UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
 
Form 10-K

R
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the fiscal year ended December 31, 2005
 
OR
ð
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____

Commission File Number: 001-31593
________________
 
Apollo Gold Corporation
(Exact name of registrant as specified in its charter)

Yukon Territory
Not Applicable
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)

5655 S. Yosemite Street, Suite 200
Greenwood Village, Colorado 80111-3220
(Address of Principal Executive Offices Including Zip Code)

(720) 886-9656
(Registrant’s telephone number, including area code)
________________
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
 
Name of Each Exchange on Which Registered 
Common Shares, no par value
 
American Stock Exchange
Toronto Stock Exchange
     
   
Securities registered pursuant to Section 12 of the Act: Common Shares, no par value
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
Yes £ No R
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
 
Yes £ No R


 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R No £
 
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. R
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):
 
 Large accelerated filer £
 Accelerated filer £
 Non-accelerated filer R
        
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes £  No R
 
As of June 30, 2005, the approximate aggregate market value of voting stock held by non-affiliates of the registrant was $31,424,977 million (based upon the closing price for shares of the registrant’s common shares as reported by the American Stock Exchange on that date).
 
As of March 24, 2006, the registrant had 121,396,859 common shares, no par value per share, outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of our Definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the 2006 Annual Meeting of Shareholders are incorporated by reference to Part III of this Annual Report on Form 10-K.





- 2 -



REPORTING CURRENCY, FINANCIAL AND OTHER INFORMATION
 
All amounts in this Report are expressed in United States (“U.S.”) dollars. Unless otherwise indicated Canadian currency is denoted as “Cdn$.”
 
Financial information is presented in accordance with generally accepted accounting principles (“GAAP”) in Canada (“Cdn GAAP”). Differences between accounting principles generally accepted in the U.S. (“U.S. GAAP”) and those applied in Canada, as applicable to Apollo Gold Corporation, are discussed in Note 20 to the Consolidated Financial Statements.
 
Information in Part I and II of this report includes data expressed in various measurement units and contains numerous technical terms used in the gold mining industry. To assist readers in understanding this information, a conversion table and glossary are provided below.
 
References to “Apollo,” the “Company,” “we,” “our,” or “us” mean Apollo Gold Corporation, its predecessors and consolidated subsidiaries, or any one or more of them, as the context requires.
 
NON-GAAP FINANCIAL MEASURES
 
In this Annual Report on Form 10-K, we use the terms “cash operating costs,” “total cash costs,” and “total production costs,” each of which are considered non-GAAP financial measures as defined in the United States Securities and Exchange Commission (the “SEC”) Regulation S-K Item 10 and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. These terms are used by management to assess performance of individual operations and to compare our performance to other gold producers.
 
The term “cash operating costs” is used on a per ounce of gold basis. Cash operating costs per ounce is equivalent to direct operating cost as found on the Consolidated Statements of Operations, less production royalty expenses and mining taxes but includes by-product credits for payable silver, lead and zinc.
 
The term “total cash costs” is equivalent to cash operating costs plus production royalties and mining taxes.
 
The term “total production costs” is equivalent to total cash costs plus non-cash costs including depreciation and amortization.
 
These measures are not necessarily indicative of operating profit or cash flow from operations as determined under GAAP and may not be comparable to similarly titled measures of other companies. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations for a reconciliation of these non-GAAP measures to our Statements of Operations.
 
STATEMENTS REGARDING FORWARD-LOOKING INFORMATION


This Annual Report on Form 10-K contains forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, with respect to our financial condition, results of operations, business prospects, plans, objectives, goals, strategies, future events, capital expenditure, and exploration and development efforts. Words such as “anticipates,” “expects,” “intends,” and similar expressions identify forward-looking statements. These statements include comments regarding:
 

- 3 -



· Company's future focus on Black Fox;
 
· the establishment and estimates of mineral reserves and resources;
 
· production;
 
· production commencement dates;
 
· total production costs;
 
· cash operating costs;
 
· total cash costs;
 
· grade;
 
· processing capacity;
 
