UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-31593
APOLLO GOLD CORPORATION
(Exact name of Registrant as Specified in Its Charter)
Yukon Territory Not Applicable
- -------------------------------- --------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Suite 300, 204 Black Street
Whitehorse, Yukon Territory, Canada Y1A 2M9
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (720) 886-9656
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days
Yes X No
Indicate by check mark whether the registrant is an accelerated filer ( as
defined in Rule 12-b2 of the Exchange Act). Yes No X
At October 31, 2003, there were 73,721,838 shares of Apollo Gold Corporation
common stock outstanding.
APOLLO GOLD CORPORATION
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APOLLO GOLD CORPORATION
CONSOLIDATED BALANCE SHEET (UNAUDITED) -- as of September 30, 2003 2
CONOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
For the Three and Nine Month Periods Ended September 30, 2003 and 2002 3
CONDENSED STATEMENT OF DEFICIT (UNAUDITED)
For the Three and Nine Month Periods Ended September 30, 2003 and 2002 4
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 30, 2003 and 2002 5
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION 27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 55
ITEM 4. CONTROLS AND PROCEDURES 56
PART II - OTHER INFORMATION 56
ITEM 1. LEGAL PROCEEDINGS 56
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 56
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 56
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 56
ITEM 5. OTHER INFORMATION 56
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 56
SIGNATURES
CERTIFICATION
ii
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following unaudited consolidated financial statements have been
prepared by Apollo Gold Corporation pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). In this document unless the context
otherwise requires, "we", "our", "us", the "Company" or "Apollo" mean Apollo
Gold Corporation and its subsidiaries. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such SEC rules and regulations.
These consolidated financial statements should be read in conjunction with
the financial statements, accompanying notes and other relevant information
included in the Company's Form 10 Registration Statement (the "Registration
Statement") which was declared effective with the Securities and Exchange
Commission on August 13, 2003.
APOLLO GOLD CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF CANADIAN DOLLARS)
- ----------------------------------------------------------------------------------------
SEPTEMBER 30, December 31,
2003 2002
--------------- --------------
ASSETS (UNAUDITED) (Audited)
CURRENT
Cash and cash equivalents $ 44,336 $ 13,293
Accounts receivable 5,925 5,093
Prepaids 778 840
Broken ore on leach pad - current 13,259 14,352
Materials and supplies 4,196 4,615
- ---------------------------------------------------------------------------------------
Total current assets 68,494 38,193
BROKEN ORE ON LEACH PAD - LONG TERM 2,526 2,533
PROPERTY, PLANT AND EQUIPMENT (Note 3) 46,525 47,920
DEFERRED STRIPPING COSTS 29,485 26,815
RESTRICTED CERTIFICATE OF DEPOSIT 8,636 8,365
- ---------------------------------------------------------------------------------------
TOTAL ASSETS $ 155,666 $ 123,826
=======================================================================================
LIABILITIES
CURRENT
Accounts payable and accrued liabilities $ 11,031 $ 10,755
Notes payable 5,228 4,912
Property and mining taxes payable 1,099 1,562
- ---------------------------------------------------------------------------------------
Total current liabilities 17,358 17,229
NOTES PAYABLE 4,472 8,277
ACCRUED SITE CLOSURE COSTS 28,865 32,354
- ---------------------------------------------------------------------------------------
TOTAL LIABILITIES 50,695 57,860
- ---------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY (DEFICIT)
Share capital (Note 4) 172,546 110,252
Issuable common shares 350 350
Special warrants (Note 4) - 9,768
Contributed surplus (Note 4) 10,782 10,998
Cumulative translation adjustment (8,377) 1,393
Accumulated deficit (70,330) (66,795)
- ---------------------------------------------------------------------------------------
Total shareholders' equity 104,971 65,966
- ---------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 155,666 $ 123,826
=======================================================================================
2
APOLLO GOLD CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
- -----------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
REVENUE
Revenue from sale of minerals $ 27,738 $ 17,008 $ 64,976 $ 17,008
- -----------------------------------------------------------------------------------------
OPERATING EXPENSES
Direct operating costs 22,488 12,254 52,025 12,254
Depreciation and amortization 2,000 2,825 6,035 2,825
General and administrative 1,502 1,409 4,795 1,827
Share-based compensation 27 - 534 -
Accrued site closure costs -
accretion expense 442 609 1,373 609
Royalties 327 425 981 425
Exploration and development 72 1,140 2,977 1,140
- -----------------------------------------------------------------------------------------
26,858 18,662 68,720 19,080
- -----------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 880 (1,654) (3,744) (2,072)
OTHER INCOME (EXPENSES)
Interest income 14 - 73 -
Interest expense (175) (842) (629) (842)
Foreign exchange (loss) gain (191) - 765 -
- -----------------------------------------------------------------------------------------
NET INCOME (LOSS) FOR
THE PERIOD $ 528 $ (2,496) $ (3,535) $ (2,914)
=========================================================================================
NET INCOME (LOSS) PER
SHARE, BASIC AND DILUTED $ 0.01 $ (0.08) $ (0.07) $ (0.24)
=========================================================================================
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 49,843,353 33,022,537 48,480,820 12,356,666
=========================================================================================
The accompanying notes are an integral part of these interim financial
statements.
3
APOLLO GOLD CORPORATION
CONSOLIDATED STATEMENTS OF DEFICIT
(IN THOUSANDS OF CANADIAN DOLLARS)
(UNAUDITED)
- ------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
------------------------ ----------------------
2003 2002 2003 2002
----------- ----------- ----------- ---------
Deficit, beginning of period $ (70,858) $ (62,432) $ (66,795) $(62,014)
Net income (loss) for
the period 528 (2,496) (3,535) (2,914)
- ------------------------------------------------------------------------------
Deficit, end of period $ (70,330) $ (64,928) $ (70,330) $(64,928)
==============================================================================
The accompanying notes are an integral part of these interim financial
statements.
4
APOLLO GOLD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF CANADIAN DOLLARS)
(UNAUDITED)
- ---------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
------------------------ ------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
OPERATING ACTIVITIES
Net income (loss) for the period $ 528 $ (2,496) $ (3,535) $ (2,914)
Items not affecting cash
Depreciation and amortization 2,000 2,825 6,035 2,825
Amortization of deferred stripping 4,577 - 6,758 -
Share-based compensation 27 - 534 -
Accrued site closure costs -
accretion expense 442 609 1,373 609
Gain on sale of property, plant and
equipment (57) - (57) -
Changes in non-cash operating
assets and liabilities (751) (987) (1,233) (536)
- ---------------------------------------------------------------------------------------------
Net cash flows from (used in)
operating activities 6,766 (49) 9,875 (16)
- ---------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Deferred stripping costs (5,193) - (13,914) -
Property, plant and equipment
expenditures (5,918) (22,577) (12,016) (22,577)
Proceeds from disposal of
property, plant and equipment 237 - 237 -
Acquisition of Nevoro - - - (16,756)
Restricted Certificate of Deposit (295) (1,513) (1,604) (1,513)
- ---------------------------------------------------------------------------------------------
Net cash flows used in investing
activities (11,169) (24,090) (27,297) (40,846)
- ---------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Capital lease repayments - (1,149) - (1,149)
Proceeds from exercise of warrants
and options 977 9,864 5,140 9,864
Proceeds on issuance of shares 46,450 - 46,450 -
Notes payable (1,292) 4,762 (1,548) 4,762
Proceeds on issuance of
convertible debentures, net - 12,907 - 32,820
- ---------------------------------------------------------------------------------------------
Net cash flows from financing
activities 46,135 26,384 50,042 46,297
- ---------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 122 1,684 (1,577) 1,685
- ---------------------------------------------------------------------------------------------
NET INCREASE IN CASH 41,854 3,929 31,043 7,120
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 2,482 3,321 13,293 130
- ---------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 44,336 $ 7,250 $ 44,336 $ 7,250
=============================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest $ 175 $ - $ 620 $ -
=============================================================================================
Income taxes $ - $ - $ - $ -
=============================================================================================
During the quarter ended June 30, 2003, the Company issued 61,500 shares to
acquire certain parcels of land located in Nevada. Share capital and property,
plant and equipment both increased by $187 as a result of these transactions.
The accompanying notes are an integral part of these interim financial
statements.
5
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS
On June 25, 2002, pursuant to a statutory Plan of Arrangement, Apollo Gold
Corporation ("Apollo" or the "Company") acquired the business of Nevoro
Gold Corporation ("Nevoro"). This acquisition has been accounted for using
the purchase method of accounting. Prior to the acquisition of Nevoro, the
Company had interests in exploration projects in Indonesia and the
Philippines.
