UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
4601 DTC Boulevard, Suite 750
Denver, Colorado 80237-2571
(Address of Principal Executive Offices Including Zip Code)
(720) 886-9656
(Registrant's telephone number, including area code)
_________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, no par value
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 [_]
1
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [_] No [X]
As of March 15, 2004, the approximate aggregate market value of voting stock
held by non-affiliates of the registrant was $147,811,000 (based upon the
closing price for shares of the registrant's common stock as reported by the
American Stock Exchange on that date). Shares of common stock held by each
officer, director, and holder of 5% or more of the outstanding common stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of March 15, 2004, the registrant had 75,031,198 shares of common stock, no
par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the 2004 Annual Meeting of Stockholders are
incorporated by reference in Part III.
2
APOLLO GOLD CORPORATION
FORM 10-K
TABLE OF CONTENTS
PART I
- ------
ITEM 1. Business
ITEM 2. Properties
ITEM 3. Legal Proceedings
ITEM 4. Submission Of Matters To A Vote Of Security Holders
PART II
- -------
ITEM 5. Market For Registrant's Common Equity
And Related Stockholder Matters
ITEM 6. Selected Consolidated Financial Data
ITEM 7. Management's Discussion And Analysis Of
Financial Condition And Results Of Operations
ITEM 7A. Quantitative And Qualitative Disclosures
About Market Risk
ITEM 8. Financial Statements And Supplementary Data
ITEM 9. Changes In And Disagreements With Accountants
On Accounting And Financial Disclosure
ITEM 9A. Controls and Procedures
PART III
- --------
ITEM 10. Directors And Executive Officers Of The Registrant
ITEM 11. Executive Compensation
ITEM 12. Security Ownership Of Certain Beneficial Owners
And Management
ITEM 13. Certain Relationships And Related Transactions
ITEM 14. Principal Accounting Fees And Services
PART IV
- -------
ITEM 15. Exhibits, Financial Statement Schedules,
And Reports
On Form 8-K
SIGNATURES
CERTIFICATIONS
3
PART I
ITEM 1. BUSINESS
PRELIMINARY INFORMATION
The earliest predecessor to Apollo Gold Corporation was incorporated under
the laws of the Province of Ontario in 1936. In May 2003, it reincorporated
under the laws of the Yukon Territory. Apollo Gold Corporation maintains its
registered office at Suite 300, 204 Black Street, Whitehorse, Yukon Territory,
Canada Y1A 2M9, and the telephone number at that office is (416) 668-5252.
Apollo Gold Corporation maintains its principal executive office at 4601 DTC
Boulevard, Suite 750, Denver, Colorado 80237-2571, and the telephone number at
that office is (720) 886-9656.
Apollo Gold Corporation prepares its consolidated financial statements in
accordance with accounting principles generally accepted in Canada and publishes
its financial statements in United States dollars. In this Annual Report on
Form 10-K, unless otherwise specified or the context otherwise requires, all
dollar amounts or references to dollars are expressed in United States dollars.
Unless otherwise specified or the context otherwise requires, in this Form
10-K the terms "we" and "our" in reference to the operations or business of
Apollo Gold Corporation prior to June 25, 2002, shall mean the operations or
business of Nevoro Gold Corporation and its wholly-owned subsidiary Apollo Gold,
Inc. The terms "we" and "our" in reference to the operations or business of
Apollo Gold Corporation on or after June 25, 2002, shall mean the operations or
business of Apollo Gold Corporation, a corporation presently incorporated under
the laws of the Yukon Territory, its wholly-owned subsidiary Apollo Gold, Inc.,
and Apollo Gold Inc.'s material wholly-owned subsidiaries Montana Tunnels
Mining, Inc., Florida Canyon Mining, Inc., Standard Gold Mining, Inc. and Apollo
Gold Exploration, Inc.
INTRODUCTION
We are principally engaged in the exploration, development and mining of
gold. We have focused our mining 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
development activities involve our Black Fox Property and Standard Mine
project, and our exploration activities involve the Pirate Gold, Nugget Field
and Diamond Hill properties. During 2003, Standard Gold Mining, Inc. acquired
and incorporated into its Standard Mine property additional adjacent land
positions in Buffalo Canyon, and Apollo Gold Exploration, Inc. acquired a new
Willow Creek property.
We are the result of the Plan of Arrangement that resulted in the
amalgamation of International Pursuit Corporation ("Pursuit") and Nevoro Gold
Corporation ("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, Apollo Gold, Inc. ("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.
In February 2003, we filed a Registration Statement on Form 10 with the
Securities and Exchange Commission ("SEC"). The Registration Statement was
declared effective on August 13, 2003. On August 26, 2003, the Company began
trading on the American Stock Exchange under the ticker symbol AGT.
4
We own and operate the Florida Canyon Mine, a low grade heap leach gold
mine located approximately 42 miles southwest of Winnemucca, Nevada. Heap
leaching is a process of extracting gold and silver by placing crushed ore on
sloping, impermeable pads and applying a dilute cyanide solution that dissolves
a portion of the contained gold, which is then recovered. On average, the
Florida Canyon Mine produces approximately 125,000 ounces of gold and
approximately 80,000 ounces of silver annually. During 2003, it produced
101,811 ounces of gold and 60,065 ounces of silver.
We also own and operate the Montana Tunnels Mine, an open pit gold mine
located near Helena, Montana. When in full production, over the past five
years, the Montana Tunnels Mine has produced approximately 78,000 ounces of
gold, 26,000 tons of zinc, 8,700 tons of lead and 1,200,000 ounces of silver
annually. The Montana Tunnels Mine 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. The concentrates are shipped to a
smelter, and after smelting charges, we are paid for the metal content. 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. In October 2003, a second waste stripping
project ("Phase II") known as the L-Pit project was initiated, and we intend to
pre-strip approximately 17 million tons of waste from the south and west high
walls of the open pit after which the L-Pit should add an additional three to
four years of mine life.
We have two development stage properties, the Black Fox Property ("Black
Fox"), located near Timmins, Ontario, and the Standard Mine Project (including
the new Buffalo Canyon component), owned by our wholly-owned subsidiary Standard
Gold Mining, Inc. located in Nevada. We also have several exploration stage
assets including Willow Creek ("Willow Creek"), Pirate Gold Prospect ("Pirate
Gold") and the Nugget Field Prospect ("Nugget Field"), each located in Nevada
and owned by our wholly-owned subsidiary, Apollo Gold Exploration, Inc. We also
own Diamond Hill Mine ("Diamond Hill"), an exploration asset which is an
unincorporated division of Montana Tunnels Mining, Inc. and located in Montana.
In 2003, we focused our exploration efforts on our Black Fox and Standard
Mine properties. The Black Fox Property is located east of Timmins, Ontario,
and was acquired in September 2002. We currently anticipate that the
development and commercialization of our Black Fox Property will require three
phases. The first phase commenced in early 2003, and involved a shallow
drilling program to test the open pit potential and core drilling of 297 core
holes from 200 to 500 meters in depth. As a result of the core drilling, we
have identified proven and probable reserves at the Black Fox Property.
Upon completion of the first phase, we began the second phase of our Black
Fox project in February 2004. The second phase will provide for the development
of underground access for further exploratory drilling. We are developing an
underground ramp from existing structures. We also plan to begin the permitting
process for the third phase of the Black Fox project, and anticipate that this
process will require approximately two years, based on a plan for combined open
pit and underground mining, with on-site milling, at a capacity of 1500 metric
tons of ore per day. The third phase would include construction of the mine and
processing facilities at an aggregate estimated cost of approximately $45.0
million.
We have continued drilling at the Standard Mine and drilled approximately
80 holes in 2003. The Buffalo Canyon portion of our Standard Mine property is
located immediately south of and contiguous to the pre-existing Standard Mine
property. We acquired Buffalo Canyon in 2003 and completed our Phase I
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drilling program in December 2003. We believe that the northern portion of
Buffalo Canyon has the highest potential for commercialization, and plan to
conduct follow-up drilling in 2004.
The table below summarizes our production for gold, silver and other
metals, as well as average metals prices, for each period indicated:
Years
2003 2002 2001 2000
----------- ----------- ----------- -----------
Gold (ounces) 145,935 148,173 192,887 259,863
Silver (ounces) 471,241 275,925 963,050 1,257,972
Lead (pounds) 10,843,184 5,481,230 13,759,579 12,141,771
Zinc (pounds) 21,792,452 15,328,392 40,158,321 31,689,125
Average metals prices:
Gold - London Bullion $ 364 $ 310 $ 271 $ 279
Mkt. ($/ounce)
Silver - London Bullion $ 4.88 $ 4.59 $ 4.37 $ 5.00
Mkt. ($/ounce)
Lead - LME Cash ($/pound) $ 0.23 $ 0.20 $ 0.216 $ 0.206
Zinc - LME Cash ($/pound) $ 0.38 $ 0.35 $ 0.402 $ 0.512
Note: Includes the operations of Nevoro Gold Corporation and its wholly-owned
subsidiary Apollo Gold, Inc prior to June 25, 2002.
BACKGROUND
We are the result of the Plan of Arrangement that resulted in the
amalgamation of International Pursuit Corporation ("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. 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.
INTERNATIONAL PURSUIT CORPORATION (PRIOR TO THE PLAN OF ARRANGEMENT)
International Pursuit Corporation ("Pursuit") was incorporated under the
laws of the Province of Ontario in 1936, under the name Brownlee Mines (1936)
Limited. Pursuit was a public company engaged in the business of exploration and
development of mineral properties for many years.
Pursuit was involved in the exploration, evaluation and development of
precious and base metal properties, involving primarily copper, for commercial
exploitation. Most of Pursuit's business activities took place in the
Philippines, Indonesia and Mongolia, through joint ventures and contracts of
work to explore and develop mining properties.
For example, in April 1995, Pursuit entered into a joint venture agreement
to explore and develop the Hinoba-an copper deposit, located in the southwest
part of the island of Negros in the Republic of the Philippines. Pursuant to
this agreement, Pursuit earned a 50% interest in the Hinoba-an property by
incurring Cdn$9,600,000 of exploration expenditures and by making aggregate
option payments of Cdn$300,000. In addition, 50% of certain expenditures made
by Pursuit in excess of the Cdn$9,600,000 minimum were to be repaid to Pursuit
with interest. Pursuit also had the right to obtain the remaining 50% interest
in Hinoba-an for a purchase price of Cdn$15,000,000, payable to the joint
venture partner through a net smelter return from anticipated production.
Pursuant to this arrangement, Pursuit expended over Cdn$14,700,000 on the
Hinoba-an property (including option payments and accrued interest) through
6
December 1998 and acquired a 100% interest in the property in 1999 through the
bankruptcy of its joint venture partner. However, during this time the world
price of copper declined, and Pursuit placed the Hinoba-an project on hold. In
December 2001, Pursuit executed an agreement with Hinoba Holdings Limited,
granting an option to acquire all of the rights to the Hinoba-an project for
7.5% of Hinoba Holdings Limited shares and $5 million payable within 18 months
of having achieved commercial production. Neither party fully performed under
that agreement. Pursuit discontinued efforts to exploit or sell the project,
and halted financing to the subsidiary holding the underlying title to the
Hinoba-an property. In 2003, Apollo Gold Corporation sold its remaining
interest in this project, including its equity interests in the subsidiary
holding title to the Hinoba-an project and the contingent $5 million receivable,
for $76,287. In connection with that transaction, Hinoba Holdings Limited
released us from and agreed to indemnify us against any past, present or future
third party claims associated with the Hinoba-an project. We no longer hold any
interest in Pursuit's former Philippine Islands properties.