· potential mine life;
 
· feasibility studies;
 
· publication of reserves and an NI 43-101 report and any results therefrom;
 
· development costs;
 
· expenditures;
 
· exploration;
 
· permits;
 
· expansion plans;
 
· plans for Black Fox and Huizopa;
 
· closure costs;
 
· remediation costs for Montana Tunnels;
 
· sale of and continued milling at Montana Tunnels;
 
· WARN Act notice and timing of layoff;
 
· development drilling and its potential results;
 
· surveys of claims;
 
· recovery rates;
 
· geological prospects;
 
· impact of governmental laws;
 
· nonpayment of dividends and use of earnings from operations;
 
· delivery of metals;
 
· hedging contracts;
 
· cash flows;
 
· future financing;
 
· liquidity;
 
· our ability to fund our estimated expenditure and capital requirements;
 
· estimated environmental liabilities;
 

- 4 -



 
· factors impacting our results of operations;
 
· application of Sarbanes Oxley 404 reporting requirements and our ability to meet those reporting requirements; and
 
· the impact of adoption of new accounting standards.
 
Although we believe that our plans, intentions and expectations reflected in these forward-looking statements are reasonable, we cannot be certain that these plans, intentions or expectations will be achieved. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of the risk factors set forth below and other factors described in more detail in this Annual Report on Form 10-K:
 
· unexpected changes in business and economic conditions;
 
· significant increases or decreases in gold prices;
 
· changes in interest and currency exchange rates;
 
· timing and amount of production;
 
· unanticipated grade changes;
 
· unanticipated recovery or production problems;
 
· changes in mining and milling costs;
 
· operational problems at our mining property;
 
· metallurgy, processing, access, availability of materials, equipment, supplies and water;
 
· determination of reserves;
 
· changes in project parameters;
 
· costs and timing of development of new reserves;
 
· results of current and future exploration activities;
 
· results of pending and future feasibility studies;
 
· joint venture relationships;
 
· ability to sell our mining property or its assets;
 
· political or economic instability, either globally or in the countries in which we operate;
 
· local and community impacts and issues;
 
· timing of receipt of government approvals;
 
· accidents and labor disputes;
 
· environmental costs and risks;
 
· competitive factors, including competition for property acquisitions;
 
· availability of external financing at reasonable rates or at all; and

- 5 -

 
· the factors discussed in this Annual Report on Form 10-K under the heading “Risk Factors.”
 
Many of these factors are beyond our ability to control or predict. These factors are not intended to represent a complete list of the general or specific factors that may affect us. We may note additional factors elsewhere in this Annual Report on Form 10-K and in any documents incorporated by reference into this Annual Report on Form 10-K. We undertake no obligation to update forward-looking statements.
 
GLOSSARY OF TERMS
 
We report our reserves on two separate standards to meet the requirements for reporting in both Canada and the United States (“U.S.”). Canadian reporting requirements for disclosure of mineral properties are governed by National Instrument 43-101 (“NI 43-101”). The definitions given in NI 43-101 are adopted from those given by the Canadian Institute of Mining Metallurgy and Petroleum. U.S. reporting requirements for disclosure of mineral properties are governing by SEC Industry Guide 7. These reporting standards have similar goals in terms of conveying an appropriate level of confidence in the disclosures being reported, but embody differing approaches and definitions.

We estimate and report our resources and reserves according to the definitions set forth in NI 43-101 and modify and reconcile them as appropriate to conform to SEC Industry Guide 7 for reporting in the U.S. The definitions for each reporting standard are presented below with supplementary explanation and descriptions of the parallels and differences.

NI 43-101 Definitions
 
   
indicated mineral resource
The term “indicated mineral resource” refers to that part of a mineral resource for which quantity, grade or quality, densities, shape and physical characteristics can be established with a level of confidence sufficient to allow the appropriate application of technical and economic parameters, to support mine planning and evaluation of the economic viability of the deposit. The estimate is based on detailed and reliable exploration and testing information gathered through appropriate techniques from locations such as outcrops, trenches pits, workings and drill holes that are spaced closely enough for geological and grade continuity to be reasonably assumed.
inferred mineral resource
The term “inferred mineral resource” refers to that part of a mineral resource for which quantity and grade or quality can be estimated on the basis of geological evidence and limited sampling and reasonably assumed, but not verified, geological and grade continuity. The estimate is based on limited information and sampling gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes.