Apollo, through its acquisition of Nevoro, is engaged in gold mining
including extraction, processing and refining and the production of other
by-product metals, as well as related activities including exploration and
development. The Company currently owns and has rights to operate the
following facilities: the Florida Canyon Mine through Florida Canyon
Mining, Inc. ("FCMI") located in the State of Nevada, the Montana Tunnels
Mine through Montana Tunnels Mining, Inc. ("MTMI") located in the State of
Montana and the Diamond Hill Mine also located in the State of Montana.
Apollo Gold also purchased the Black Fox Project (former Glimmer Mine)
which is located in the Province of Ontario near the Township of Mattheson
in September of 2002. This project is now considered a development
property.
Currently the Company is operating the Florida Canyon Mine at its designed
capacity (approximately 110,000 gold ounces per year). The Montana Tunnels
Mine recommenced commercial production in April 2003.
2. ACCOUNTING POLICIES
These consolidated interim financial statements have been prepared in
accordance with Canadian generally accepted accounting principles. The
accounting policies followed in preparing these financial statements are
those used by the Company as set out in the audited financial statements
for the year ended December 31, 2002. Certain information and note
disclosure normally included in consolidated financial statements prepared
in accordance with generally accepted accounting principles have been
omitted. These interim financial statements should be read together with
the Company's audited financial statements for the year ended December 31,
2002.
In the opinion of management, all adjustments considered necessary for fair
presentation have been included in these financial statements. Interim
results are not necessarily indicative of the results expected for the
fiscal year.
Certain of the comparative figures have been reclassified to conform with
the current period presentation.
- --------------------------------------------------------------------------------
6
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
2. ACCOUNTING POLICIES (CONTINUED)
In April 2003 the Company recommenced commercial production at the Montana
Tunnels Mine and now amortizes the deferred stripping costs in accordance
with the following accounting policy:
Deferred stripping costs
Mining costs associated with open-pit deposits that have diverse ore grades
and waste-to-ore ton ratios are deferred and amortized over the mine life.
These mining costs arise from the removal of waste rock commonly referred
to as "deferred stripping costs". Amortization of amounts deferred is based
on a ratio, calculated as estimated total mining costs divided by the
current proven and probable reserves and mineral resources expected to be
converted into mineral reserves. This ratio is used to calculate the
current period production cost charged against earnings by multiplying the
ratio times the reserves mined during the period. Amortization of deferred
stripping costs is included within direct operating costs in our statement
of operations. This accounting method results in the smoothing of these
costs over the life of the mine, rather than expensing them as incurred.
The full amount of deferred stripping costs may not be expensed until the
end of the life of the mine. Some mining companies expense these costs as
incurred, which may result in the reporting of greater volatility in period
to period results of operations. Deferred stripping costs are included with
related mining property, plant and equipment for impairment testing
purposes.
3. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows:
SEPTEMBER 30, December 31,
2003 2002
-------------------------------------- ---------------
Accumulated Net Book Net Book
Cost Depreciation Value Value
------------ ------------- --------- ---------------
Mine assets
Building, plant and equipment $ 16,142 $ 2,906 $ 13,236 $ 11,506
Mining properties and
development costs 31,049 7,560 23,489 25,207
- --------------------------------------------------------------------------------------------
47,191 10,466 36,725 36,713
Mineral rights 9,800 - 9,800 11,207
- --------------------------------------------------------------------------------------------
Total property, plant and equipment $ 56,991 $ 10,466 $ 46,525 $ 47,920
============================================================================================
- --------------------------------------------------------------------------------
7
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
4. SHARE CAPITAL
(a) Authorized
Unlimited number of common shares with no par value.
(b) Issued and outstanding
Contributed Special
Shares Amount Surplus Warrants
----------- -------- ------------- ----------
Balance, December 31, 2002 40,190,874 $110,252 $ 10,998 $ 9,768
Shares issued for cash 22,300,000 45,973 477 -
Conversion of units 6,000,000 9,768 - (9,768)
Warrants exercised 2,156,500 5,048 - -
Options exercised 83,412 92 - -
Nevoro acquisition, senior
executive share
compensation - - 271 -
Shares issued to supplier 50,000 262 - -
Shares issued for land 61,500 187 - -
Fiscal 2002 stock-based
compensation issued
in 2003 265,000 964 (964) -
- -----------------------------------------------------------------------------
Balance, September 30, 2003 71,107,286 $172,546 $ 10,782 $ -
=============================================================================
(c) Shares issued for cash
During the three months ended September 30, 2003, the Company issued
22,300,000 shares for proceeds of $50,175, net of agent's commissions
of $3,010, expenses of $715 and fair value of agent's options of $477.
The Company granted the agents 669,000 agent's options with an
exercise price of $2.25 per option in connection with this issuance.
These agent's options expire in two years and vest immediately. Using
the fair value based method for stock-based compensation, share
issuance costs of approximately $477 were recognized. This amount was
determined using an option pricing model assuming no dividends were
paid, a volatility of the Company's share price of 53%, an expected
life of the options of two years, and annual risk-free rate of 3.52%.
Subsequent to September 30, 2003, the agents exercised their
over-allotment option and the Company issued a further 2,132,300
shares at an offering price of $2.25 and granted a further 63,969
agent's options with similar terms to those previously granted.
- --------------------------------------------------------------------------------
8
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
4. SHARE CAPITAL (CONTINUED)
(d) Warrants
The following summarizes outstanding warrants as at September 30,
2003:
Number of Exercise Expiry
Warrants Shares Price Date
---------- --------- ----------------- -----------------
5,749,750 5,749,750 $2.16 (U.S.$1.60) March 24, 2004
3,000,000 3,000,000 $ 3.25 December 23, 2006
-----------------------------------------------------------
8,749,750 8,749,750
===========================================================
(e) Share purchase options
(i) Fixed stock option plan
The Company has a stock option plan that provides for the
granting of options to directors, officers, employees and service
providers of the Company.
At September 30, 2003, there were 1,939,100 options outstanding
with a weighted average price of $3.38 and expiry dates ranging
from February 2013 to August 2013.
(ii) Performance-based stock option plan
As part of the Nevoro acquisition, 2,780,412 options were granted
to certain directors, officers and employees, and are subject to
a reduction if certain performance criteria are not met.
Furthermore, certain senior executives are entitled to receive
530,000 common shares subject to a reduction if certain
performance criteria are not met.
In fiscal 2002, one-half of the options and common shares vested
based upon the established performance criteria. The balance of
the options vest based upon the established fiscal 2003
performance criteria. Furthermore, one half of the related common
shares were approved for issuance in 2003 based upon the fiscal
2002 performance and the balance of the shares vest based upon
the established fiscal 2003 performance criteria. An expense of
$271 has been recorded in the statement of operations relating to
the fair value expense of the common shares vesting in fiscal
2003 and credited to contributed surplus.
- --------------------------------------------------------------------------------
9
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
4. SHARE CAPITAL (CONTINUED)
(e) Share purchase options (continued)
(ii) Performance-based stock option plan (continued)
As at September 30, 2003, there were 2,660,160 performance-based
options outstanding with a weighted average price of $1.08
(U.S.$0.80) and an expiry date of June 25, 2007. In addition,
there is an entitlement to 265,000 performance-based common
shares outstanding.
(f) Stock-based compensation
The following pro forma financial information presents the net loss
for the period and the basic and diluted loss per common share had the
Company adopted the fair value method of accounting for stock options
as set out in CICA Handbook Section 3870, Stock-Based Compensation and
Other Stock-Based Payments:
THREE MONTHS Nine months
ENDED ended
SEPTEMBER 30, September 30,
2003 2003
--------------- ---------------
Net income (loss)
As reported $ 528 $ (3,535)
Compensatory fair value of options 826 3,407
----------------------------------------------------------------------------
Pro forma $ (298) $ (6,942)
============================================================================
Basic and diluted income (loss) per share
As reported $ 0.01 $ (0.07)
Pro forma (0.01) (0.14)
============================================================================
Using the fair value based method for stock-based compensation,
additional costs of approximately $826 and $3,407 would have been
recorded for the three and nine month periods ended September 30,
2003, respectively. This amount was determined using an option pricing
model assuming no dividends were paid, a weighted average volatility
of the Company's share price of 52%, a weighted average expected life
of the options of 2 to 5 years, and weighted average annual risk-free
rate of 3.52%.
- --------------------------------------------------------------------------------
10
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
4. SHARE CAPITAL (CONTINUED)
(g) Earnings (loss) per share
Basic earnings (loss) per common share is calculated by dividing net
income (loss) by the weighted average number of common shares
outstanding during the period. Diluted earnings (loss) per share is
calculated by dividing net income (loss) by the sum of the weighted
average number of common shares outstanding plus all additional common
shares that would have been outstanding if potentially dilutive common
shares had been issued. In periods for which there is a reported net
loss, potentially dilutive securities have been excluded from the
calculation, as their effect would be anti-dilutive.