Pursuit's Indonesian transactions were in the form of contracts of work
("CoWs"), project-specific agreements granted by the President of Indonesia,
with terms of approximately 30 years. After conducting preliminary negotiations
for a number of CoWs, in February 1998 Pursuit entered into two CoWs for the
Mahakan East and Mahakan West properties in Indonesia, and paid a security
deposit of $100,000 for each property plus a bank guarantee of $0.60 per hectare
less the security deposit. Pursuit also obtained temporary exploration licenses
for each property. In 1998, Pursuit expended approximately Cdn$1,066,000 on the
exploration of the Indonesian properties.
As the world price of copper declined significantly in the late 1990s and
third world countries experienced recessions and, in the case of Indonesia,
political unrest, Pursuit adopted a policy designed to maintain its mineral
properties in good standing and to seek out joint venture partners until such
time as world copper prices recovered and the political situation in Indonesia
stabilized. We are not currently maintaining the corporate franchises of, or
otherwise financially supporting, Pursuit's discontinued Indonesian
subsidiaries.
In 1999 and 2000, Pursuit also investigated business opportunities outside
the mining industry. In June 1999, Pursuit entered into a joint venture with
StockSet Associates to develop and manage a financial Internet site through a
newly formed corporation, StockSet.com. Pursuit invested $61,142 for a 50%
interest in StockSet.com. In March 2000, Pursuit sold its interest in
StockSet.com to a company controlled by a relative of a then-officer and
director of Pursuit for consideration of Cdn$500,000.
In November 2001, Pursuit was notified by the Toronto Stock Exchange
("TSX") that its shares would be delisted if it did not comply with the TSX's
continued listing requirements within 120 days. Pursuit then sought out
potential acquisition and merger opportunities, which eventually led it to
amalgamate with Nevoro Gold Corporation.
NEVORO GOLD CORPORATION (PRIOR TO THE PLAN OF ARRANGEMENT)
Nevoro was a private company incorporated under the Canada Business
Corporations Act in February 2002. In March 2002, Nevoro acquired all of the
outstanding common stock of AGI. The acquisition included AGI's wholly-owned
subsidiaries, Montana, Inc. and Florida, Inc.
AGI was originally incorporated under the General Corporation Law of the
State of Delaware on December 16, 1998. AGI commenced business on February 5,
1999, pursuant to a plan of reorganization ("Plan of Reorganization") involving
Pegasus Gold International, Inc. ("PGII"), Diamond Hill Mining, Inc. ("Diamond
Hill, Inc."), Florida Canyon Mining, Inc. ("Florida, Inc."), and Montana Tunnels
Mining, Inc. ("Montana, Inc."), all of whom voluntarily filed for protection
under Chapter 11 of the United States Bankruptcy Code on January 16, 1998.
7
Under the Plan of Reorganization, PGII was reincorporated in Delaware and
renamed Apollo Gold, Inc., and its common stock was distributed to certain
former creditors of PGII, Diamond Hill, Inc., Florida, Inc. and Montana, Inc.
AGI became the parent holding company for the reorganized Diamond Hill, Inc.,
Florida, Inc., and Montana, Inc. entities, all of which were also reincorporated
in Delaware but retained their former names. Under the Plan of Reorganization,
AGI and its three subsidiaries were discharged from all liabilities not asserted
prior to the applicable bar dates or otherwise provided for in the Plan of
Reorganization to the maximum extent permitted by the United States Bankruptcy
Code. Following emergence from bankruptcy protection, AGI and its subsidiaries
carried on mining and exploration activities under new management and with the
benefit of the protection afforded by the Plan of Reorganization and the United
States Bankruptcy Code against unsatisfied liabilities associated with its
former ultimate parent company Pegasus Gold Inc. ("PGI") and other former PGI
affiliates.
On January 1, 2002, Diamond Hill, Inc. was merged into Montana, Inc. and
became an unincorporated division of Montana, Inc. On March 26, 2002, Nevoro
acquired 100% of the common stock of AGI from a shareholder group controlled by
a syndicate of banks through the merger of Nevoro Gold USA Inc., a Delaware
corporation and wholly-owned subsidiary of Nevoro, with and into AGI, resulting
in AGI becoming a wholly-owned subsidiary of Nevoro.
PURSUIT AND NEVORO PLAN OF ARRANGEMENT
On June 25, 2002, as a result of Pursuit's extensive search for acquisition
and merger opportunities and after extensive discussions and negotiations,
Pursuit and Nevoro obtained court approval for the Plan of Arrangement that
formed Apollo Gold Corporation. On March 24, 2002, Pursuit conducted a private
placement of $23 million principal amount of 0.0% secured convertible debentures
and related warrants (the "Debentures") through registered dealers (the
"Agents") on a best efforts agency basis. In connection with the private
placement of Debentures, Pursuit issued compensation warrants (the "Compensation
Warrants") to the Agents to purchase an aggregate of 718,750 shares of our
common stock at an exercise price of $1.60 with such warrants being exercisable
for two years from the date of issuance. Approximately $11 million of the
proceeds from the sale of the Debentures were loaned by Pursuit to Nevoro to
facilitate the acquisition of Apollo Gold, Inc., and the remaining amount was
used to fund our operations, including the Montana Tunnels Mine pre-stripping
project.
The Plan of Arrangement involved the following steps, which were deemed to
have occurred in the following order on June 25, 2002 (the "Effective Date"):
(a) the outstanding shares of Pursuit (the "Pursuit Shares") (excluding
any Pursuit Shares issued pursuant to the conversion of the Debentures or issued
upon exercise of the Compensation Warrants) were consolidated (the "Pursuit
Share Consolidation") on a basis of one Pursuit Share for each 43.57 Pursuit
Shares previously held by the Pursuit shareholders;
(b) the terms of each of Pursuit's outstanding common share options
(the "Pursuit Options") were amended to: (i) consolidate the number of Pursuit
Shares which the holder of the Pursuit Option was entitled to acquire upon the
exercise thereof on the basis of one Pursuit Share for every 43.57 Pursuit
Shares which the Pursuit Option previously entitled the holder to acquire; and
(ii) to increase the purchase price of the Pursuit Shares which the Pursuit
Option entitled the holder to acquire by the amount stipulated by the terms
governing such Pursuit Option in the event of a consolidation in the share
capital of Pursuit;
(c) all of the outstanding Debentures were converted into the
underlying Pursuit Shares and common share purchase warrants of Pursuit (the
"Pursuit Warrants") in accordance with their terms;
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(d) immediately following the Pursuit Share Consolidation, all of the
Pursuit Shares outstanding on the Effective Date were exchanged for shares of
our common stock on the basis of one share for each one Pursuit Share held;
(e) all of the outstanding Pursuit Options (as amended in accordance
with paragraph (b) above) were exchanged for options to acquire shares of our
common stock on the basis of one option for each Pursuit Option held;
(f) all Pursuit Warrants outstanding on the Effective Date were
exchanged for warrants to purchase shares of our common stock on the basis of
one warrant for each one Pursuit Warrant held;
(g) all Compensation Warrants outstanding on the Effective Date were
exchanged for warrants to purchase shares of our common stock on the basis of
one warrant for each one Compensation Warrant held;
(h) all Nevoro common shares outstanding on the Effective Date were
exchanged for an aggregate of 1,970,000 shares of our common stock; and
(i) Pursuit acquired Nevoro and the operations of Pursuit and Nevoro
were merged.
APOLLO GOLD CORPORATION
The following chart illustrates our operations and principal operating
subsidiaries, their jurisdictions of incorporation and the percentages of their
voting securities beneficially held by us as of March 15, 2004.
Apollo Gold Corporation
(Yukon Territory)
|
100%
|
Apollo Gold, Inc.
(Delaware)
|
|
100% 100% 100% 100% 100%
| | | | |
- --------------------------------------------------------------------------------------------------
| | | | |
Montana Tunnel Florida Canyon Apollo Gold Standard Gold Mine Development
Mining, Inc. Mining, Inc. Exploration, Inc. Mining, Inc. Finance Company
("Montana, Inc.") ("Florida, Inc.") (Delaware) ("Standard, Inc.") ("MDFC")
(Delaware) (Delaware) (Delaware) (Delaware)
9
NOTES:
APOLLO GOLD CORPORATION: American Stock Exchange listed and Toronto Stock
Exchange listed holding company; owns and operates the Black Fox development
Property.
APOLLO GOLD, INC.: United States holding company employing United States
corporate officers and furnishes corporate services.
MONTANA, INC.: Owns and operates the Montana Tunnels Mine and Diamond Hill
Mine, an exploration property.
FLORIDA, INC.: Owns and operates the Florida Canyon Mine.
APOLLO GOLD EXPLORATION, INC.: Holds United States exploration land positions
not tied to any existing operating subsidiary.
STANDARD GOLD MINING, INC.: Owns and operates the Standard Mine development
project.
MINE DEVELOPMENT FINANCE COMPANY: Provides intercompany loans and other
financial services to affiliated companies.
PRODUCTS
Our mines primarily produce gold but also yield quantities of silver, zinc
and lead. We sell gold and these other metals principally to custom smelters
and metals traders. The percentage of sales contributed by each class of
product is reflected in the following table:
Periods
Product 2003 2002 2001 2000
- ------------ ----- ----- ----- -----
Gold 79% 85% 67% 72%
Zinc 13% 11% 20% 17%
Other metals 8% 04% 13% 11%
GOLD
GOLD PRODUCTION
We produced 145,935 ounces of gold during the year ended December 31, 2003.
We produced 148,173 ounces of gold in the year ended December 31, 2002, and
192,887 ounces and 259,863 ounces in the years ended December 31, 2001 and 2000,
respectively. For the year ended December 31, 2003, 70% of our gold production
came from our Florida Canyon Mine, and 30% from our Montana Tunnels Mine. In
2002, 82% of our gold production came from our Florida Canyon Mine, and 18% from
our Montana Tunnels Mine. Approximately 63% of our gold production in 2001 came
from our Florida Canyon Mine and the remaining 37% from our Montana Tunnels
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Mine. In 2000, 65% of our gold production came from our Florida Canyon Mine,
and 35% from our Montana Tunnels Mine.
GOLD USES
Gold is used for two primary purposes: product fabrication and bullion
investment. Fabricated gold has a variety of end uses, including jewelry,
electronics, dentistry, industrial and decorative uses, medals, medallions and
official coins. Gold investors purchase gold bullion, official coins and
high-carat jewelry.
Most of our revenue is derived from the sale of refined gold in the
international market. However, our end product is dore bars. Because dore is
an alloy consisting primarily of gold but also containing silver and other
metals, dore bars are sent to refiners to produce bullion that meets the
required market standard of 99.95% pure gold. Under the terms of our refining
contracts, the dore bars are refined for a fee, and our share of the refined
gold and the separately recovered silver is paid to us.
GOLD SUPPLY
The worldwide supply of gold consists of a combination of new production
from mining and existing stocks of bullion and fabricated gold held by
governments, financial institutions, industrial organizations and private
individuals.
GOLD PRICES
The price of gold is affected by numerous factors that are beyond our
control. See "Risk Factors - Risks Relating to the Metals Mining Industry".