- 6 -



   
measured mineral resource
The term “measured mineral resource” refers to a part of a mineral resource for which quantity, grade or quality, densities, shape and physical characteristics are so well established that they can be estimated with confidence sufficient to allow the appropriate application of technical and economic parameters to support production planning and evaluation of the economic viability of the deposit. The estimate is based on detailed and reliable exploration, sampling and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes that are spaced closely enough to confirm both geological and grade continuity..
mineral reserve
The term “mineral reserve” refers to the economically mineable part of a measured or indicated mineral resource demonstrated by at least a preliminary feasibility study. The study must include adequate information on mining, processing, metallurgical, economic, and other relevant factors that demonstrate, at the time of reporting, that economic extraction can be justified. A mineral reserve includes diluting materials and allowances for losses that might occur when the material is mined.
mineral resource
The term “mineral resource” refers to a concentration or occurrence of natural, solid, inorganic or fossilized organic material in or on the Earth’s crust in such form and quantity and of such a grade or quality that it has reasonable prospects for economic extraction. The location, quantity, grade, geological characteristics and continuity of a mineral resource are known, estimated or interpreted from specific geological evidence and knowledge.
probable mineral reserve
The term “probable mineral reserve” refers to the economically mineable part of an indicated, and in some circumstances a measured mineral resource demonstrated by at least a preliminary feasibility study. This study must include adequate information on mining, processing, metallurgical, economic, can other relevant factors that demonstrate, at the time of reporting, that economic extraction can be justified.
proven mineral reserve1
The term “proven mineral reserve” refers to the economically mineable part of a measured mineral resource demonstrated by at least a preliminary feasibility study.
qualified person2
The term “qualified person” refers to an individual who is an engineer or geoscientist with at least five years of experience in mineral exploration, mine development, production activities and project assessment, or any combination thereof, including experience relevant to the subject matter of the project or report and is a member in good standing of a self-regulating organization.

- 7 -



   
SEC Industry Guide 7 Definitions
   
exploration stage
An “exploration stage” prospect is one which is not in either the development or production stage.
development stage
A “development stage” project is one which is undergoing preparation of an established commercially mineable deposit for its extraction but which is not yet in production. This stage occurs after completion of a feasibility study.
mineralized material3 
The term “mineralized material” refers to material that is not included in the reserve as it does not meet all of the criteria for adequate demonstration for economic or legal extraction.
probable reserve
The term “probable reserve” refers to reserves for which quantity and grade and/or quality are computed from information similar to that used for proven (measured) reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation.
production stage
A “production stage” project is actively engaged in the process of extraction and beneficiation of mineral reserves to produce a marketable metal or mineral product.
proven reserve
The term “proven reserve” refers to reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well-established.
reserve
The term “reserve” refers to that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination. Reserves must be supported by a feasibility study done to bankable standards that demonstrates the economic extraction. (“Bankable standards” implies that the confidence attached to the costs and achievements developed in the study is sufficient for the project to be eligible for external debt financing.) A reserve includes adjustments to the in-situ tonnes and grade to include diluting materials and allowances for losses that might occur when the material is mined.
   
1For Industry Guide 7 purposes this study must include adequate information on mining, processing, metallurgical, economic, and other relevant factors that demonstrate, at the time of reporting, that economic extraction is justified.
2 Industry Guide 7 does not require designation of a qualified person.
3 This category is substantially equivalent to the combined categories of measured and indicated mineral resources specified in NI 43-101.