The following table reconciles the number of shares utilized in the
earnings (loss) per common share calculations for the periods
indicated:
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Basic weighted
average shares
outstanding 49,843,353 33,022,537 48,480,820 12,356,666
Effect of dilutive
securities,
stock options 760,841 - - -
------------------------------------------------------------------
Diluted weighted
average shares
outstanding 50,604,194 33,022,537 48,480,820 12,356,666
==================================================================
5. INCOME TAXES
The Company did not record a recovery for income taxes for the period ended
September 30, 2003 due to the availability of net operating loss carry
forwards and the uncertainty of their future realization.
6. SEGMENTED INFORMATION
Apollo operates the Montana Tunnels and Florida Canyon Mines in the United
States and the Black Fox exploration project in Canada. As the products and
services of the Company's largest segments, Montana Tunnels and Florida
Canyon, are essentially the same, the reportable segments have been
determined at the level where decisions are made on the allocation of
resources and capital and where performance is measured. The accounting
policies for these segments are the same as those followed by the Company
as a whole.
- --------------------------------------------------------------------------------
11
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
6. SEGMENTED INFORMATION (CONTINUED)
Amounts as at September 30, 2003 are as follows:
Montana Florida Black Corporate
Tunnels Canyon Fox and Other Total
-------- -------- ------- ---------- --------
Cash and cash equivalents $ 12 $ 19 $ 825 $ 43,480 $ 44,336
Broken ore on leach pad -
current - 13,259 - - 13,259
Other non-cash current assets 7,069 3,267 183 380 10,899
------------------------------------------------------------------------------------
7,081 16,545 1,008 43,860 68,494
Broken ore on leach pad -
long-term - 2,526 - - 2,526
Property, plant and equipment 15,836 17,410 8,948 4,331 46,525
Deferred stripping costs 29,485 - - - 29,485
Restricted certificate of deposit 3,055 4,999 437 145 8,636
------------------------------------------------------------------------------------
Total assets $ 55,457 $ 41,480 $10,393 $ 48,336 $155,666
====================================================================================
Current liabilities $ 7,265 $ 9,425 $ 22 $ 646 $ 17,358
Notes payable 444 4,028 - - 4,472
Accrued site closure costs 11,992 16,873 - - 28,865
------------------------------------------------------------------------------------
Total liabilities $ 19,701 $ 30,326 $ 22 $ 646 $ 50,695
====================================================================================
- --------------------------------------------------------------------------------
12
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
6. SEGMENTED INFORMATION (CONTINUED)
Amounts as at December 31, 2002 are as follows:
Montana Florida Black Corporate
Tunnels Canyon Fox and Other Total
-------- -------- ------- ---------- --------
Cash and cash equivalents $ 139 $ 31 $ 4,439 $ 8,684 $ 13,293
Broken ore on leach pad -
current - 14,352 - - 14,352
Other non-cash current assets 5,632 4,470 23 423 10,548
------------------------------------------------------------------------------------
5,771 18,853 4,462 9,107 38,193
Broken ore on leach pad -
long-term - 2,533 - - 2,533
Property, plant and equipment 16,724 20,026 7,852 3,318 47,920
Deferred stripping costs 26,815 - - - 26,815
Restricted certificate of deposit 2,459 5,581 158 167 8,365
------------------------------------------------------------------------------------
Total assets $ 51,769 $ 46,993 $12,472 $ 12,592 $123,826
====================================================================================
Current liabilities $ 6,950 $ 7,571 $ - $ 2,708 $ 17,229
Notes payable 2,168 6,109 - - 8,277
Accrued site closure costs 13,691 18,663 - - 32,354
------------------------------------------------------------------------------------
Total liabilities $ 22,809 $ 32,343 $ - $ 2,708 $ 57,860
====================================================================================
- --------------------------------------------------------------------------------
13
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
6. SEGMENTED INFORMATION (CONTINUED)
Amounts for the three and nine month periods ended September 30, 2003 and
2002, respectively, are as follows:
THREE MONTHS ENDED SEPTEMBER 30, 2003
---------------------------------------------------
Montana Florida Black Corporate
Tunnels Canyon Fox and Other Total
--------- --------- ------ ----------- --------
Revenue from sale of minerals $ 14,934 $ 12,804 $ - $ - $27,738
-----------------------------------------------------------------------------------
Direct operating costs 12,292 10,196 - - 22,488
Depreciation and amortization 750 1,203 - 47 2,000
General and administrative - - - 1,502 1,502
Share-based compensation - - - 27 27
Accrued site closure costs
- accretion expense 109 333 - - 442
Royalties - 327 - - 327
Exploration and development - - - 72 72
-----------------------------------------------------------------------------------
13,151 12,059 - 1,648 26,858
-----------------------------------------------------------------------------------
Operating income (loss) 1,783 745 - (1,648) 880
Interest income 4 - - 10 14
Interest expense (49) (112) - (14) (175)
Foreign exchange loss - - - (191) (191)
-----------------------------------------------------------------------------------
Net income (loss) $ 1,738 $ 633 $ - $ (1,843) $ 528
===================================================================================
Investing activities
Property, plant and
equipment
expenditures $ 2,831 $ 350 $2,086 $ 651 $ 5,918
Deferred stripping
expenditures 5,193 - - - 5,193
- --------------------------------------------------------------------------------
14
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
6. SEGMENTED INFORMATION (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2003
-----------------------------------------------------
Montana Florida Black Corporate
Tunnels Canyon Fox and Other Total
--------- --------- -------- ----------- --------
Revenue from sale of minerals $ 25,906 $ 39,070 $ - $ - $64,976
-------------------------------------------------------------------------------------
Direct operating costs 22,630 29,395 - - 52,025
Depreciation and amortization 2,138 3,781 - 116 6,035
General and administrative - - - 4,795 4,795
Share-based compensation - - - 534 534
Accrued site closure costs
- accretion expense 109 1,264 - - 1,373
Royalties - 981 - - 981
Exploration and development - - 2,324 653 2,977
-------------------------------------------------------------------------------------
24,877 35,421 2,324 6,098 68,720
-------------------------------------------------------------------------------------
Operating income (loss) 1,029 3,649 (2,324) (6,098) (3,744)
Interest income 4 - - 69 73
Interest expense (166) (381) - (82) (629)
Foreign exchange gain - - 535 230 765
-------------------------------------------------------------------------------------
Net income (loss) $ 867 $ 3,268 $(1,789) $ (5,881) $(3,535)
=====================================================================================
Investing activities
Property, plant and
equipment
expenditures $ 4,117 $ 4,255 $ 2,297 $ 1,534 $12,203
Deferred stripping
expenditures 13,914 - - - 13,914
- --------------------------------------------------------------------------------
15
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
6. SEGMENTED INFORMATION (CONTINUED)
Three months ended September 30, 2002
---------------------------------------------------
Montana Florida Black Corporate
Tunnels Canyon Fox and Other Total
--------- --------- ------ ----------- --------
Revenue from sale of minerals $ - $ 17,008 $ - $ - $17,008
----------------------------------------------------------------------------------
Direct operating costs - 12,254 - - 12,254
Depreciation and amortization - 2,811 - 14 2,825
General and administrative - - - 1,409 1,409
Share-based compensation - - - - -
Accrued site closure costs
- accretion expense - 609 - - 609
Royalties - 425 - - 425
Exploration and development - - - 1,140 1,140
----------------------------------------------------------------------------------
- 16,099 - 2,563 18,662
----------------------------------------------------------------------------------
Operating (loss) income - 909 - (2,563) (1,654)
Interest income - - - - -
Interest expense (264) (516) - (62) (842)
Foreign exchange gain - - - - -
----------------------------------------------------------------------------------
Net (loss) income $ (264) $ 393 $ - $ (2,625) $(2,496)
==================================================================================
- --------------------------------------------------------------------------------
16
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
6. SEGMENTED INFORMATION (CONTINUED)
Nine months ended September 30, 2002
---------------------------------------------------
Montana Florida Black Corporate
Tunnels Canyon Fox and Other Total
--------- --------- ------ ----------- --------
Revenue from sale of minerals $ - $ 17,008 $ - $ - $17,008
- ----------------------------------------------------------------------------------
Direct operating costs - 12,254 - - 12,254
Depreciation and amortization - 2,811 - 14 2,825
General and administrative - - - 1,827 1,827
Share-based compensation - - - - -
Accrued site closure costs
- accretion expense - 609 - - 609
Royalties - 425 - - 425
Exploration and development - - - 1,140 1,140
- ----------------------------------------------------------------------------------
- 16,099 - 2,981 19,080
- ----------------------------------------------------------------------------------
Operating (loss) income - 909 - (2,981) (2,072)
Interest income - - - - -
Interest expense (264) (516) - (62) (842)
Foreign exchange gain - - - - -
- ----------------------------------------------------------------------------------
Net (loss) income $ (264) $ 393 $ - $ (3,043) $(2,914)
==================================================================================
- --------------------------------------------------------------------------------
17
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
7. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Gold hedges
The Company has entered into hedging contracts, with Standard Bank London
Limited, for gold in the aggregate amount of 100,000 ounces involving the
use of combinations of put and call options. As of October 1, 2003 there
are 76,000 ounces remaining on these contracts. The contracts give the
holder the right to buy, and the Company the right to sell, stipulated
amounts of gold at the upper and lower exercise prices, respectively. The
contracts continue through April 25, 2005 with a put option strike price of
two hundred and ninety-five U.S. dollars per ounce and a call option strike
price of three hundred and forty-five U.S. dollars per ounce. The Company
has also entered into certain spot deferred forward contracts for the
delivery of 16,400 ounces of gold. Gains or losses on these spot deferred
forward contracts are recognized as an adjustment of revenue in the period
when the originally designated production is sold. As at September 30,
2003, the fair value of the contracts is a loss of $5,819 (December 31,
2002 - $3,573).