The following table presents the annual high, low and average afternoon
fixing prices over the past three years, for gold per ounce on the London
Bullion Market:
Year High Low Average
- ---- ---- --- -------
2001 $ 293 $ 256 $ 271
2002 $ 348 $ 278 $ 310
2003 $ 417 $ 319 $ 363
SILVER AND OTHER METALS
SILVER. We produced 471,241 ounces of silver during the year ended
December 31, 2003, 275,925 ounces in the year ended December 31, 2002, and
963,050 ounces and 1,257,972 ounces in the years ended December 31, 2001 and
2000, respectively. Our silver production is obtained from mining operations in
which silver is not our principal or primary product, but is produced as a
by-product of mining gold deposits. For the year ended December 31, 2003, 13%
of our silver production came from our Florida Canyon Mine, and 87% from our
Montana Tunnels Mine. Approximately 74% of our silver production came from our
Montana Tunnels Mine and the remaining 26% from our Florida Canyon Mine in the
year ended December 31, 2002. Silver has traditionally served as a medium of
exchange, much like gold. While silver continues to be used for currency, the
principal uses of silver are for industrial uses, primarily for electrical and
electronic components, photography, jewelry and silverware. Silver's strength,
malleability, ductility, thermal and electrical conductivity, sensitivity to
light and ability to endure extreme changes in temperature combine to make
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silver a widely used industrial metal. Specifically, it is used in photography,
batteries, computer chips, electrical contacts, and high technology printing.
Silver's anti-bacterial properties also make it valuable for use in medicine and
in water purification.
OTHER METALS. Production from the Montana Tunnels Mine also includes the
extraction, processing and sale of zinc and lead contained in sulfide
concentrates. Due to its corrosion resisting property, zinc is used primarily
as the coating in galvanized steel. Galvanized steel is widely used in
construction of infrastructure, housing and office buildings. In the automotive
industry, zinc is used for galvanizing and die-casting, and in the vulcanization
of tires. Smaller quantities of various forms of zinc are used in the chemical
and pharmaceutical industries, including fertilizers, food supplements and
cosmetics, and in specialty electronic applications such as satellite receivers.
The primary use of lead is in motor vehicle batteries, but it is also used
in cable sheathing, solder in printed wiring circuits, shot for ammunition and
alloying. Lead in chemical form is used in alloys, glass and plastics.
The price of silver, lead and zinc is affected by numerous factors that are
beyond our control. See "Risk Factors - Risks Relating to the Metals Mining
Industry".
REFINING PROCESS
We have agreements with Johnson Matthey to refine our gold dore to a final
finished product. Johnson Matthey receives $0.50 for each ounce of gold it
refines, in addition to receiving a fee of 0.50% of the payable metal for silver
and 0.10% of the payable metal for gold.
Our lead and zinc concentrates are shipped to Teck Cominco Metals Ltd.
("Teck Cominco") in British Columbia, Canada. Teck Cominco's smelter is located
in Trail, British Columbia, and is approximately five hours, via train, from the
Montana Tunnels Mine. In order to alleviate as much risk as possible regarding
the smelting process, we have chosen to enter into a contract with Teck Cominco
until March 2005. For further information see "Florida Canyon Mine and Montana
Tunnels Mine."
ITEM 2. PROPERTIES
MINING PROPERTIES AND OPERATIONS
Through our two wholly-owned subsidiaries, Florida, Inc. and Montana, Inc.,
we have two currently operating mines: the Florida Canyon Mine, a low grade heap
leach gold mine, and the Montana Tunnels Mine, a gold mine.
The following table presents certain information regarding our metal mining
properties, including the relative percentage each contributed to our sales for
the year ended December 31, 2003:
Name of Ownership Percentage of
Property Interest 2003 Sales
- ------------------------- ---------- --------------
Montana Tunnels Mine 100% 46%
Florida Canyon Mine 100% 54%
12
Florida, Inc. and Montana, Inc. land holdings are primarily divided into
two categories, unpatented mining claims and fee acreage/patented mining claims.
Our unpatented mining claims require annual filings with the United States
Bureau of Land Management and the county where the claims are held. A $100 per
claim maintenance fee is paid to the United States Bureau of Land Management on
or before September 1 of each year. An affidavit of notice of intent to hold
unpatented mining claims and notice of maintenance fee payment in lieu of
assessment work is filed with the county recorder on or before November 1 of
each year. The notices and fees are filed and paid on a yearly basis and
currently all claims are in good standing.
Fee acreage/patented mining claims are lands owned by us. To the best of
our knowledge, our owned patented claims have been legally located, documented,
recorded and maintained in compliance with applicable state and federal laws,
and there are no violations of, or defaults under, any obligation of such lands.
We also have various leases and agreements for small parcels of land. To
our knowledge, each lease is in full force and effect and valid and enforceable
in accordance with its terms.
GLOSSARY OF TERMS
The following are definitions of certain abbreviations used in this
Business section:
"AG" means silver.
"AU" means gold.
"AUEQ" means gold equivalent.
"FE" means iron.
"FLOTATION" means a concentration process selectively attaching valuable
minerals to air bubbles in a chemical solution.
"GPM" means gallons per minute.
"ISO" means International Standards Organization.
"MA" means million years before present.
"NPI" means net profit interest, a royalty based on the market value of the gold
produced less the cost of refining and transportation.
"NSR" means net smelter return.
"ORE" means material that can be economically mined and processed.
"OZ AG/TON" means ounces silver per short ton (oz/ton).
13
"OZ AU/TON" means ounces gold per short ton (oz/ton).
"PB" means lead.
"ROM" means run of mine (leaching of uncrushed materials).
"RQD" means rock quality designation.
"RC OR RVC" means reverse circulation drilling method.
"STRIP (OR STRIPPING) RATIO" means the tonnage of waste material removed to
allow the mining of one ton of ore in an open pit.
"SULFIDE ORE" means mineralization contained in the form of a sulfide.
"T" or "TON" means short ton.
"TPD" means short tons per day.
"ZN" means zinc.
FLORIDA CANYON MINE
The Florida Canyon Mine is owned and operated by Florida, Inc. Florida
Canyon Mine is a low grade, open pit, heap leach operation located near
Winnemucca, Nevada. Daily production totals approximately 30,000 tons of
crusher ore (ore that is crushed to specified grades) and run-of-mine ore
(uncrushed ore) that is placed on a permanent leach pad for heap leaching to
recover gold and silver. The Florida Canyon Mine has operated since 1986. For
the year ended December 31, 2003, a total of 8,625,912 tons containing 132,232
ounces of gold had been placed on the leach pad and 101,811 ounces of gold had
been recovered. Slightly lower amounts of silver have also been recovered.
The Standard Mine is a development project located south of the Florida
Canyon Mine and is currently owned by Standard Gold Mining, Inc. Historically,
the Standard Mine project assets have been part of the Florida Canyon Mine and
therefore the production and other information in this Annual Report on Form
10-K for the Florida Canyon Mine includes data for the Standard Mine project.
However, in the fourth quarter of 2003 we transferred the Standard Mine project
assets into one of our wholly-owned subsidiaries, Standard Gold Mining, Inc.
Location. The Florida Canyon Mine is located about 42 miles south of
Winnemucca, Nevada, just off Interstate 80 at the Humboldt exit. The pits, waste
dumps, and facilities are located in sections 1, 2, 3, 10, 11, and 12 of T31N,
R33E and sections 34, 35 of T32N, R33E Mount Diablo Base & Meridian, Pershing
County, Nevada. The approximate location of the deposit is longitude 118 14'
and latitude 40 35'. The Standard Mine Area is located approximately five miles
south of the Florida Canyon Mine.
Land Area. The land that we own, lease or control at the Florida Canyon
Mine covers a total of 15,456 acres. Fee lands total 4,075.81 acres, while 19
patented claims total 359.9 acres. We also maintain 579 unpatented claims that
total 11,580 acres. The fee lands and patented claims and most of the unpatented
14
claims have been surveyed. Land lease and option payments and unpatented claim
maintenance fees total $823,975 for 2002 and 2003, after which the total land
cost drops to $115,900 annually. The Florida Canyon Mine operating permit area
contains 5,522 acres. We have disturbed approximately 1,958 acres of land,
consisting of 1,034 acres of public lands and 923 acres of fee (private) lands.
Mining the remaining reserves will add 77 acres of disturbance, of which 24
acres are public lands and 53 acres are private lands. We expect approval in
late June 2004 to mine the additional reserves. The land that we own or lease
at the Standard Mine covers a total of 6,087 acres, and fee lands total 1,926.89
acres. We also maintain 208 unpatented claims that total 4,160 acres at the
Standard Mine.
Production. We have historically processed approximately 10 million tons
of ore annually at the Florida Canyon Mine. Approximately 45% of the ore is
crushed to 80% passing 0.75 inch and 55% of the ore is run-of-mine ore placed
directly on the leach heap. Production from the Florida Canyon Mine operation
is summarized in Table 1.
This table presents data from the Florida Canyon Mine property. All
production is subject to a 2.5% net smelter return (NSR) royalty.
TABLE 1 FLORIDA CANYON PRODUCTION HISTORY
MINE
REPORT CRUSHER REPORT RUN OF MINE TOTAL ORE (FROM CRUSHER REPORT) WASTE
- ------ ------------------------- ----------------------- -------------------------- -------------------------------
YEAR MINE GRADE GOLD CRUSHER GRADE GOLD RUN OF MINE GRADE GOLD TOTAL ORE GRADE GOLD TONS
ORE TONS OZ AU/T OUNCES ORE TONS OZ AU/ OUNCES ORE TONS OZ AU/T OUNCES TONS OZ AU/T OUNCES WASTE
000'S 000'S 000'S TONS 000'S 000'S TONS 000'S 000'S TONS 000'S 000'S
- ------ -------- ------- ------ -------- ------ ------ -------- ------- ------ ------ ------- ------ ------
1999 5,584 0.0262 146 5,441 0.0261 142 7,394 0.0123 91 12,835 0.0182 233 4,545
2000 4,596 0.0297 137 4,815 0.0299 144 5,702 0.0123 70 10,516 0.0203 214 12,676
2001 3,593 0.0208 75 3,719 0.0207 77 6,035 0.0116 70 9,754 0.0151 147 15,808
2002 4,368 0.0228 100 4,221 0.0229 97 4,098 0.0119 49 8,319 0.0175 146 13,566
2003 3,804 0.0203 77 2,806 0.0203 77 4,822 0.0114 55 8,625 0.0153 132 11,079
- ------ -------- ------- ------ -------- ------ ------ -------- ------- ------ ------ ------- ------ ------
TOTALS 21,945 0.0244 535 22,022 0.0244 537 28,051 0.0119 335 50,049 0.0174 872 57,674
Mining Claim Description. Mining operations and facilities are on Sections
1, 2, 3, 10, 11, and 12 of T31N, R33E, Mount Diablo Base and Meridian, Pershing
County, Nevada. The mineralization and facilities extend to the north in
Sections 34 and 35 of T32N, R33E, Mount Diablo Base and Meridian. Usually only
36 sections are in each township, however, in T31N, R33E, Sections 37, 38, and
39 are included due to old government surveying problems leaving gaps between
the normal sections.
Agreements and Encumbrances. All current reserves at the Florida Canyon
Mine deposit are subject to a 2.5% net smelter return royalty. Other Florida
Canyon Mine property is subject to royalties shown in Table 2.