- 8 -



 
Additional Definitions
 
breccia
rock consisting of angular fragments of other rocks held together by mineral cement or a fine-grained matrix
   
call
a financial instrument that provides the right, but not the obligation, to buy a specified number of ounces of gold at a specified price
   
clasts
fragments of a pre-existing rock or fossil embedded within another rock
   
concentrate
a processing product containing the valuable ore mineral from which most of the waste mineral has been eliminated
   
cretaceous
the third and latest of the periods in the Mesozoic era
   
cut-off grade
when determining economically viable mineral reserves, the lowest grade of mineralized material that qualifies as ore, i.e. that can be mined at a profit
   
diatreme
an upward sloping passage forced through sedimentary rock by volcanic activity
   
doré
unrefined gold bullion bars containing various impurities such as silver, copper and mercury, which will be further refined to near pure gold
   
fault
a rock fracture along which there has been displacement
   
feasibility study
a definitive engineering and economic study addressing the viability of a mineral deposit taking into consideration all associated technical factors, costs, revenues, and risks
   
fold
a curve or bend of a planar structure such as rock strata, bedding planes, foliation, or cleavage
   
footwall
a geologic or mining term meaning the rock below a fault or vein, or underlying a natural feature, or the mining floor
   
formation
a distinct layer of sedimentary rock of similar composition
   
geochemistry
the study of the distribution and amounts of the chemical elements in minerals, ores, rocks, solids, water, and the atmosphere
   
geophysicist
one who studies the earth; in particular the physics of the solid earth, the atmosphere and the earth’s magnetosphere
   
geotechnical
the study of ground stability
   
grade
quantity of metal per unit weight of host rock
   
hanging wall
a geologic or mining term meaning the rock above a fault or vein, or overlying a natural feature (as opposed to a footwall)
   
heap leach
a mineral processing method involving the crushing and stacking of ore on an impermeable liner upon which solutions are sprayed to dissolve metals such as gold and copper; the solutions containing the metals are then collected and treated to recover the metals
   
heterolithic
having more than one, differing kinds of rock components
   
host rock
the rock containing a mineral or an ore body
   
 
- 9 -

hydrothermal
the products of the actions of heated water, such as a mineral deposit precipitated from a hot solution
   
induced polarization
a method of conducting geophysics and locating drilling targets
   
intercalated
said of layered material that exists or is introduced between layers of a different character
   
latitic composition
igneous rock composed largely of equal amounts of orthoclase and plagioclase feldspar minerals and less than 10% quartz
   
mafic
pertaining to or composed dominantly of the ferromagnesian rock-forming silicates; said of some igneous rocks and their constituent minerals
   
mapped or geological mapping
the recording of geologic information such as the distribution and nature of rock units and the occurrence of structural features, mineral deposits, and fossil localities
   
mineral
a naturally formed chemical element or compound having a definite chemical composition and, usually, a characteristic crystal form
   
mineralogy
the science of minerals
   
mineralization
a natural occurrence in rocks or soil of one or more metal yielding minerals
   
mining
the process of extraction and beneficiation of mineral reserves to produce a marketable metal or mineral product. Exploration continues during the mining process and, in many cases, mineral reserves are expanded during the life of the mine operations as the exploration potential of the deposit is realized.
   
National Instrument 43-101
Canadian standards of disclosure for mineral projects
   
open pit
surface mining in which the ore is extracted from a pit or quarry, the geometry of the pit may vary with the characteristics of the ore body
   
ore
mineral bearing rock that can be mined and treated profitably under current or immediately foreseeable economic conditions
   
ore body
a mostly solid and fairly continuous mass of mineralization estimated to be economically mineable
   
outcrop
that part of a geologic formation or structure that appears at the surface of the earth
   
petrographic
the systematic classification and description of rocks, especially by microscopic examinations of thin sections
   
pluton
a body of igneous rock that has formed beneath the surface of the earth by consolidation from magma
 
- 10 -

   
put
a financial instrument that provides the right, but not the obligation, to sell a specified number of ounces of gold at a specified price
   
pyrite
common sulfide of iron
   
quartz
a mineral composed of silicon dioxide, SiO2 (silica)
   
quartz monzonite
a course-grained igneous rock made up principally of feldspar minerals and quartz
   
reclamation
the process by which lands disturbed as a result of mining activity are modified to support beneficial land use. Reclamation activity may include the removal of buildings, equipment, machinery and other physical remnants of mining, closure of tailings storage facilities, leach pads and other mine features, and contouring, covering and re-vegetation of waste rock and other disturbed areas.
   