- --------------------------------------------------------------------------------
18
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
7. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)
Gold hedges (continued)
The contracts mature as follows:
Ounces
of Gold
----------------
2003 (as of October 1) 18,400
2004 58,000
2005 16,000
-------------------------------------------
92,400
===========================================
8. COMMITMENTS AND CONTINGENCIES
(a) Environmental
The Company's mining and exploration activities are subject to various
federal, provincial and state laws and regulations governing the
protection of the environment. These laws and regulations are
continually changing and generally becoming more restrictive. The
Company conducts its operations so as to protect public health and the
environment and believes its operations are materially in compliance
with all applicable laws and regulations. The Company has made, and
expects to make in the future, expenditures to comply with such laws
and regulations.
(b) Litigation and claims
The Company is from time to time involved in various claims, legal
proceedings and complaints arising in the ordinary course of business.
The Company does not believe that adverse decisions in any pending or
threatened proceedings related to any matter, or any amount which it
may be required to pay by reason thereof, will have a material effect
on the financial conditions or future results of operations of the
Company.
- --------------------------------------------------------------------------------
19
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
9. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP")
The Company prepares its consolidated financial statements in accordance
with accounting principles generally accepted in Canada. The following
adjustments and/or additional disclosures would be required in order to
present the financial statements in accordance with U.S. GAAP and with
practices prescribed by the United States Securities and Exchange
Commission for the three and nine month periods ended September 30, 2003
and 2002.
Material variances between financial statement items under Canadian GAAP
and the amounts determined under U.S. GAAP are as follows:
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2003
Accounts
Property, Deferred Payable and
Restricted Plant and Stripping Accrued Other Share
Cash Cash Equipment Costs Liabilities Liabilities Capital
-------- ----------- ----------- ----------- ------------- ------------ ---------
As at September 30, 2003
Canadian GAAP $44,336 $ - $ 46,525 $ 29,485 $ 11,031 $ - $172,546
Convertible debenture (a) - - - - - - -
Share-based compensation (b) - - - - - - -
Gold hedge loss (c) - - - - (305) 5,819 -
Impairment of property,
plant and equipment
and capitalized deferred
stripping costs (d) - - (8,608) (13,927) - - -
Amortization of deferred
stripping costs (e) - - - (1,144) - - -
Flow-through common
shares (f) (825) 825 - - - 69 (375)
Black Fox development
costs (g) - - (1,943) - - - -
- ---------------------------------------------------------------------------------------------------------------------
As at September 30, 2003
U.S. GAAP $43,511 $ 825 $ 35,974 $ 14,414 $ 10,726 $ 5,888 $172,171
=====================================================================================================================
Contributed
Surplus Deficit
------------ ----------
As at September 30, 2003
Canadian GAAP $ 10,782 $ (70,330)
Convertible debenture (a) 32,666 (32,666)
Share-based compensation (b) 5,265 (5,265)
Gold hedge loss (c) - (5,514)
Impairment of property,
plant and equipment
and capitalized deferred
stripping costs (d) - (22,535)
Amortization of deferred
stripping costs (e) - (1,144)
Flow-through common
shares (f) - 306
Black Fox development
costs (g) - (1,943)
- ------------------------------------------------------
As at September 30, 2003
U.S. GAAP $ 48,713 $(139,091)
======================================================
- --------------------------------------------------------------------------------
20
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
9. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP") (CONTINUED)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2002
Property, Deferred
Restricted Plant and Stripping Other Share Contributed
Cash Cash Equipment Costs Liabilities Capital Surplus Deficit
-------- ----------- ----------- ----------- ------------ --------- ------------ ----------
As at December 31, 2002
Canadian GAAP $13,293 $ - $ 47,920 $ 26,815 $ - $110,252 $ 10,998 $ (66,795)
Convertible debenture (a) - - - - - - 32,666 (32,666)
Share-based compensation (b) - - - - - - 4,079 (4,079)
Gold hedge loss (c) - - - - 3,573 - - (3,573)
Impairment of property, plant
and equipment and
capitalized deferred
stripping costs (d) - - (8,608) (13,927) - - - (22,535)
Flow-through common
shares (f) (4,488) 4,488 - - 375 (375) - -
- ----------------------------------------------------------------------------------------------------------------------------------
As at December 31, 2002 U.S.
GAAP $ 8,805 $ 4,488 $ 39,312 $ 12,888 $ 3,948 $109,877 $ 47,743 $(129,648)
==================================================================================================================================
Under U.S. GAAP, the net loss and net loss per share would be adjusted as
follows:
2003 2002
-------- --------
Net income (loss) for the three month period ended
September 30, based on Canadian GAAP $ 528 $(2,496)
Convertible debenture (a) - -
Share-based compensation (b) (63) -
Gold hedge loss (c) (3,910) -
Amortization of deferred stripping costs (e) (1,144) -
Flow through shares premium paid in excess of
market value (f) 306 -
Black Fox development costs (g) (1,943) -
-----------------------------------------------------------------------
Net loss for the period based on U.S. GAAP $(6,226) $(2,496)
=======================================================================
Other comprehensive income:
Currency translation adjustment $ 76 $ -
-----------------------------------------------------------------------
Comprehensive loss $(6,150) $(2,496)
=======================================================================
Net loss per share - U.S. GAAP basic $ (0.12) $ (0.08)
=======================================================================
- --------------------------------------------------------------------------------
21
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
9. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP") (CONTINUED)
2003 2002
--------- ---------
Net loss for the nine month period ended
September 30, based on Canadian GAAP $ (3,535) $ (2,914)
Convertible debenture (a) - (32,666)
Share-based compensation (b) (1,186) -
Gold hedge loss (c) (1,941) -
Amortization of deferred stripping costs (e) (1,144) -
Flow through shares premium paid in excess of
market value (f) 306 -
Black Fox development costs (g) (1,943) -
--------------------------------------------------------------------
Net loss for the period based on U.S. GAAP $ (9,443) $(35,580)
====================================================================
Other comprehensive income:
Currency translation adjustment $ (9,770) $ -
--------------------------------------------------------------------
Comprehensive loss $(19,213) $(35,580)
====================================================================
Net loss per share - U.S. GAAP basic $ (0.19) $ (2.88)
====================================================================
(a) Convertible debenture
Under Canadian GAAP, the convertible debenture was recorded as an
equity instrument on issuance in March 2002. Under U.S. GAAP, on
issuance, the convertible debenture would have been recorded as a
liability and reclassified to equity only upon conversion. Further,
under U.S. GAAP, the beneficial conversion feature represented by the
excess of the fair value of the shares and warrants issuable on
conversion of the debenture, measured on the commitment date, over the
amount of the proceeds to be allocated to the common shares and
warrants upon conversion, would be allocated to contributed surplus.
This results in a discount on the debenture that is recognized as
additional interest expense over the term of the debenture and any
unamortized balance is expensed immediately upon conversion of the
debenture. Accordingly, for U.S. GAAP purposes, the Company has
recognized a beneficial conversion feature and debenture issuance
costs of $32,666 for the year ended December 31, 2002 ($Nil for the
three months ended September 30, 2002). Canadian GAAP does not require
the recognition of any beneficial conversion feature.
(b) Share-based compensation
In accordance with Canadian GAAP, the Company has not recorded any
expense with respect to stock options granted to employees. Under U.S.
GAAP, the Company has elected to continue to measure its employee
stock-based awards using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees ("APB No. 25").
