resulting in $8.5 million
cash being available to Apollo, less expenses for the transaction.
Related
to this transfer of collateral the Company agreed to reduce the exercise
price on 5,013,600 of the Note Warrants attached to the Debentures from
$0.80 to $0.40 per common share. The
APOLLO
GOLD CORPORATION
Notes
to the Consolidated Financial Statements -
(Continued)
21. SUBSEQUENT
EVENTES (continued)
reduction
in the exercise price was effective January 16, 2006, and applies to all
warrants attached to the Debentures except for the 240,000 warrants held by
the
Company’s insiders, which remain exercisable at $0.80 per common
share.
(b) Corporate
officer changes and related agreements
On
January 23, 2006, Apollo announced that the number of executive officers would
be reduced from seven to three, effective February 18, 2006. Apollo entered
into
severance agreements with the four departing officers, and as a result, an
aggregate of 1,187,175 common shares were issued to the officers as part of
their severance.
Also
on
January 23, 2006, the Company entered into amended employment agreements with
the three remaining executive officers, pursuant to which the officers have
agreed to reduce their base salaries by an aggregate of $170,000 per annum
in
exchange for an aggregate of 1,103,223 common shares.
The
above
described actions were approved by the Company’s Board of Directors in December
2005 and the related expenses of $2.3 million were accrued in 2005.
(c) Issuance
of stock
On
January 26, 2006, the Company completed a private placement with Jipangu for
11,650,000 units at $0.30 (Cdn$0.35) per share for proceeds of $3.5 million.
Each unit consists of one common share of Apollo and 0.17167 of a warrant (for
a
total of up to 2,000,000 warrants), with each whole warrant exercisable for
two
years at Cdn$0.39 for one common share of the Company.
(d) Montana
Tunnels
In
March
2006 the Company adopted a plan to dispose of Montana Tunnels Mining, Inc,
which
includes the Montana Tunnels and Diamond Hill mines. As at December 31, 2005,
the net book value of Montana Tunnels Mining, Inc. was $5.5
million.
INDEX
TO EXHIBITS
Exhibit
No.
|
Exhibit
Name
|
10.20
|
Form
of Amended and Restated Indemnification Agreement, dated November
18,
2005, by and among Apollo Gold, Inc.;Apollo Gold Finance, Inc.; Montana
Tunnels Mining, Inc. and each of R. David Russell, Melvyn Williams,
David
K. Young, Donald O. Miller, James T. O’Neil, Jr., G. Michael Hobart, W.S.
Vaughan, and Charles Stott.
|
|
|
21.1
|
List
of subsidiaries of the Registrant
|
|
|
23.1
|
Consent
of Deloitte & Touche LLP
|
|
|
23.2
|
Consent
of Mine Development Associates
|
|
|
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 and Chief Financial Officer pursuant to
Section
906 of the Sarbanes-Oxley Act
|