TABLE 2 ROYALTY AGREEMENTS
Ranleigh International Corp. 2.5% NSR +8 Square Mile Area Centered on Florida Canyon
Mine
Asarco, McCullough 2.0% NPI NE1/4 of NE1/4 Section 11 T31N R33E
Hall 2.5% NSR Madre & Calaveras Patented Claims, Sections 2 &12
T31N, R33E
Muller Investments 1.0% NSR NE1/4 of NW1.4; S1/2 of NW1/4, Section 1 T30N
R33E
We have paid royalties of $898,104, $508,000 and $0, respectively, in the
years ended December 31, 2003, 2002 and 2001.
15
The annual holding costs of Florida Canyon Mine, exclusive of property
taxes, are shown in Table 3.
16
TABLE 3 FLORIDA, INC. & STANDARD GOLD MINING, INC. LAND HOLDING COSTS
PROPERTY 2002 2003 ANNUAL AFTER 2003 ROYALTY
- ---------------------- -------- -------- ------------------ --------
Hanna Hall $ 7,200 $ 7,200 $ 7,200 2.5% NSR
Asarco $ 10,000 $ 10,000 $ 10,000 1.0% NPI
Herbert McCullough 1.0% NPI
Ranleigh International 2.5% NSR
Campbell $ 40,000 $471,175
Campbell $ 54,000 $110,000
Rex Resources $ 6,000 $ 11,000
Muller Investments $ 20,000 $ 20,000 $ 20,000 1% NSR
Unpatented Claims $ 55,100 $ 78,700 $ 78,700
TOTALS $192,300 $708,075 $ 115,900
Mine equipment at our Florida Canyon Mine is held under installment
purchase agreements and capital leases with Caterpillar Financial Services
Corporation and a capital lease with ATEL Equipment Leasing. The total initial
purchase price of mine equipment was approximately $34.72 million. As of
February 29, 2004, the balance owed was approximately $4.56 million.
At February 29, 2004, the net book value of the Florida Canyon Mine and its
associated plant and equipment was approximately $9.55 million.
Environmental Liabilities. The Florida Canyon Mine has been in continuous
operation since 1986. The original permit to operate was granted by the U.S.
Bureau of Land Management ("BLM") and the Nevada Department of Environmental
Protection ("NDEP") Reclamation Permit 126. The remaining reserves are the
subject of the 17 sequentially numbered amendments to the Florida Canyon Mine
operating plan. The current permit area encompasses approximately 5,522 acres of
privately owned Florida, Inc. lands and BLM-administered public lands. The 17th
amendment ("APO 17") did not propose any new disturbance; however, overall
authorized disturbance within the permit area was reduced by 5.9 acres. Florida,
Inc.'s existing and approved operations comprise a total of 1,957.5 disturbance
acres consisting of 1,034.1 acres of disturbance on public land administered by
the BLM, and approximately 923.4 acres of disturbance on private land. An 18th
amendment ("APO 18") was submitted in December 2003 seeking approval to mine
additional reserves identified in the Switchback Pit area and expand the
existing heap leach pad to accommodate approximately 20 million tons of ore. An
environmental assessment is currently being prepared by a third-party
contractor. Any development of additional reserves will require additional
amendments.
We are required to maintain reclamation bonds covering the costs of
reclaiming all disturbances at our mines as established by regulatory
authorities from time to time. Bonding requirements for the Florida Canyon Mine
were met by the following bond instruments:
17
TYPE OF BONDING PENAL SUM AS AT YEAR END
- --------------------------------------------------------------- ------------- ------------
2002 2003
------------- ------------
Unsecured surety bond issued by Safeco and subject to the final
judgment described below: $ 16,936,130 $ 16,936,130
- --------------------------------------------------------------- ------------- ------------
Unsecured surety bond issued by Safeco pursuant to the
"Montana Settlement Agreement" described below: $ 520,000 $ 520,000
- --------------------------------------------------------------- ------------- ------------
Personal bond secured by irrevocable stand-by letter of credit
issued by Washington Mutual Bank: $ 3,537,745 $ 3,703,149
- --------------------------------------------------------------- ------------- ------------
TOTAL BONDING REQUIREMENT MET: $ 20,993,875 $ 21,159,279
- --------------------------------------------------------------- ------------- ------------
The first two reclamation bonds totaling $17,456,130 were issued by Safeco
Insurance Company of America ("Safeco"). In 1999, Safeco cancelled the first
bond in the amount of $16,936,130; however, prior to the effective date of
cancellation, the U.S. District Court for the District of Nevada entered a
declaratory judgment holding that Safeco's cancellation does not affect the
BLM's right to treat the bond as remaining "outstanding" as part of the required
bonding for the Florida Canyon Mine and that ongoing mining under our plan of
operation does not affect Safeco's obligations under the bond upon eventual
completion of mining. In reliance on that judgment, BLM has counted the
cancelled Safeco bond towards satisfaction of our bonding requirements and has
permitted us to continue to mine both inside and outside the area covered by the
cancelled Safeco bond. On May 29, 2003, a not-for-publication memorandum
decision was delivered by a three-judge panel of the Ninth Circuit Court of
Appeals affirming the U.S. District Court judgment in our favor. Safeco did not
file notice of any further appeal within the period permitted, and the District
Court judgment has become final. A more complete description of the litigation
among Safeco, the United States, the State of Nevada, and us with respect to the
cancelled Safeco bond is included below under "Legal Proceedings". In view of
Safeco's cancellation of the bond, Safeco has not invoiced us for, and we have
not paid, any premium on, the cancelled Safeco bond since August 15, 1999.
Safeco's future intention with respect to the cancelled bond is not known.
The unsecured Safeco-issued bond in the amount of $16,936,130 covers only
disturbances within the area disturbed as of August 15, 1999, and further
disturbances within that area. The second Safeco bond in the amount of $520,000
carries an annual bond premium of $6,500. Safeco issued that bond in 2001 under
a settlement agreement preventing cancellation until May 1, 2003. Safeco has
extended the $520,000 bond to May 1, 2004, and has advised that it will further
extend the bond to May 1, 2005. That bond was furnished by Safeco as part of
its obligations under the settlement agreement resolving related litigation
involving Safeco, Diamond Hill, Inc., the United States, and the State of
Montana as more completely described below under "Legal Proceedings". The
$520,000 Safeco bond covers all disturbances within the Florida Canyon Mine
site's area of operations.
The $3,527,270 personal bond issued to Florida, Inc. is secured by an
irrevocable stand-by letter of credit in the same amount issued by Washington
Mutual Bank for the benefit of BLM. We are required to maintain a deposit
account pledged to Washington Mutual Bank equal to 100% of the amount available
for drawing under the letter of credit to secure Washington Mutual Bank's
obligations under the letter of credit. We pay annual letter of credit fees
equal to 1.5% of the face amount of the letter of credit. We earn interest on
the pledged deposit account at the rate established by Washington Mutual Bank
from time to time.
18
We have not yet made arrangements for meeting increased bonding
requirements likely to be imposed in connection with mine expansion plans
scheduled for 2004.
The bonding requirements for the Standard Mine development project were met
by the following bond instruments:
TYPE OF BONDING PENAL SUM AS AT YEAR END
- -------------------------------------------------------------- ---------------------------
SECURITY 2002 2003
- -------------------------------------------------------------- ------------- ------------
Personal bond secured by irrevocable stand-by letter of credit
issued by Washington Mutual Bank: $ 96,410 $ 96,410
- -------------------------------------------------------------- ------------- ------------
Personal bond secured by pledge of deposit account maintained
with Washington Mutual Bank: $ 8,500 $ 8,500
- -------------------------------------------------------------- ------------- ------------
REQUIREMENT MET: $ 104,910 $ 104,910
- -------------------------------------------------------------- ------------- ------------
The $96,410 personal bond is secured by an irrevocable stand-by letter of
credit in the same amount issued by Washington Mutual Bank for the benefit of
BLM. We are required to maintain a deposit account pledged to Washington Mutual
Bank equal to 100% of the amount available for drawing to secure Washington
Mutual Bank's obligations under the letter of credit. We pay annual letter of
credit fees equal to 2.0% of the face amount of the letter of credit. We earn
interest on the pledged deposit account at the rate established by Washington
Mutual Bank from time to time. The $8,500 personal bond is secured by direct
pledge to BLM of a certificate of deposit equal to 100% of the penal sum of the
bond. We do not pay any fees. We earn interest on the pledged certificate of
deposit at the rate established by Washington Mutual Bank from time to time. We
intend to substitute Standard, Inc. for Florida, Inc. as bond principal on all
bonding for the Standard Mine area. The bonding requirement will increase by a
material amount upon approval of the Standard Mine area permit applications that
are currently pending prior to commencement of mining scheduled for 2004. We
have not yet arranged for issuance of bonding to cover mining operations.
Like all mine operators, we always face the risk of redetermination of
bonding requirements as a result of changes in regulatory agency assumptions and
methodology used to establish bonding requirements, and there can be no
assurance that our bond requirements will remain the same.
As of December 31, 2003, we estimate accrued closure costs at the Florida
Canyon Mine to be an aggregate of $12.5 million (including severance costs of
$1.6 million), of which $1.0 million has already been completed. Following
approval of APO 18, internal closure costs are estimated to increase to
approximately $15.1 million, of which $2.0 million will be completed in 2004.
The $15.1 million post-APO 18 closure costs do not include employee severance.
Florida Canyon Mine and Standard Mine Area Geology. The Florida Canyon
Mine and Standard Mine Area deposits are situated in the Basin and Range
physiographic province of northwestern Nevada, typified by a series of
northward-trending elongated mountain ranges separated by alluvial valleys. The
deposits are located in the Humboldt Range, which is formed by north-trending
folding and faulting.
The Florida Canyon and Standard Mine Area are dominated by a major regional
structural zone, termed the Humboldt Structural Zone, which is a 200 km wide
northeasterly-trending structural zone with left-lateral strike slip movement.
Permo-Triassic rocks of the Rochester Rhyolite, Prida Formation, Natchez Pass
Formation, and Grass Valley Formation are all exposed in the Florida Canyon
19
area. The Humboldt City Thrust separates the Natchez Pass and Grass Valley
formations from the underlying Prida Formation. There is a strong N30 degrees E
to N50 degrees E structural fabric prevalent in and adjacent to the Florida
Canyon Mine and Standard Mine deposits, as evidenced by the alignment of quartz
veining, shear zones, and well-developed joint sets.
Mineralization at the Florida Canyon Mine consists of native gold and
electrum, an alloy of gold and silver associated with quartz, iron oxides,
pyrite, marcasite, and arsenopyrite. Quartz is the major gangue mineral.
Secondary minerals identified in the Florida Canyon Mine deposits include gypsum
(likely remobilized from the Grass Valley Formation), alunite, barite, native
sulfur, calcite, dolomite, anhydrite, pyrargyrite, pyrrhotite, and stibnite.
Gold mineralization at the Standard Mine Area deposits also consists of
native gold and electrum generally associated with silicification and
argillization at the contact between Grass Valley argillite and the underlying
Natchez Pass limestone.
Florida Canyon Mine and Standard Mine Area Drilling and Sampling. The
Florida Canyon Mine property is situated in the Imlay Mining District in
Pershing County, Nevada. Historically, the only significant gold production in
the area came from the Standard Mine between 1939 to 1942 and 1946 to 1949.