- --------------------------------------------------------------------------------
22
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
9. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP") (CONTINUED)
(b) Share-based compensation (continued)
In the fourth quarter of fiscal 2002, an expense of $4,079 has been
recorded under APB No. 25 with respect to the intrinsic value of stock
options granted in the year and for the three and nine month periods
ended September 30, 2003, an expense of $63 and $1,186, respectively,
has been recorded under APB No. 25. In addition, under APB No. 25, the
performance shares granted during 2002 are accounted for as variable
awards until the performance targets are met.
(c) Gold hedge gain (loss)
Under Canadian GAAP, gains or losses on spot deferred forward
contracts are recognized as an adjustment of revenue in the period
when the originally designated production is sold. Under U.S. GAAP,
SFAS 133 requires that for hedge accounting to be achieved, a company
must provide detailed documentation and must specifically designate
the effectiveness of a hedge. Furthermore, U.S. GAAP also requires
fair value accounting to be used for all types of derivatives. As the
Company has chosen not to meet these requirements for U.S. GAAP
purposes, a charge of $3,573 has been recorded in the fourth quarter
of fiscal 2002 to reflect the fair value loss on the contracts
outstanding at December 31, 2002, and an additional loss of $3,910 and
$1,941 has been recorded in the three and nine month periods ended
September 30, 2003, respectively, to reflect the fair value loss on
the contracts between December 31, 2002 and September 30, 2003. The
gold hedge loss on outstanding hedge contracts amounted to $5,819 at
September 30, 2003.
(d) Impairment of property, plant and equipment and capitalized deferred
stripping costs
Under Canadian GAAP, write-downs for impairment of property, plant and
equipment and capitalized deferred stripping costs are determined
using current proven and probable reserves and mineral resources
expected to be converted into mineral reserves. Under U.S. GAAP,
write-downs are determined using current proven and probable reserves.
In addition, under U.S. GAAP, future cash flows from impaired
properties are discounted. Accordingly, for U.S. GAAP purposes, a
reduction in property, plant and equipment and capitalized deferred
stripping costs of $22,535 has been recorded as an impairment in the
fourth quarter of fiscal 2002.
- --------------------------------------------------------------------------------
23
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
9. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP") (CONTINUED)
(e) Amortization of deferred stripping costs
Under Canadian GAAP, amortization of deferred stripping costs is based
on a stripping ratio calculated as estimated total mining costs
divided by the current proven and probable reserves and mineral
resources expected to be converted into mineral reserves. Under U.S.
GAAP, current proven and probable reserves are used in determining the
stripping ratio. Accordingly, for U.S. GAAP purposes, a reduction in
capitalized deferred stripping costs of $1,144 has been recorded as at
September 30, 2003.
(f) Flow-through common shares
Under Canadian income tax legislation, a company is permitted to issue
shares whereby the company agrees to incur qualifying expenditures and
renounce the related income tax deductions to the investors. The
Company has accounted for the issue of flow-through shares using the
deferral method in accordance with Canadian GAAP. At the time of
issue, the funds received are recorded as share capital. For U.S.
GAAP, the premium paid in excess of the market value of $375 is
credited to other liabilities and included in income as the qualifying
expenditures are made.
Also, notwithstanding whether there is a specific requirement to
segregate the funds, the flow-through funds which are unexpended at
the consolidated balance sheet dates are considered to be restricted
and are not considered to be cash or cash equivalents under U.S. GAAP.
As at September 30, 2003, unexpended flow-through funds were $825
(December 31, 2002 - $4,488).
(g) Black Fox Project
Under Canadian GAAP, mining development costs at the Black Fox Project
have been capitalized. Under U.S. GAAP, these expenditures are
expensed as incurred. Accordingly, for U.S. GAAP purposes, a reduction
in property, plant and equipment of $1,943 has been recorded as at
September 30, 2003.
- --------------------------------------------------------------------------------
24
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
9. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP") (CONTINUED)
STATEMENT OF CASH FLOWS
Under Canadian GAAP, expenditures incurred for deferred stripping costs are
included in cash flows from investing activities in the consolidated
statement of cash flows. Under U.S. GAAP, these expenditures are included
in cash flows from operating activities. Accordingly, under U.S. GAAP, the
consolidated statement of cash flows for the period ended September 30,
2003 would reflect a reduction in cash utilized in investing activities of
$5,193 and $13,914 for the three and nine month periods ended September 30,
2003, respectively, and a corresponding increase in cash utilized in
operating activities.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income ("SFAS 130") establishes standards for the reporting
and display of comprehensive income and its components in a full set of
general purpose financial statements. SFAS 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement. For the Company,
the only components of comprehensive loss are the net loss for the period
and the changes in the foreign currency translation component of
shareholders' equity as reported in the consolidated balance sheet prepared
in accordance with Canadian GAAP.
SUPPLEMENTAL INFORMATION FOR U.S. GAAP PURPOSES ON STOCK-BASED COMPENSATION
Pro forma information regarding net loss and net loss per share is required
by SFAS No. 123, Accounting for Stock-Based Compensation and has been
determined as if the Company had accounted for its employees stock options
under the fair value method. The fair value for these options was estimated
at the date of grant using a Black-Scholes option pricing model with the
following weighted average assumptions for 2003 and 2002: risk-free
interest rate of 3.52%, dividend yield of 0%, volatility factor of 52% and
a weighted average expected life of the options of 2 to 5 years. The
weighted average fair value per share of options granted during 2003 and
2002 was $2.01 and $1.92, respectively, and the expense is amortized over
the vesting period.
- --------------------------------------------------------------------------------
25
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
9. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP") (CONTINUED)
The following table presents the net loss and net loss per share, under
U.S. GAAP, as if the Company had recorded compensation expense under SFAS
No. 123 with the estimated fair value of the options being amortized to
expense over the options' vesting period.
2003 2002
--------- ---------
Net loss for the three month period ended
September 30, 2003, as reported $ (6,226) $ (2,496)
Stock option expense as reported 63 -
Pro forma stock option expense (826) -
---------------------------------------------------------------------
Net loss - pro forma $ (6,989) $ (2,496)
=====================================================================
Net loss per share, basic - for the three month
period ended September 30, 2003 $ (0.12) $ (0.08)
Stock option expense as reported - -
Pro forma stock option expense (0.02) -
---------------------------------------------------------------------
Net loss per share, basic - pro forma $ (0.14) $ (0.08)
=====================================================================
2003 2002
--------- ---------
Net loss for the nine month period ended
September 30, 2003, as reported $ (9,443) $(35,580)
Stock option expense as reported 1,186 -
Pro forma stock option expense (3,407) -
---------------------------------------------------------------------
Net loss - pro forma $(11,664) $(35,580)
=====================================================================
Net loss per share, basic - for the nine month
period ended September 30, 2003 $ (0.19) $ (2.88)
Stock option expense as reported 0.02 -
Pro forma stock option expense (0.07) -
---------------------------------------------------------------------
Net loss per share, basic - pro forma $ (0.24) $ (2.88)
=====================================================================
- --------------------------------------------------------------------------------
26
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, INCLUDING, WITHOUT LIMITATION,
STATEMENTS REGARDING OUR EXPECTATIONS, BELIEFS, INTENTIONS OR FUTURE STRATEGIES
THAT ARE SIGNIFIED BY THE WORDS "EXPECTS", "ANTICIPATES", "INTENDS", "BELIEVES",
OR SIMILAR LANGUAGE. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS,
UNCERTAINTIES AND OTHER FACTORS. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS
DOCUMENT ARE BASED ON INFORMATION AVAILABLE TO US ON THE DATE HEREOF AND SPEAK
ONLY AS OF THE DATE HEREOF. THE FACTORS DISCUSSED BELOW UNDER "RISK FACTORS" AND
ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q ARE AMONG THOSE FACTORS THAT, IN
SOME CASES, HAVE AFFECTED OUR RESULTS AND COULD CAUSE THE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS.
Overview
The following presents a discussion of the financial condition and results
of operations of the Company for the three and nine months ended September 30,
2003 and 2002. Prior to June 24, 2002, the Company's operations were those of
International Pursuit Corporation ("Pursuit"), a public company previously
trading on the Toronto Stock Exchange under the ticker symbol "IPJ." In June
2002, Pursuit entered into a Plan of Arrangement ("Plan of Arrangement") that
resulted in the merger of Pursuit and Nevoro Gold Corporation ("Nevoro"), a
privately held corporation and the parent of Apollo Gold, Inc., a Delaware
corporation ("AGI").
This Form 10-Q should be read in conjunction with our consolidated
financial statements and related notes included in this quarterly report, as
well as our annual financial statements for the fiscal year ended December 31,
2002 included in our Form 10 Registration Statement (the "Registration
Statement") filed with the SEC. Certain classifications have been made to the
prior period financial statements to conform with the current period
presentation. Unless stated otherwise, all dollar amounts are reported as
Canadian dollars.
In this document unless the context otherwise requires, "we", "our", "us",
the "Company" or "Apollo" mean Apollo Gold Corporation and its subsidiaries.
BACKGROUND AND RECENT DEVELOPMENTS
We are principally engaged in the exploration, development and mining of
gold. We have focused our efforts to date on two principal properties: our
Montana Tunnels Mine, owned by one of our subsidiaries, Montana Tunnels
Mining, Inc. ("Montana, Inc.") and our Florida Canyon Mine, owned by another
one of our subsidiaries, Florida Canyon Mining, Inc. ("Florida, Inc."). Our
exploration activities involve our Pirate Gold, Nugget Field and Diamond Hill
properties as well as our Black Fox Property, acquired in September 2002.
We are the result of the Plan of Arrangement that resulted in the
merger of Pursuit and Nevoro. Pursuant to the terms of the Plan of
Arrangement, Pursuit acquired Nevoro and continued operations under the
name of Apollo Gold Corporation. Through our wholly-owned subsidiary, AGI
acquired by Nevoro in March 2002, we own the majority of our assets and operate
our business. We continued trading on the Toronto Stock Exchange under our
new name, Apollo Gold Corporation, and with a new ticker symbol, APG.U, on
July 3, 2002. On August 2, 2002 our ticker symbol changed to APG.
27
In February 2003, we filed a Registration Statement on Form 10 with the
SEC. The Registration Statement was declared effective on August 13, 2003. On
August 26, 2003 the Company began trading on the American Exchange under the
ticker symbol AGT.
We own and operate the Florida Canyon Mine, a low grade heap leach gold
mine located approximately 42 miles southwest of Winnemucca, Nevada. The Florida
Canyon Mine employs approximately 168 full-time non-unionized employees and
produces approximately 110,000 ounces of gold annually. In addition to the
mining activities being conducted at the Florida Canyon Mine, we are continuing
a drilling program which is directed at confirmation and expansion of additional
mineralization, and we are conducting a study to determine if areas in some of
the mine walls may be used for additional mining.
Operating highlights at the Florida Canyon Mine include moving 4.882
million tons during the quarter. While less than forecasted, we anticipate
increasing our mine tonnage at the Florida Canyon Mine in the fourth quarter
with the addition of two additional haul trucks.
We also own and operate the Montana Tunnels Mine, an open pit located near
Helena, Montana. When in full production, the Montana Tunnels Mine has
historically produced approximately 70,000 ounces of gold, 26,000 tons of zinc,
6,676 tons of lead and 1,200,000 ounces of silver annually. The Montana Tunnels
Mine produces approximately 15% of its annual gold production in the form of
dore, an unrefined material consisting of approximately 90% gold, which is then
further refined. The remainder of the mine's production is in the form of
concentrates, one a zinc-gold concentrate and the other a lead-gold concentrate
which are shipped to a smelter. We are paid for the metal content, net of
smelter charges. The Montana Tunnels Mine was idle for approximately four months
in 2002, while we made preparations to begin the removal of waste rock at the
Mine. Limited production resumed in October 2002, and full production on the
K-Pit resumed in April 2003. Since that time, the Montana Tunnels Mine has
experienced pit wall problems that have resulted in significant changes to the
mine plan, including an accelerated stripping schedule to remove 10 million tons
of material that slid off the southwest pit wall. Additional stripping is
currently underway and adequate funding is in place. The Montana Tunnels Mine
employs approximately 162 full-time non-unionized employees.
Operating highlights for the quarter at the Montana Tunnels Mine include
the completion of the primary crusher. While the crusher ran for about one half
of the quarter, the mill processed 1,267,973 tons, or an average of 13,934 tons
per day. Stripping on the west wall began towards the end of the quarter.
Noticeable progress was made as 4.35 million waste tons were moved.
We have several exploration assets including Pirate Gold and Nugget Field,
each located in Nevada and owned by our wholly-owned subsidiary, Apollo Gold
Exploration, Inc., a Delaware corporation. In addition, we also own Diamond
Hill, which is located in Montana and Standard Mine which is located in
Nevada.
In the third quarter of 2003, we received three operating permits for the
Standard Mine from the State of Nevada, and we have begun drafting preliminary
operating and production plans for mine production set to begin in 2005. At the
Standard Mine, drilling began in October 2003, and we expect to drill at
numerous targets
28
through several phases of drilling. All but two of our drilling sites require
additional permitting, and we have submitted an exploration drill planning map
to the State of Nevada for these additional permits. At Pirate Gold we have
solicited drilling bids and we expect to drill approximately 14 holes in 2004 to
explore the mineralization of this property.
In September 2002, we completed the acquisition of certain assets known as
our Black Fox Property from two unrelated third parties, Exall Resources Limited
and Glimmer Resources, Inc. The Black Fox Property is located east of Timmins,
Ontario. We currently anticipate that the development and commercialization of
our Black Fox Property will require three phases. The first phase commenced in
early 2003, and involved core drilling of approximately 215 core holes. As a
result of the core drilling, we have identified proven and probable reserves at
the Black Fox Property. We are conducting a study to confirm the reserves and
the study should be complete by December 2003. We believe that the first phase
will cost approximately US $3.5 million.
Upon completion of the first phase, we will then begin the second phase of
our Black Fox project. The second phase will provide for the development of
underground access for further exploratory drilling with an anticipated cost of
US $11.7 million for the period from January, 2004 through December, 2004. We
plan to develop an underground ramp from existing structures. We currently
anticipate commencing the second phase underground drilling in January, 2004. We
also plan to begin the permitting process for the third phase of the Black Fox
project, and anticipate that this process will require approximately 2 years,
based on a plan for combined open pit and underground mine, with on-site
milling, at a capacity of 1500 metric tons of ore per day. The third phase will
include the development of these capabilities, at an aggregate estimated cost of
approximately US $45.0 million.
APOLLO GOLD CORPORATION
The results of operations of the Company for the nine months ended
September 30, 2002 includes the results of operations of Pursuit for the nine
months ended September 30, 2002, and Nevoro for the period from June 25, 2002
through September 30, 2002.
RESULTS OF OPERATIONS:
- ----------------------
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2002
Our revenues for the nine months ended September 30, 2003 were
approximately $65.0 million derived primarily from the sale of 107,604 ounces of
gold. This compares to approximately $17.0 million derived primarily of the sale
of 34,147 ounces of gold for the same period in 2002. The average price received
for gold for the first nine months of 2003 and 2002 was $489.48 and $493.53 per
ounce, respectively. Our revenues for silver, zinc and lead for the nine moths
ended September 30, 2003 were $11.2 million compared to $0.2 million during the
same period 2002. The growth in revenue in 2003 was due in part to an increase
in mining activity in that year. For the first six months of 2002, Pursuit was
primarily engaged in seeking joint venture partners for its existing operations
and in negotiating the terms of its acquisition of Nevoro. In addition, during
the three months ended September 30, 2002, the mill at the Montana Tunnels Mine
was placed on a care and maintenance basis; therefore, the only revenues for
this period came from the Florida Canyon Mine.
29
Sales of minerals from our Florida Canyon Mine accounted for 60% of our
revenues for the nine months ended September 30, 2003, with the remaining 40% of
revenues derived from sales of minerals from our Montana Tunnels Mine. In the
nine months ended September 30 2003, we received approximately 82% of our
revenue from sales of gold and 18% from sales of silver, zinc and lead compared
to 99% from the sales of gold and 1% from the sales of silver, zinc and lead for
the same period in 2002.
Our revenues for the first six months of 2003 were impacted by mixed
performances from our mine operations. Our primary goal of bringing the Montana
Tunnels Mine back into production was completed during the first quarter of
2003; however, wall slippage at the mine and problems with our crusher
installation limited our gold production to 13,118 ounces at the Montana Tunnels
Mine for the first six months of 2003 which was 10,000 ounces below our initial
production expectations. Production began to accelerate during June 2003, when
5,377 ounces of gold were produced. We completed the installation of our new
crusher in August 2003, at a cost of US $1.5 million.
These improvements led to the increased production at Montana Tunnels Mine.
We produced 16,538 ounces of gold at the Montana Tunnels Mine for the three
months ended September 30, 2003, an increase over the first six months of 2003
when we produced 13,118 ounces of gold. We expect to be in the center of the ore
body by August 2004. The east side walls have stabilized and the stripping
program has begun on the west side of the pit with 4.5 million waste tons moved
in the most recent quarter. Once the stripping process is complete, we expect to
produce between 65,000 to 72,000 ounces of gold per year together with the
associated silver, lead, and zinc by-products.
At Florida Canyon, we produced 77,948 ounces of gold for the nine months
ended September 30, 2003 as compared to 34,147 ounces of gold for the same
period in 2002. At September 30, 2003, production was 8,000 ounces less than
anticipated for gold due to lower than expected ore grades. Our operation at
Florida Canyon is expected to accelerate during the last quarter to an estimated
total production of 110,000 ounces for 2003.