Modern exploration at Florida Canyon Mine began in 1969. It has been explored
by five different mining and exploration companies. Table 4 summarizes the
drilling on the Florida Canyon Mine property between 1969 and December 31, 2003,
which totals over 1.9 million feet in 4,476 drill holes; this also includes 857
holes totaling 240,139 feet that were drilled in the Standard Mine Area.
TABLE 4 FLORIDA CANYON MINE AND STANDARD MINE DRILL HOLE DATABASE SUMMARY
(Florida Canyon Mine Area Drilling)
DRILL TYPE NUMBER OF HOLES FOOTAGE
--------------- ---------
Core 55 34,522
Reverse Circulation & Rotary 3,561 1,598,052
TOTAL 3,616 1,632,574
Number of Samples 299,304
(Standard Mine Area Drilling)
DRILL TYPE NUMBER OF HOLES FOOTAGE
--------------- ---------
Core 11 1,983
Reverse Circulation & Rotary 842 237,005
TOTAL 853 238,988
Number of Samples 43,892
The reverse circulation drilling we have completed is done wet from the
surface, with a 10 to 15 lb sample collected from a wet rotary splitter.
American Assay Labs of Sparks, Nevada completed most of the analyses of Florida
Canyon drill hole samples. Gold analysis is by standard fire assay with either
atomic absorption or gravimetric finish.
20
About 10% of the drill samples we have completed were analyzed in
duplicate. Mine Development Associates, an independent mining testing firm,
examined the checked assay data which showed good correlation between the
original and duplicate data. In addition to internal checks, American Assay
continually monitors the laboratory performance of our independent consultants.
Drill Hole Spacing. Measured oxide resources for the Florida Canyon Mine
are classified as those model blocks with at least three composites within
one-half the distance of the variogram range; indicated resources are model
blocks with at least two composites within the distance of the variogram range.
The drill hole spacing at Florida Canyon Mine and Standard Mine Area
approximates a 100 foot grid. The variogram range varies between 40 feet and
170 feet. About 26% of the oxide resources at the mines are measured,
indicating the drill spacing is within of the variogram range, and 74% are
defined as indicated, indicating spacing more than of the variogram range, but
less than the full range. The variogram ranges at the Standard Mine Area are
between 30 feet and 210 feet and are generally slightly longer than the ranges
at the Florida Canyon Mine. At the Standard Mine Area approximately 54% of the
resources are defined as measured. Kriging variance was used to define measured
and indicated materials at the Standard Mine Area.
Florida Canyon Mine Reserves. The Florida Canyon Mine reserves include the
remaining material from several pits with prior mining and some new areas that
have not been mined. The pits for the new areas were designed using Whittle pit
optimization at $400/ounce gold price to complete the design, and cut off grades
based on $350/ounce gold price to determine reserves. Additional drilling was
conducted in 2002 and 2003 in some of the new pit areas. The areas with prior
mining include the Brown Derby, Central, Jasperoid Hill and Main Extension,
while new areas include Headwaters, Northeast Extension, and Radio Towers West.
The new areas are generally further up the slope of the Humboldt Range. Table 5
summarizes Florida Canyon Mine and Standard Mine Project reserves as of December
31, 2003, which conform to the definitions ascribed by the Canadian Institute of
Mining, Metallurgy and Petroleum and guidelines adopted by CIM Counsil on August
20, 2000 and the United States Securities Exchange Commission Industry Guide 7
definitions of Proven and Probable reserves.
TABLE 5 FLORIDA CANYON MINE RESERVES
Tons Grade Ounces Grade Ounces
Area 000's oz Au/t Au oz Ag/t Ag
Florida Canyon Mine
Proven & Probable Reserves 23,874.1 0.016 374.4 NA NA
SUBTOTAL FLORIDA CANYON MINE 23,874.1 0.016 374.4 NA NA
Standard Mine
Proven & Probable Reserves 22,501.7 0.018 404.1 0.16 3,618.9
SUBTOTAL STANDARD MINE 22,501.7 0.018 404.1 0.16 3,618.9
TOTAL PROVEN AND PROBABLE RESERVES 46,375.8 0.017 778.5 9.16 3,618.9
Note: Mine Development Associates located at 210 South Rock Blvd., Reno
Nevada 89052 is an independent mining engineering company, and completed its
review of our reserve estimates in February 2004.
Florida Canyon Mine and Standard Mine Area Mineralized Material. The
Florida Canyon Mine resources were modeled by our manager of exploration, with
supporting work and input from our engineering and geology staff. In addition to
a gold grade model, a geologic/mineralogic model was made to represent the
21
extent of each alteration/lithologic group recognized at the Florida Canyon
Mine.
Grade population domains were used to restrict high-grade assays from
smearing into lower grade domains. Domain boundaries that corresponded to each
of the four gold composite populations were drawn on 20 feet spaced bench maps;
these hard boundary polygons were used to code the drill composites and model
blocks to each particular domain and constrain the estimate. We used a
multi-pass technique to estimate block grades starting with measured resources
and ending with inferred material. Block grades were estimated by a combination
of ordinary kriging and inverse distance techniques.
All of our mine pits have been developed from optimized pits based only on
mineralized material. All of the pits are based on designed pit slopes with
ramps, with the exception of the Star pit at our Standard Mine area. Most of our
Standard Mine Area pits are side hill access, are not deep, and do not require
an in-pit ramp system.
Florida Canyon Mine Operations. The Florida Canyon Mine generally operates
two 10-hour shifts per day, six days per week. Generally, several pits are
mined at the same time. All equipment utilized at the Florida Canyon Mine is
leased or owned, and is in good working condition. Ore grade material is
transported to the run of mine heap or the crusher stockpile. The run of mine
material generally grades between 0.006 and 0.018 ounces of gold per short ton
(oz/ton), however, the actual cut off grade is dependent on rock and alteration
type. This material is dumped on the pad by 85-ton to 150-ton trucks, then
bulldozed prior to leaching. The higher-grade material is crushed to 80%
passing 0.75 inch and transported to the pad by a radial stacking conveyor.
Material is leached in three stages by drip systems, each applying 4,000
gallons per minute of leach solution to the heap. The first stage continues to
leach older ore. The second stage may leach younger ore or run-of-mine
materials. The third stage leaches the most recently crushed material on the
pad. In this fashion, the grade of the leach solution builds as it travels
through each stage. After the leach solution has traveled through all three
stages, the solution is stored in the pregnant solution pond.
The pregnant leach solution is processed by absorbing the gold in the leach
solution onto activated carbon. This is completed in one of the four carbon
absorption plants on the property, each with five leach tanks. After the carbon
has absorbed sufficient gold, the carbon is transported to the stripping,
regeneration, and refinery plant. The carbon is stripped and the concentrated
gold solution is pumped through electrowinning cells, where the gold is plated
onto cathodes and then refined into gold/silver dore bars. Most of the makeup
water used for leaching comes from a geothermal source located near the plant
site.
The operation uses a six- month recovery cycle to model gold recovery for
both run of mine and crushed materials. Table 6 shows the expected recovery for
gold over the six-month period.
22
TABLE 6 FLORIDA CANYON MINE HEAP LEACH RECOVERY MODEL
CUMULATIVE
CRUSHED CRUSHED ROM CUMULATIVE
MONTH RECOVERY RECOVERY RECOVERY ROM RECOVERY
- ----- ----------- --------- --------- -------------
1 13.4% 13.4% 4.1% 4.1%
2 22.1% 35.5% 19.3% 23.4%
3 21.2% 56.7% 18.6% 42.0%
4 13.1% 69.8% 11.4% 53.4%
5 4.6% 74.4% 4.1% 57.5%
Cutoff Grade Calculation. The internal cutoff grade calculation assumes
the material is already inside an optimum pit and must be mined. The decision
is where to send the material. If a profit can be made by processing the
material rather than sending it to the waste dump then the material should be
processed. The internal cutoff grade calculation removes the mining cost from
the cutoff calculation. A $350 ounce gold price is used for the cutoff grade
calculation. Set forth below are the cutoff grades used for the respective
mines.
For our Florida Canyon Mine two types of ore are processed. Higher grade
material is sent to the crusher and after crushing is placed on the heap. The
cutoff grade for this material ranges from 0.010 to 0.022 ounces of gold per
short ton depending on location and type of rock. Material that is below this
cutoff grade, but above a grade of 0.005 to 0.008 ounces of gold per short ton
is sent to the heap without crushing, and termed run-of-mine (ROM) material.
For our Standard Mine all material would be run of mine (ROM). The cutoff
grade for this material ranges from 0.005 to 0.006 ounces of gold per short ton.
MONTANA TUNNELS MINE
Our Montana Tunnels Mine, owned and operated by Montana, Inc., our
wholly-owned subsidiary, is an open pit gold mine located approximately five
miles west of Jefferson City, Montana, with gravity and flotation processing
facilities. Operations at the Montana Tunnels Mine commenced in 1987.
Location. The Montana Tunnels Mine is located about five miles west of
Jefferson City, Montana. We are currently operating a 16,000-ton per day
flotation plant (upgraded in 2003) and open pit mine at the deposit. The
Montana Tunnels Mine operation is located in the historic "Wickes-Corbin" mining
district. Our plan involves mining inside the current open pit to extract the
remaining reserves. We have also studied alternates for future expansion
including underground mining and rerouting a creek to allow the pit to expand to
the northwest.
Land Area. We own or lease an aggregate of 5,023.2 acres in fee and
patented lands at the Montana Tunnels Mine. The property consists of 136 wholly
or partially owned patented claims (2,345.14 acres), three patented leased
claims (45.19 acres) expiring on March 19, 2004, and 2,632.87 acres of owned fee
lands. All patented claims and fee lands have been surveyed. In addition, 213
unpatented claims are maintained (4,260 acres). We estimate that 90% of the
unpatented claims have been surveyed. A number of claims outside the contiguous
mining claims and fee land are isolated.
23
Production. Production during 2003 was lower for the reasons stated below.
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 Montana Tunnels Mine's production is in the form
of zinc-gold concentrate and a lead-gold concentrate. The concentrates are
shipped to a smelter, and after smelting charges, we are paid for the metal
content. The Montana Tunnels Mine was idle for approximately four months in
2002, while we removed waste rock at the Mine under our Phase I stripping
program. 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 Phase II stripping schedule to remove 10
million tons of material that slid off the southwest pit wall. We anticipate
completing Phase II by mid-2004, which should provide a four-year mine life and
a return to the historical gold production levels. We have all permits in place
to complete this development.
The following table sets forth annual production levels for gold, silver,
lead and zinc at the Montana Tunnels Mine since 1999:
TABLE 7 MONTANA TUNNELS MINE PRODUCTION HISTORY
YEAR MILLION AU OZ AU AG OZ AG PB TONS PB ZN TONS
TONS OZ AU/T OZ AG/T 000'S % 000'S % ZN
- ------ ------- ------ ------- ------- ------- ----- ------- ----- -----
1999 5,076 0.0173 88.0 0.22 1,120.2 0.20 10.2 0.62 31.3
2000 5,384 0.0143 77.0 0.37 2,003.7 0.17 9.4 0.47 25.5
2001 5,424 0.0168 91.2 0.28 1,510.9 0.18 9.9 0.55 30.1
2002 2,881 0.0156 44.9 0.24 685.6 0.17 4.9 0.47 13.5
2003 4,663 0.0156 72.7 0.21 979.2 0.20 9.3 0.44 20.5
Totals 23,428 0.0159 373.8 0.27 6,299.6 0.19 43.7 0.51 120.9
Mining Claim Description. The Montana Tunnels Mine is located in Section 8
of Township 7 North, Range 4 West, while the permit boundary covers portions of
Section 4, 5, 8, 9, 15, 16, 17, and 20. Mining claims that cover the pit are
listed in Table 8. About half of Section 8 lands are our owned fee lands.