We anticipate commencing operations at the Standard Mine in 2005. We will
operate this mine as a satellite of the Florida Canyon Mine. We currently
project production rates of 100,000 to 130,000 ounces of gold on an annual basis
for the combined operation of the Florida Canyon Mine and Standard Mine.
Assuming a gold price range of approximately US$375.00 ounce, we look
forward to the Montana Tunnels Mine, the Florida Canyon Mine and the Standard
Mine, collectively, producing approximately 180,000 ounces of gold next year,
with output potentially increasing to approximately 185,000 to 190,000 ounces a
year thereafter.
Our direct operating costs equaled approximately $52.0 million and $12.3
million for the nine months ended September 30, 2003 and 2002, respectively.
These amounts include mining and processing costs. As explained above, the
lower direct operating costs in 2002 reflect the operating cost of AGI from and
after June 25, 2002. We have focused on reducing our direct operating costs in
2003 focusing on cost reductions at our mines. As of September 30, 2003, our
scheduled commitments include only our operating leases, with minimum lease
payments of $27,000 in 2003 and $111,000 in 2004. We incurred depreciation
and amortization expenses of approximately $6.0 million for the nine
months ended September 30, 2003 as compared to $2.8 million for the same period
2002. The difference is the result that Pursuit had limited operations in 2002
and was focused upon the Nevoro acquisition for the first six months of 2002.
30
We incurred approximately $4.8 million and $1.8 million for the nine months
ended September 30, 2003 and 2002, respectively, in general and administrative
expenses. General and administrative expenses for the nine months ended
September 30, 2003 consisted of increased legal and accounting expenses
incurred in the preparation of our Registration Statement for the registration
of our common stock in the United States, and increased investor relations
costs, including exchange listing fees. In 2002, general and administrative
expenses consisted primarily of salaries and legal and accounting expenses for
maintaining Pursuit as a publicly traded company in Canada for the first six
months of the year (approximately $417,000). Subsequent to that time the costs
included organization costs and maintenance of a Denver corporate office. In the
nine months ended September 30, 2003, we also incurred share-based compensation
of approximately $534,000, resulting from the issuance of stock in lieu of
certain cash compensation. We do not currently intend to continue to use
share-based compensation for the foreseeable future, except for the possible
issuance of shares pursuant to the balance of the arrangement options granted to
certain of our officers and directors in 2002. These shares would be issued in
February 2004, based on fiscal 2003 performance, if earned pursuant to the terms
of those options.
In the nine months ended September 30, 2003 and 2002, we accrued accretion
expense of approximately $1,373,000 and $609,000 respectively, relating to
accrued site closure costs at our Florida Canyon Mine and Montana Tunnels Mines.
This expense represents our estimation of the fair value of the increase in our
site closure and reclamation costs. We incurred $981,000 in royalty expenses for
the nine months ended September 30, 2003 as compared to $425,000 during the same
period 2002. These amounts are attributable to royalties on production from our
Florida Canyon Mine. Our expenses for exploration and development, consisting of
drilling and related expenses at our exploration properties, totaled
approximately $3.0 million and $1.1 million for the nine months ended September
30, 2003 and 2002, respectively. Given that Pursuit was focused upon the Nevoro
acquisition in the first six months of 2002, it did not incur exploration or
development costs during that period, and in the third quarter of 2002, our
exploration and development expenses were primarily focused on the Black Fox
project.
As a result of these expense components, our operating expenses totaled
approximately $68.7 million for the nine months ended September 2003, as
compared to approximately $19.1 million for the same period in 2002. The
difference is the result that Pursuit had limited operations in 2002 and was
focused upon the Nevoro acquisition for the first six months of 2002.
We realized interest income of approximately $73,000 during the nine months
ended September 30, 2003. We incurred interest expense of approximately $629,000
in the nine months ended September 30, 2003, primarily for equipment leases and
bridge loans. We did not realize interest income but incurred net interest
expense of approximately $842,000 during the comparable period in 2002.
We realized foreign exchange gains of approximately $765,000 during the
nine months ended September 30, 2003, from cash balances not held in United
States dollars. Although we report currency in Canadian dollars, we utilize
United States dollars as our functional currency. We did not realize any
foreign exchange gains during the nine months ended September 30, 2002.
31
Based on these factors, we incurred a loss of approximately $3.5 million or
$0.07 per share for the nine months ended September 30, 2003, as compared to a
loss of approximately $2.9 million or $0.24 per share, for the nine months ended
September 30, 2002.
Differences Between Canadian and US GAAP
In accordance with Canadian GAAP, we have not recorded any expense for the
nine months ended September 30, 2003 with respect to stock options granted
to employees. Under US GAAP, we have elected to continue to measure our
employee stock-based awards using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"). For the nine months ended September 30, 2003,
an expense of approximately $1.2 million has been recorded under APB No. 25
with respect to the intrinsic value of stock options granted during that
period.
Under US GAAP, SFAS 133 requires that for hedge accounting to be achieved,
a company must provide detailed documentation and must specifically designate
the effectiveness of a hedge. Furthermore, US GAAP also requires fair value
accounting to be used for all types of derivatives. As we have chosen not to
meet these requirements for US GAAP purposes for the nine months ended
September 30, 2003, an additional loss of approximately $1.9 million has been
recorded in that period to reflect the fair value loss on the contracts
outstanding between December 31, 2002 and September 30, 2003. The cumulative
gold hedge loss on outstanding hedge contracts amounted to approximately $5.8
million at September 30, 2003.
Under US GAAP, the convertible debenture issued in June 2002 requires that
the beneficial conversion feature and debenture issuance costs be amortized over
the term of the debenture. Accordingly, an expense of approximately $32.7
million was recorded in the nine month period ended September 30, 2002
representing the amortization of these costs.
In accordance with Canadian GAAP, we have determined the amortization of
deferred stripping costs using a ratio calculated using proven and probable
reserves and mineral resources expected to be converted into reserves. Under US
GAAP the ratio would be calculated using only proven and probable reserves. For
the nine months ended September 30, 2003, an additional amortization of deferred
stripping costs of approximately $1.1 million is recognized under US GAAP.
Under Canadian GAAP, we capitalize costs associated with the Black Fox
project as we have identified proven and probable reserves. Under US GAAP these
costs are expensed. For the nine months ended September 30, 2003, approximately
$1.9 million has been expensed under US GAAP in relation to the Black Fox
project.
Under US GAAP, the foreign currency component of shareholders' equity is
required to be recognized as a component of comprehensive income and reported in
the financial statements. Canadian GAAP does not recognize the concept of
comprehensive income. The only components of our comprehensive loss are the net
loss for the period and the foreign currency translation component of
shareholders' equity as reported in our consolidated balance sheet prepared in
accordance with Canadian GAAP.
The net loss per share for the nine months ended September 30, 2003 was
$0.07 and $0.19 under Canadian GAAP and US GAAP, respectively, and $0.24 and
$2.88, respectively for the nine months ended September 30, 2002.
32
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002
Our revenues for the three months ended September 30, 2003 were
approximately $27.7 million derived primarily from the sale of 42,695 ounces of
gold. This compares to approximately $17.0 million derived primarily from the
sale of 34,147 ounces of gold for the same period in 2002. The average price
received for gold during the same period was $504.29 and $493.53 per ounce,
respectively. Our revenues for silver, zinc and lead were $6.5 million for the
nine months ended September 30, 2003, as compared to $0.2 million during the
same period in 2002. The growth in revenue in 2003 was due in part to an
increase in mining activity for that year. During the three months ended
September 30, 2002, the mill at the Montana Tunnels Mine was placed on a care
and maintenance basis; therefore the only revenues for this period came from the
Florida Canyon operation. For the three months ended September 30, 2003 we
produced 16,538 ounces of gold at the Montana Tunnels Mine and 26,157 ounces of
gold at the Florida Canyon Mine. We received approximately 76% of our revenue in
the three months ended September 30, 2003 from sales of gold and 24% from sales
of silver, zinc and lead compared to 99% from the sales of gold and 1% from the
sales of silver, zinc and lead for the same period in 2002.
Our direct operating costs equaled approximately $22.5 million and $12.3
million for the three months ended September 30, 2003 and 2002, respectively.
These amounts include mining and processing costs. The primary difference is
during the three months ended September 30, 2002, the Montana Tunnels Mine was
on a care and maintenance basis. We have focused on reducing our direct
operating costs in 2003, focusing on cost reductions at our mines. However, our
direct operating costs increased significantly from the first quarter of 2003
due to increasing production at the Montana Tunnels Mine. As of September 30,
2003, our scheduled commitments include only our operating leases, with minimum
lease payments of $27,000 in 2003 and $111,000 in 2004. We incurred depreciation
and amortization expenses of approximately $2.0 million for the three months
ended September 30, 2003 as compared to $2.8 million for the same period 2002.