TABLE 8 CLAIMS COVERING MONTANA TUNNELS MINE
PATENTED CLAIMS MINERAL SURVEY UNPATENTED CLAIMS
- --------------------- -------------- -----------------
Geraldine C 9184 MF 1
P.Q.C. 9184 F 14
Montana 9184 F 15
General Harris 2038
Black Rock No. 2 9184
Black Rock No. 3 8940
D.E.D. 9184
Placer 258
Anna 8940
Agreements and Encumbrances. None of the Montana Tunnels Mine reserves are
subject to royalties, but we do have three leased claims that contain
mineralization which will be subject to a 4.5% net smelter return royalty if
24
they are mined. The annual holding costs of Montana Tunnels Mine lands,
exclusive of property taxes, total $47,150 as shown in Table 9.
TABLE 9 MONTANA, INC. LAND HOLDING COSTS
MONTH DUE LESSOR TYPE $AMOUNT
- ------------ --------------------------------------- --------------------- -------
January James Madison Easement $ 5,000
March MT Rail Link Lease Rental $ 5,000
Louis F. Hill/Fremont River Development Advance Royalty $10,300
August U.S. Bureau of Land Management Unpatented Claim Fees $21,300
September MT Department of Highways Lease Rental $ 250
October Fred L. Bell Water Use Agreement $ 300
November Virginia & Pamela Bompart Water Rights $ 5,000
Agreement
ANNUAL TOTAL $47,150
Mine equipment at the Montana Tunnels Mine is financed on an installment
note purchase basis with Caterpillar Financial Services, Inc. ("CAT Financial").
The total initial purchase price of mine equipment was $15,265,256. As of
February 29, 2004, the balance owed to CAT Financial was approximately $2.1
million.
At December 31, 2003, the net book value of the Montana Tunnels Mine,
determined in accordance with accounting principles generally accepted in the
United States ("US GAAP"), and its associated plant, equipment and capitalized
pre-stripping costs was approximately $17.8 million.
Environmental Liabilities. In 1998, the citizens of Montana passed
Initiative I-137, which banned cyanide leach mining of gold and silver. We
believe Initiative I-137 will have minimal, if any, impact on our mine located
in Montana. Although we use cyanide in our leaching processes, the cyanide is
not used in a manner prohibited by Initiative I-137. In addition, we have a
permit to utilize cyanide in our leaching process at our Diamond Hill Mine. As
of the date hereof, we are not aware of any other state or local regulation that
would have a material impact on our operations.
In March 2002, the Montana Department of Environmental Quality approved a
minor amendment to the operating permit for the Montana tunnels Mine that will
allow expansion of the present pit to mine about 20 million tons of ore in our
K-Pit, process and dispose of 20 million tons of tailings (waste materials
removed from a mining circuit after separation of the valuable minerals), and
mine and dispose of 30 million tons of waste rock. The permit allows raising the
tailings embankment by about 40 feet, and mining the K-Pit. The permit boundary
contains 2,116 acres with permitted disturbance totaling 1,176.4 acres. Our
current tailings dam is permitted to accommodate tailings from the 19.6 million
ton combined ore reserved from Pits K and L, which are currently scheduled to be
mined out in the second quarter of 2006. Further, if we receive approval from
the Montana Department of Environmental Quality of our expansion plans, we plan
to renew a phased lifting of our tailings dam to accommodate processing of an
additional 28.7 million ore tons which would result from such expansion plans.
25
The bonding requirements for the Montana Tunnels Mine were met by the
following bond instruments:
TYPE OF BONDING PENAL SUM AS AT YEAR END
- ----------------------------------------------------------- ---------------------------
2002 2003
------------- ------------
Partially secured surety bond issued by CNA pursuant to the
Term Bonding Agreement described immediately below: $ 14,987,688 $ 14,987,688
- ----------------------------------------------------------- ------------- ------------
Cash bond posted directly with the State of Montana: 0 128,697
- ----------------------------------------------------------- ------------- ------------
Real estate bond posted directly with State of Montana: 0 296,912
- ----------------------------------------------------------- ------------- ------------
TOTAL REQUIREMENT MET: $ 14,987,688 $ 15,413,297
- ----------------------------------------------------------- ------------- ------------
National Fire Insurance Company of Hartford, a unit of Continental Casualty
Company ("CNA"), provides $14,987,688 of the total reclamation bonding for the
Montana Tunnels Mine plan of operations at a deferred bond premium cost of $14
per $1,000 of bonding under a Term Bonding Agreement dated as of August 1, 2002.
Under that agreement: (i) CNA is committed to furnish $14,987,688 in bonding for
a 15-year term ending July 31, 2017; (ii) Montana, Inc. has agreed to deposit
$75,000 each month (to be adjusted periodically according to our sales price of
gold) into a collateral trust account established for CNA's benefit to secure
Montana Tunnel Mine's reimbursement obligations to CNA until the value of the
collateral trust account is equal to the outstanding penal sum of the CNA bond;
(iii) Apollo Gold Corporation and Apollo Gold, Inc., have guaranteed Montana,
Inc.'s obligations to CNA under the agreement; (iv) payment of premium is
deferred without interest until the value of the collateral trust account equals
the then-outstanding penal sum of the CNA bond; and (v) Montana, Inc. may
terminate the agreement at any time by obtaining a release of the CNA bond
either through posting a substitute bond with the State of Montana or otherwise,
at which time all property held in the collateral trust account will revert to
Montana, Inc.'s sole ownership. As of December 31, 2003, the collateral trust
account held $1,827,981. As an incidental benefit, the Term Bonding Agreement
also provides for an exploration surety bond with a penal sum of $53,186 to
secure reclamation of exploration disturbances outside the Montana Tunnels
Mine's permit boundary for the same 15-year term secured by the same collateral
trust account.
The $128,697 in cash bond posted directly with the State of Montana does
not require payment of any fees. However, interest accrues on cash balances at
a short-term rate established by the State of Montana from time to time.
The $296,912 in real estate bonding is established by a bonding instrument
recorded in the real estate records of Jefferson County, Montana. As of
December 31, 2003, real property having an appraised value of approximately
$422,500 was encumbered in order to meet the $296,912 bonding requirement.
There are no on-going fees associated with the posting of the real estate bond.
The real estate bond is in substance a mortgage, creating a security interest in
the encumbered properties, and does not interfere with ongoing beneficial use of
the encumbered properties by Montana, Inc., or its lessees.
Bonding requirements are subject to adjustment by the State of Montana for
various reasons from time to time. As noted above, the bonding requirement for
the Montana Tunnels Mine increased from $14,987,688 to $15,413,297 over the
course of 2003. As of March 21, 2004, the bonding requirement is scheduled to
increase to $15,888,955.
26
The Environmental Management Bureau of the Montana Department of
Environmental Quality is required to inspect the site twice each year for
compliance, with a written report required for each visit. The Montana
Department of Environmental Quality Air Quality Bureau is required to inspect
the site a minimum of once per year to review emissions. Other environmental
inspections completed by regulatory agencies over the past several years include
hazardous waste compliance, Water Quality Bureau permit inspections, Nuclear
Regulatory Commission inspection for nuclear gauges and the U.S. Bureau of
Alcohol, Tobacco, and Firearms inspections for mining explosives. No material
notices of violation or non-compliance have been received from any agency as the
result of a site inspection.
We have developed closure plans for the Montana Tunnels Mine and currently
estimate the present value of the cost of closure, as of December 31, 2003, to
total approximately $7.6 million, plus severance costs of approximately $1.5
million. We currently believe that cleanup of this site will commence during
2010.
Montana Tunnels Mine Geology. The Montana Tunnels Mine deposit is hosted in
the central part of the Montana Tunnels Mine diatreme, an upward-sloping passage
forced through sedimentary rock by volcanic activity. The Montana Tunnels Mine
diatreme is a heterolithic breccia, a conglomerate rock with sharp fragments,
that is matrix-rich, characterized by a sand-size fragmented matrix of quartz
latitic composition surrounding subangular to well-rounded fragments of
Cretaceous Elkhorn Mountains Volcanics, Tertiary Lowland Creek Volcanics, and
clasts derived from the Cretaceous Butte Quartz Monzonite pluton.
There are two main zones of mineralization in the Montana Tunnels Mine: a
central, pipe-like core of contiguous mineralization, and discontinuous zones of
mineralization peripheral to the core deposit, termed fringe mineralization.
The core of the deposit in plain view is oblong in shape and ranges from about
200 feet to 1000 feet in width, and from 1400 to 2000 feet in length, with a
vertical extent of at least 2000 feet. The core zone strikes approximately N30
E and dips steeply (60 degrees to 80 degrees) to the northwest.
Montana Tunnels Mine Drilling And Sampling. As of December 31, 2003, the
Montana Tunnels Mine database contains 891 reverse circulation, rotary, core and
blasthole drill holes, totaling 466,609 feet, that were drilled from the mid
1970s to the present by numerous mining and exploration companies. There are
48,279 drill sample intervals in the Montana Tunnels Mine database, each with
gold, silver, lead, zinc, and calculated gold-equivalent values. The Montana
Tunnels Mine drill hole database is summarized in Table 10:
TABLE 10 MONTANA TUNNELS MINE DRILL HOLE DATABASE SUMMARY
DRILL TYPE NUMBER OF HOLES FOOTAGE
- ------------------- --------------- -------
CORE 95 63,184
REVERSE CIRCULATION 644 351,333
ROTARY 140 51,372
BLASTHOLE 12 720
- ------------------- --------------- -------
TOTAL 891 466,609
Gold is analyzed by fire assay methods with a duplicate assay for each
sample. Silver, lead, and zinc are analyzed by atomic absorption spectroscopy
with a duplicate analysis once every 24 samples and are standard analyzed once
every 12 samples. The majority of drill samples are analyzed at our onsite
laboratory. Comparison of gold fire assay check samples indicate high sample
27
variance, though the average grade of the check sample datasets, as a whole,
agreed closely. There is good correlation between silver, lead, and zinc
duplicate samples.
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. The K-Pit should be completed
during the second quarter of 2004. In October 2003, a second waste stripping
project ("Phase II") known as the L-Pit project was initiated, and we intend to
pre-strip approximately 17 million tons of waste from the south and west high
walls of the open pit after which the L-Pit will supply about three years of
ore. The final designed expansion at this time is the M-Pit, based on a $350/oz
gold price optimized pit.
Montana Tunnels Mine Drill Hole Spacing. The Montana Tunnels Mine drill
hole spacing is generally within the gold variogram range of 30 feet to 140 feet
in the core. The core diatreme contains about 80% of the Montana Tunnels Mine
Measured and Indicated Resources. The drill hole spacing in the fringe is
generally wider than the variogram range of 50 feet to 170 feet. Measured
mineralization is defined by those model blocks within one-half the variogram
range from the nearest composite. About 57% of the model blocks above the 0.016
ounces AU EQ/T cutoff grade have the closest composite within one half of the
variogram range. Indicated resources are model blocks with the closest
composite within the average variogram range, which are about 43% of the model
blocks above the 0.016 ounces AU EQ/T cutoff grade. Montana, Inc. considers
material beyond the variogram range and within three times the variogram range
to be inferred. We use an estimate of three times the variogram range because
the core of the diatreme is generally known to almost always be mineralized.
Montana Tunnels Mine Reserves. The reserves reported for the Montana
Tunnels Mine deposit conform to the definitions ascribed by the Canadian
Institute of Mining, Metallurgy and Petroleum and guidelines adopted by CIM
Council on August 20,2000 and the United States Securities Exchange Commission
Industry Guide 7 definitions of Proven and Probable Reserves. The Montana
Tunnels Mine reserves as of December 31, 2003 are made up of three pit
expansions. The first expansion is the material remaining in the current pit
expansion ("K22A"), which is scheduled to be mined out during the second quarter
of 2004.
The second pit expansion of the Montana Tunnels Mine reserves is the L8B
pit expansion, resulting from a redesign of the current pit ramp system and
steeper pit slopes below the 5,000 feet elevation. The initial waste stripping
from this expansion is nearly completed and is scheduled to supply all of the
mill feed material for the next three years, until the M2 Pit can supply the
remaining ore.
The third and potentially final pit phase is the M2 Pit. Mining permits
have not been received for the M2 expansion; however, we have been in
discussions regarding the expansion over the past two years and expect to apply
for the necessary permits during the second quarter of 2004. A portion of the
material contained in the low-grade stockpile is included in the reserve
tabulation. Montana Tunnels Mine reserves as of December 31, 2003 are
summarized in Table 11. The reserves were calculated using metal prices of
$350/ounce gold, $5.50/ounce silver, $0.45/lb zinc, and $0.30/lb lead.
28
TABLE 11 MONTANA TUNNELS MINE RESERVES (1)
RESERVES CONTAINED MATERIALS
PIT TONS GOLD SILVER TONS TONS
PHASE CLASSIFICATION 000'S OZ AU/T OZ AG/T % PB % ZN OZ 000'S OZ 000'S PB ZN
- -------------- ----------------- -------- ------- ------- ----- ----- -------- -------- ------ -------
K22A Proven 1,685.8 0.013 0.170 0.187 0.578 21.5 287.3 3,155 9,748
L8C Proven 15,691.1 0.016 0.189 0.206 0.554 244.9 2,969.2 32,264 86,988
M2 Proven*
Mill Stockpile Proven 138.0 0.011 0.150 0.200 0.480 1.5 20.7 276 662
- -------------- ----------------- -------- ------- ------- ----- ----- -------- -------- ------ -------
TOTAL PROVEN 17,514.8 0.015 0.187 0.204 0.556 267.9 3,277.1 35,695 97,399
- -------------- ----------------- -------- ------- ------- ----- ----- -------- -------- ------ -------
K22A Probable 24.1 0.018 0.178 0.208 0.642 0.4 4.3 50 155
L8C Probable 1,413.9 0.015 0.259 0.172 0.439 21.3 365.7 2,436 6,206
M2 Probable* 15,893.7 0.017 0.237 0.171 0.585 263.8 3,766.3 27,112 93,049
M2 Probable 8,319.8 0.017 0.228 0.168 0.611 139.1 1,897.5 13,936 50,834
- -------------- ----------------- -------- ------- ------- ----- ----- -------- -------- ------ -------
TOTAL PROBABLE 25,651.4 0.017 0.235 0.170 0.586 424.6 6,033.7 43,534 150,244
- -------------- ----------------- -------- ------- ------- ----- ----- -------- -------- ------ -------
TOTALS PROVEN & PROBABLE 43,166.2 0.016 0.216 0.184 0.574 692.5 9,310.9 79,228 247,643
- -------------- ----------------- -------- ------- ------- ----- ----- -------- -------- ------ -------
* note meets proven classificaion criteria, however lowered to probable classification since all permits have
not yet been received
Note: 1. Mine Development Associates, located at 210 South Rock Blvd., Reno
Nevada 89052, is an independent mining engineering company, and completed its
review of our reserve estimates in February 2004.
Montana Tunnels Mine Recovery Factors. The reserves stated for the Montana
Tunnels Mine are an estimate of what can be economically and legally recovered
from the mine, and as such, incorporate losses for dilution and mining recovery.
Reconciliation with actual production indicates the reserve estimates have been
accurately predicting the material mined. Some of the recovery factors for the
Montana Tunnels Mine are the following:
Ending
Item Units Value
-------- ------
Gold Price $/oz Au $ 350
Silver Price $/oz Ag $ 5.50
Lead Price $/lb Pb $ 0.30
Zinc Price $/lb Zn $ 0.45
Recovery-Au 82.5%
Recovery-Ag 74.8%
Recovery-Pb 87.0%
Recovery-Zn 85.2%
Montana Tunnels Mine Operations. Open pit mining at Montana Tunnels Mine
is conducted with an equipment fleet either leased, owned or being purchased
under installment notes. The equipment is in good working condition. The
Montana Tunnels Mine operates two 12-hour shifts, seven days per week.
Currently, mine production averages approximately 60,000 tons per day of ore and
waste, of which 15,000 tons per day of ore is shipped to the crusher stockpile
where it is loaded into the crusher hopper for size reduction before entering
the plant. The plant uses a conventional flotation process to produce lead and
zinc concentrates. Gold and silver are also recovered using a gravity circuit
and refined at the plant to produce a dore. Flotation is a process used to
concentrate the grade of the sulfide ore material to allow the economic shipment
29
of higher grade material to a smelter. The flotation process uses chemicals
that are added to the crushed and milled ore and waste slurry. The concentrate
that is created rises to the surface and overflows while the waste material
sinks to the bottom of a tank. The concentrate is collected and dried and then
shipped to a smelter. The waste material is collected and becomes the tailing
material usually deposited in the tailing impoundment at the mine site. Gravity
concentration is a process used to separate materials that have significantly
different densities. Gravity separation is especially useful with gold ore
recovery since it is a very dense material. Several types of equipment and
systems are used to separate material with different densities. In 2003, we
upgraded the flotation mill by the installation of a new primary crusher and a
modification to the grinding circuit. The objective of these upgrades is to
increase our total ore throughput at the Montana Tunnels Mine from 425,000 tons
to 475,000 tons per month.
Table 12 shows the plant recovery through December 31, 2003:
TABLE 12 PLANT RECOVERY - INCEPTION THROUGH YEAR END 2003
AVERAGE
METAL 1995 1996 1997 1998 1999 2000 2001 2002 2003 RECOVERY
- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ---------
AU 84.9% 84.0% 85.9% 84.1% 81.8% 77.4% 82.6% 81.0% 80.9% 82.5%
AG 75.6% 76.4% 80.7% 77.4% 76.0% 67.6% 73.2% 70.8% 75.8% 74.8%
PB 87.6% 89.7% 91.1% 90.1% 89.6% 79.8% 84.1% 85.1% 86.0% 87.0%
ZN 85.3% 85.7% 90.2% 89.7% 82.4% 78.5% 85.7% 86.0% 83.4% 85.2%
- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ---------
Table 13 shows the distribution and grades of metals in the concentrates
and tailings for 2002 and 2003 at the Montana Tunnels Mine:
TABLE 13 MONTANA TUNNELS MINE PLANT PRODUCTION SUMMARY
GOLD SILVER LEAD ZINC TONS GRADE GRADE GRADE GRADE
DISTRIBUTION DISTRIBUTION DISTRIBUTION DISTRIBUTION PRODUCT OZ AU/ OZ AG/ % PB % ZN
% % % % TON TON
------------- ------------- ------------- ------------- --------- -------- -------- ----- -----
2002
Gravity 10.9 0.2 363,761* 21,159.8 9,998.3
Lead Concentrate 54.1 45.3 70.2 5.0 13,777 3.057 66.50 48.7 9.46
Zinc Concentrate 12.4 22.1 9.6 73.5 36,550 0.0264 12.21 2.49 52.07
Tailings 22.6 32.4 20.2 21.5 5,333,683 0.0032 0.120 0.035 0.102
2003
Gravity 11.84 0.5 421,513* 18,740.5 10,261.0
Lead Concentrate 59.43 52.34 79.05 8.52 15,736 2.773 31.63 45.56 11.18
Zinc Concentrate 9.61 22.72 6.91 74.92 29,974 0.2357 7.18 2.09 51.58
Tailings 19.12 24.24 14.04 16.56 4,649,238 0.003 0.05 0.03 0.07
* grams of gravity concentrate
Gold and silver dore is shipped to Johnson Matthey in Salt Lake City, Utah
for further refining, and our lead and zinc concentrates are shipped to Teck
Cominco Metals Ltd. in British Columbia, Canada. The smelters that we use are
in reasonable proximity to our mines; however, if we had to change smelters we
could incur substantial additional transportation costs.
Montana Tunnels Mine Cutoff Grade Calculation. Three products are made
from the ore mined from our Montana Tunnels Mine: dore containing gold and
silver recovered from a gravity circuit, a lead concentrate and a zinc
concentrate. The concentrates are shipped to a smelter in Canada for smelting
and refining. There is a transportation charge for shipping the concentrate to
the smelter. The smelter charges a treatment charge per ton of concentrate for
30
smelting, and a refining charge per unit of metal. In addition, the smelter
does not recover all the metal in the concentrate and pays only for a portion of
the contained metals. The metal prices, recovery, concentrate ratio and offsite
costs are used to calculate ratios for each payable metal compared to an ounce
of gold. For the Montana Tunnels Mine we use a historic formula to calculate
equivalent gold values: Au Eq = Au + Ag/96.105 + Pb/194.707 + Zn/63.230.
DEVELOPMENT AND EXPLORATION PROPERTIES
We conduct exploration activities. Our exploration projects located in
Canada are owned and operated by Apollo Gold Corporation, while our exploration
projects located in the United States are generally owned and operated by Apollo
Gold Exploration, Inc. We own or control patented and unpatented mining claims,
fee land, and state and private leases in the United States and Canada. Our
strategy regarding reserve replacement is to concentrate our efforts on: (1)
existing operations where an infrastructure already exists; (2) other properties
presently being developed; and (3) advanced-stage exploration properties that
have been identified as having potential for additional discoveries. We are
currently concentrating our activities at our Black Fox Mining Project (near the
site of the former Glimmer Mine), the Pirate Gold Prospect and the Standard Mine
Area. For the year ended December 31, 2003, we spent $1.61 million and $3.94
million on the exploration and development of the Standard Mine and Black Fox
Project, respectively (both amounts of which have been capitalized for
accounting purposes and we expensed $2.12 million); therefore, we have spent
approximately $7.67 million on total exploration and development expenditures
for the year ended December 31, 2003. Exploration expenditures for the years
ended December 31, 2003, 2002 and 2001 were approximately $2,117,000, $451,000,
and $94,000, respectively. The following discussion regarding our exploration
activities contain estimates, attributes and other information regarding our
properties; however, no assurance can be given that the estimate of the amount
of metal or the indicated level of recovery of these metals or other attributes
of the properties will be realized.