We incurred approximately $1.5 million and $1.4 million for the three
months ended September 30, 2003 and 2002, respectively, in general and
administrative expenses. General and administrative expenses for the three
months ended September 30, 2003 consisted of increased legal and accounting
expenses incurred in the preparation of our Registration Statement for the
registration of our common stock in the United States, and increased investor
relations costs, including exchange listing fees. In 2002, the general and
administrative expenses were primarily organization costs and maintenance of a
Denver corporate office. In the three months ended September 30, 2003, we also
incurred share-based compensation of approximately $27,000, resulting from the
issuance of stock in lieu of certain cash compensation. We do not currently
intend to continue to use share-based compensation for the foreseeable future,
except for the possible issuance of shares pursuant to the balance of the
arrangement options granted to certain of our officers and directors in 2002.
These shares would be issued in February 2004, based on fiscal 2003 performance,
if earned pursuant to the terms of those options.
In the three months ended September 30, 2003 and 2002, we accrued accretion
expense of approximately $442,000 and $609,000 respectively, relating to accrued
site closure costs at our Florida Canyon Mine and Montana Tunnels Mine. This
expense represents our estimation of the fair value of the increase in our site
closure and reclamation costs for the third quarter of the respective years. We
incurred $327,000 in royalty expenses for the quarter ended September 30, 2003
as compared to $425,000 during the same period 2002.
33
These amounts are attributable to royalties on production from our Florida
Canyon Mine. Our expenses for exploration and development, consisting of
drilling and related expenses at our exploration properties were approximately
$0.1 million and $1.1 million for the three months ended September 30, 2003 and
2002, respectively, largely the result of the Black Fox project which we
transitioned from an exploration (expensed) to a development (capitalized)
category. The expenses during 2002 were focused mainly on the Black Fox project.
As a result of these expense components, our operating expenses totaled
approximately $26.9 million for the quarter ended September 2003, as compared to
approximately $18.7 million for the same period in 2002.
We realized interest income of approximately $14,000 during the three
months ended September 30, 2003. We incurred interest expense of approximately
$175,000 in the three months ended September 30, 2003, primarily for equipment
leases and bridge loans. We did not realize interest income but incurred net
interest expense of approximately $842,000 during the comparable period in
2002.
We realized foreign exchange losses of approximately $191,000 during the
quarter ended September 30, 2003, from cash balances not held in United States
dollars. Although we report currency in Canadian dollars, we utilize United
States dollars as our functional currency. We did not realize any foreign
exchange gains during the three months ended September 30, 2002.
Based on these factors, we realized income of approximately $0.5 million or
$0.01 per share for the three months ended September 30, 2003, as compared to a
loss of approximately $2.5 million or $0.08 per share, for the three months
ended September 30, 2002.
Differences Between Canadian and US GAAP
In accordance with Canadian GAAP, we have not recorded any expense for the
three months ended September 30, 2003 with respect to stock options granted to
employees. Under US GAAP, we have elected to continue to measure our employee
stock-based awards using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25"). For the three months ended September 30, 2003, an expense of
approximately $63,000 has been recorded under APB No. 25 with respect to the
intrinsic value of stock options granted during that period.
Under US GAAP, SFAS 133 requires that for hedge accounting to be achieved,
a company must provide detailed documentation and must specifically designate
the effectiveness of a hedge. Furthermore, US GAAP also requires fair value
accounting to be used for all types of derivatives. As we have chosen not to
meet these requirements for US GAAP purposes for the three months ended
September 30, 2003, an additional loss of approximately $3.9 million has been
recorded in that period to reflect the fair value loss on the contracts
outstanding between June 30, 2003 and September 30, 2003. The cumulative gold
hedge loss on outstanding hedge contracts amounted to approximately $5.8 million
at September 30, 2003.
In accordance with Canadian GAAP, we have determined the amortization of
deferred stripping costs using a ratio calculated using proven and probable
reserves and resources. Under US GAAP the ratio would be calculated using only
proven and probable reserves. For the three months ended September 30, 2003, an
additional amortization of deferred stripping costs of approximately $1.1
million is recognized under US GAAP.
34
Under Canadian GAAP, we capitalize costs associated with the Black Fox
project. Under US GAAP these costs are expensed. For the three months ended
September 30, 2003, approximately $1.9 million has been expensed under US GAAP
in relation to the Black Fox project.
Under US GAAP, the foreign currency component of shareholders' equity is
required to be recognized as a component of comprehensive income and reported in
the financial statements. Canadian GAAP does not recognize the concept of
comprehensive income. The only components of our comprehensive loss are the net
loss for the period and the foreign currency translation component of
shareholders' equity as reported in our consolidated balance sheet prepared in
accordance with Canadian GAAP.
The net income (loss) per share for the three months ended September 30,
2003 was $0.01 and $(0.12) under Canadian GAAP and US GAAP, respectively, and
$(0.08) and $(0.08), respectively for the three months ended September 30,
2002.
FINANCIAL CONDITION AND LIQUIDITY:
- -------------------------------------
At September 30, 2003 we had cash balances of approximately $44.3 million
compared to cash of approximately $13.3 million at December 31, 2002. The
increased cash resulted from our recent equity offering. On September 26, 2003,
we completed an equity offering of 22,300,000 shares for gross proceeds of
approximately $50.2 million. We incurred commissions and expenses of
approximately $3.0 million and $0.7 million, respectively, for net proceeds
received of $46.45 million. 669,000 Agent's Options were also granted at this
time with an expiration date of September 26, 2005 and an exercise price of
$2.25 per share.
Subsequent to September 30, 2003, the Agents exercised their over allotment
option and we issued an additional 2,132,300 shares for net proceeds of
approximately $4.5 million. An additional 63,969 Agent's Options were also
granted at this time with an expiration date of October 27, 2005 and an exercise
price of $2.25 per share.
The proceeds from this offering are to be used for the following:
- Standard Mine - The Standard Mine is currently in the permitting stage. We
are receiving permits currently and expect to be permitted in 2004 with
enough time to build a leach pad and start production in 2005. We expect to
spend approximately $7 million on the project.
- Black Fox Property - The development team is preparing an RFP (Request for
Proposal) for the development plan at Black Fox, and the drilling will
continue there as well. The team is working toward an audited ore
reserve/resource which should be complete at year end, bringing the project
to the feasibility stage. We expect to spend US $17.3 million on the
project.
- Montana Tunnels - The west wall stripping project has commenced at Montana
Tunnels, six additional trucks have been added to the fleet. We expect to
be mining the west side ores by August 2004. However, we also expect to
keep the mill operating during this development time frame. We expect to
spend approximately US $11 million, net of revenues from development ores,
on the project.
35
Pursuant to the terms and conditions of a $4.5 million private placement of
flow-through common shares (as defined in sub-section 66(15) of the Income Tax
Act (Canada) conducted in November of 2002, the funds have been expended at the
Black Fox project. Some of the expenses will not qualify for flow through
treatment therefore the Company has added $700,000 to the fund to bring the
total expected expenditures at year end to $5.2 million.
In June 2003 we entered into a Revolving Loan, Guaranty and Security
Agreement with Standard Bank London Limited ("Standard Bank"). Although there
is a commitment of US $5 million, we must satisfy certain requirements in order
for Standard Bank to advance the maximum amount of the loan. Until the
commitment under the line of credit expires or has been terminated, we have to
meet certain covenants. As of September 30, 2003 we do not owe any amount under
this arrangement and all covenants have been met.
We believe our cash requirements for future development of the Black Fox
Mine, Standard Mine and for operating our other mines, will be funded through a
combination of future cash flows from operations, and/or future debt or equity
security issuances. Our ability to raise capital is highly dependent upon the
commercial viability of our projects and the associated prices of the metals we
produce. Because of the impact that significant changes in the prices of silver,
gold, lead and zinc have on our financial condition, declines in these metals
prices may negatively impact our ability to raise additional funding for
long-term projects. There can be no assurance that we will be successful in
generating adequate funding for anticipated capital expenditures related to this
property.
Operating Activities
Operating activities provided approximately $9.9 million of cash during the
nine months ended September 30, 2003. Substantially all of the operating cash
flow consisted of noncash elements; principal noncash elements included charges
for depreciation, depletion and amortization of approximately $6.0 million,
amortization of deferred stripping costs of $6.8 million, share-based
compensation of approximately $0.5 million, an increase in the provision for
accrued site closure costs of approximately $1.4 million, offset by the use,
through the change in non-cash operating assets and liabilities, of
approximately $1.2 million. Opera