BLACK FOX PROPERTY
On September 9, 2002, we completed the acquisition of certain real estate
and related assets of the Glimmer Mine from Exall Resources Limited ("Exall"),
and Glimmer Resources Inc. ("Glimmer") (now known as our Black Fox Exploration
Project or Black Fox). The Glimmer Mine was a former gold producer that ceased
operations in May 2001 due to the low price of gold. We paid to Exall and
Glimmer an aggregate purchase price consisting of $2 million in cash and an
aggregate of 2,080,000 of our common shares. Pursuant to the terms of the
acquisition, an additional $2,300,000 is payable to Exall and Glimmer at the
time the Glimmer Mine reaches commercial production (defined to mean a minimum
of 30 consecutive days of production with an average of 300 tonnes, or more, of
output from the Glimmer Mine).
Location. The Black Fox development project is located in the Kirkland Lake
Mining District, approximately five miles east of Matheson and 40 miles east of
Timmins, Ontario. Lake Abitibi is six miles northwest of the project site. The
property encompasses over 1,200 acres within the Hislop and Beatty Townships.
The majority of the property is private fee land.
Geology. The Black Fox development project sits astride the
Destor-Porcupine (DF) Fault System, which is a deep break in the Precambrian
rocks of the Abitibi Greenstone Belt. This fault system hosts many of the
deposits in the Timmins area. The system regionally strikes east-west and dips
variably to the south. Black Fox lies on the southern limb of a large scale fold
on a flexure in the DF Fault where the strike changes from east-west to
southeast. Folded and altered basalts are the host rocks for mineralization.
31
Gold occurs as free gold in quartz veining and stockworks and in gold associated
with pyrite.
Targets. We purchased Black Fox as an advanced exploration project. We
believe the potential for the property lies in new ore zones at depth and along
strike of the Destor-Porcupine Trend. We are testing the potential of this
property in several stages.
We currently anticipate that the development and commercialization of our
Black Fox Property will require three phases. 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. The first phase
commenced in early 2003, and involved shallow drilling to test the open pit
potential and deep drilling of core holes from 200 to 500 meters in depth. By
the end of 2003, a total of 297 surface core holes had been completed for a
total of 271,000 feet in these programs. Surface exploration was also started on
the Black Fox Property, and the land package was increased from 805 acres to
approximately 1,500 acres by the end of 2003.
We have begun the second phase of our Black Fox project. The second phase
will provide for the development of underground access for further exploratory
drilling. We plan to develop an underground ramp from existing structures. We
currently anticipate commencing the second phase of underground drilling in
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
two 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 construction of the mine and processing facilities, at an
aggregate estimated cost of approximately $45.0 million.
We met the bonding requirements established by the Province of Ontario for
the Black Fox Project through the following bonding instruments:
TYPE OF BONDING PENAL SUM AS AT YEAR END
- ----------------------------------------------------- ----------------------------
2002 2003
------------ --------------
Letter of Credit issued by TD Canada Trust secured by
pledged deposit account: Cdn $159,200 Cdn $489,200
- ----------------------------------------------------- ------------ --------------
TOTAL BONDING REQUIREMENT MET: Cdn $159,200 Cdn $489,200
- ----------------------------------------------------- ------------ --------------
Our obligations to reimburse TD Canada Trust for any drawing under the
letter of credit is secured by our maintenance of an amount equal to the amount
available for drawing in a deposit account pledged to TD Canada Trust. We pay
an annual letter of credit fee equal to 1% of the amount available for drawing.
We earn interest on the deposit account at a rate established by TD Canada Trust
from time to time.
Black Fox Mine Drilling and Sampling. As of December 31, 2003, we had
completed a total of 297 surface diamond drill holes totaling over 82,000
32
meters. Our drilling supplemented the 284 surface drill holes and 740
underground drill holes drilled by prior owners. Table 14 below summarizes the
drill hole database.
TABLE 14 BLACK FOX PROJECT DRILL HOLE DATABASE
COMPANY PERIOD LOCATION NUMBER METERS
- ------- --------- ----------- ------ -------
Noranda 1989-1994 Surface 142 27,930
Exall 1995-1999 Surface 142 21,295
Exall 1996-2001 Underground 720 62,827
Apollo 2002-2003 Surface 296 82,895
Totals 1,300 194,947
Black Fox Reserves. The Black Fox Project reserves were developed by
completing a pre-feasibility study of developing an open pit mine on the Black
Fox property. This study did not consider underground mining as an option; this
will be addressed in the final feasibility study.
Pit optimization studies were completed using the following parameters for
the deposit.
- Overburden mining cost - $US 1.00 per tonne of material;
- Rock mining cost - $US 1.25 per tonne of material;
- Processing cost - $US 9.00 per tonne ore;
- General and Administrative cost - $US 3.50 per tonne ore;
- Plant gold recovery - 96%;
- Assume 50% of existing underground workings backfilled with material
having a density of 2.0;
- Pit Slopes - 480 overall in rock with ramp; 19 degree overburden.
The pit slopes were based on recommendations by Golder Associates for the
rock portion of the pit. The overburden can be as thick as 40 meters in the area
of the pit. Geotechnical testing has not been completed for the overburden
materials, however a preliminary drilling program to gather samples has been
completed. We believe the current estimate of a 3:1 slope (19 degree) in the
alluvium is a reasonable assumption at this point of the study, however the
recommended overburden pit slopes may be different after the geotechnical
testing has been completed. In addition, the geotechnical parameters developed
for the overburden could also impact the waste dump height, (currently 50
meters), overburden dump slope and height (currently 30 meters), and the
tailings area storage capacity per square meter. Table 15 summarizes the results
of pit optimization studies, which illustrates that the size of the ultimate pit
does not change much between $300 and $375/oz gold prices, but does increase
significantly at $400.
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TABLE 15 BLACK FOX PROJECT PIT OPTIMIZATION
Mineralized Zones
Gold ------------------------------------------ Backfilled Alluvium Total Waste Total
Price Cutoff Grade Tonnes Grade Ounces UG Workings Tonnes Tonnes Strip Pit
US/oz g Au/t (000') g Au/t Au (000's) tonnes (000's)* (000's) (000's) Ratio tonnes
- ------ ------------ -------- ------ ---------- --------------- --------- ------------ ----- --------
400 1.00 3,576.8 4.22 485.5 348.6 9,908.3 51,035.2 14.3 54,612.0
400 1.10 3,326.9 4.46 477.0 348.6 9,908.3 51,285.1 15.4 54,612.0
400 1.27 2,971.5 4.85 463.5 348.6 9,908.3 51,640.5 17.4 54,612.0
- ------ ------------ -------- ------ ---------- --------------- --------- ------------ ----- --------
375 1.00 2,901.0 4.38 408.5 256.4 7,409.6 35,030.9 12.1 37,931.9
375 1.10 2,713.0 4.61 402.2 256.4 7,409.6 35,218.9 13.0 37,931.9
375 1.27 2,442.6 4.99 391.9 256.4 7,409.6 35,489.4 14.5 37,931.9
- ------ ------------ -------- ------ ---------- --------------- --------- ------------ ----- --------
350 1.00 2,843.3 4.42 404.3 249.9 7,314.8 34,485.0 12.1 37,328.3
350 1.10 2,660.1 4.66 398.1 249.9 7,314.8 34,668.2 13.0 37,328.3
350 1.27 2,397.8 5.03 388.2 249.9 7,314.8 34,930.4 14.6 37,328.3
- ------ ------------ -------- ------ ---------- --------------- --------- ------------ ----- --------
300 1.00 2,632.8 4.57 386.6 232.9 6,669.1 31,409.9 11.9 34,042.7
300 1.10 2,467.0 4.80 381.0 232.9 6,669.1 31,575.7 12.8 34,042.7
300 1.27 2,231.4 5.19 372.0 232.9 6,669.1 31,811.4 14.3 34,042.7
- ------ ------------ -------- ------ ---------- --------------- --------- ------------ ----- --------
250 1.00 1,044.2 6.01 201.7 31.4 3,053.7 9,753.0 9.3 10,797.2
250 1.10 996.2 6.25 200.1 31.4 3,053.7 9,801.0 9.8 10,797.2
250 1.27 925.3 6.63 197.4 31.4 3,053.7 9,872.0 10.7 10,797.2
- ------ ------------ -------- ------ ---------- --------------- --------- ------------ ----- --------
200 1.00 821.8 6.55 173.0 8.2 2,320.2 6,971.3 8.5 7,793.1
200 1.10 786.6 6.79 171.8 8.2 2,320.2 7,006.5 8.9 7,793.1
200 1.27 734.5 7.19 169.8 8.2 2,320.2 7,058.6 9.6 7,793.1
- ------ ------------ -------- ------ ---------- --------------- --------- ------------ ----- --------
150 1.00 531.2 7.39 126.2 2.3 1,559.3 3,761.4 7.1 4,292.6
150 1.10 512.2 7.62 125.5 2.3 1,559.3 3,780.4 7.4 4,292.6
150 1.27 485.2 7.98 124.5 2.3 1,559.3 3,807.4 7.8 4,292.6
- ------ ------------ -------- ------ ---------- --------------- --------- ------------ ----- --------
* UG tones assumes backfilled @ 2.0 specific gravity
The results are shown at similar cutoff grades for comparative purposes only - At a $US 350/oz gold price a
1.27 g Au/t cutoff is used
Following the pit optimization, a final pit and an initial pit were
designed using the optimized pit shapes of the $400 and $200 optimized pits
respectively as a templates for design. Table 16 illustrates the proven and
probable reserves of the Black Fox Project available by open pit mining using
the designed pits and a $350/oz gold price to establish the internal cutoff
grade of 1.27 g Au/t.
TABLE 16 BLACK FOX PROJECT PROVEN AND PROBABLE RESERVES
TONNES GRADE OUNCES AU TONNES STRIP
CLASSIFICATION 000'S G AU/T 000'S WASTE (000'S) RATIO
- -------------- ------- ------ --------- ------------- -----
Proven 2,193.6 4.84 341.6
Probable 759.7 4.73 115.5
- -------------- ------- ------ ---------
TOTALS 2,953.3 4.81 457.1 55,098.0 18.66
- -------------- ------- ------ --------- ------------- -----
Waste includes 11.05 million tones of Overburden
PIRATE GOLD PROSPECT
The Pirate Gold Prospect is owned by Apollo Gold Exploration, Inc., and is
one of our mineral exploration properties located in Nevada approximately 30
miles south of the Florida Canyon Mine. The Pirate Gold Prospect is located on
the northern end of the Eugene Mountain range and the Mill City Mining District,
Humboldt County, Nevada. It consists of 43 mining
34
claims staked on U.S. Bureau of Land Management land. Both Pirate Gold Prospect
and Florida Canyon Mine share a similar geologic setting. While no
determination has been made, we believe that the Pirate Gold prospect may have
the potential to contain many positive attributes. It shares many similar
attributes with our Florida Canyon Mine, with the most prominent being amounts
of visible gold. Intersecting faults and dikes have allowed the formation of
very high-grade ore shoots.
Pursuant to an assignment agreement made as of March 1, 2002 between Pirate
Gold LLC, Winnemucca, Nevada ("Pirate Gold") and Nevoro, Nevoro was assigned all
of Pirate Gold's right, title and interest in a mining lease (the "Mining
Lease"), effective June 22, 2001, between Pronto Prospects LLC, Winnemucca,
Nevada, as lessor and Pirate Gold as lessee. The Mining Lease has an initial
term of 15 years,