reclamation and closure costs
the cost of reclamation plus other costs, including without limitation certain personnel costs, insurance, property holding costs such as taxes, rental and claim fees, and community programs associated with closing an operating mine
   
recovery rate
a term used in process metallurgy to indicate the proportion of valuable material physically recovered in the processing of ore, generally stated as a percentage of the material recovered compared to the total material originally present
   
SAG
semi-autogenous grinding, a method of grinding rock into fine particles, in which the grinding media consists of steel balls
   
SEC Industry Guide 7
U.S. reporting guidelines that apply to registrants engaged or to be engaged in significant mining operations
   
sedimentary rock
rock formed at the earth’s surface from solid particles, whether mineral or organic, which have been moved from their position of origin and redeposited
   
shear
a form of strain resulting from stresses that cause or tend to cause contiguous parts of a body of rock to slide relatively to each other in a direction parallel to their plane of contact
   
skarn
a rock of complex mineral composition
   
stratigraphy
the branch of geology which studies the formation, composition, sequence and correlation of the stratified rock as parts of the earth’s crust
   
strike
the direction or trend that a structural surface, e.g. a bedding or fault plane, takes as it intersects the horizontal
   
strip
to remove overburden in order to expose ore
   
subangular
somewhat angular, free from sharp angles but not smoothly rounded
 
- 11 -

   
sulfide
a mineral including sulfur (S) and iron (Fe) as well as other elements; metallic sulfur-bearing mineral often associated with gold mineralization
   
variogram
graphical representation of the rate of change of grade with distance which is used to define parameters for controlling sample layout and resource modeling
   
vein
a thin, sheet like crosscutting body of hydrothermal mineralization, principally quartz
   
volcaniclastics
volcanic rocks containing significant amounts of rock fragments that have been moved from their place of origin during volcanic activity
   
volcanic rock
originally molten rocks, generally fine grained, that have reached or nearly reached the earth’s surface before solidifying
   
wall rock
the rock adjacent to a vein


CONVERSION FACTORS AND ABBREVIATIONS
 
For ease of reference, the following conversion factors are provided:
 
1 acre
= 0.4047 hectare
1 mile
= 1.6093 kilometers
1 foot
= 0.3048 meter
1 troy ounce
= 31.1035 grams
1 gram per metric tonne
= 0.0292 troy ounce/short ton
1 square mile
= 2.59 square kilometers
1 short ton (2000 pounds)
= 0.9072 tonne
1 square kilometer
= 100 hectares
1 tonne
= 1,000 kg or 2,204.6 lbs
1 kilogram
= 2.204 pounds or 32.151 troy oz
1 hectare
= 10,000 square meters
1 hectare
= 2.471 acres
 
The following abbreviations could be used herein:
 
Au
= gold
m(2)
= square meter
g
= gram
m(3)
= cubic meter
Au g/t
= grams of gold per tonne
Mg or mg
= milligram
ha
= hectare
mg/m(3)
= milligrams per cubic meter
km
= kilometer
T
= tonnes
km(2)
= square kilometers
t
= ton
kg
= kilogram
Oz
= troy ounce
lb
= pound
Ppb
= parts per billion
m
= meter
Ma
= million years

Note: All units in this report are stated in metric measurements unless otherwise noted.
 
- 12 -

 
PART I
 
ITEM 1. DESCRIPTION OF BUSINESS
 
OVERVIEW OF APOLLO GOLD
 
The earliest predecessor to Apollo Gold Corporation was incorporated under the laws of the Province of Ontario in 1936. In May 2003, it reincorporated under the laws of the Yukon Territory. Apollo Gold Corporation maintains its registered office at 204 Black Street, Suite 300, Whitehorse, Yukon Territory, Canada Y1A 2M9, and the telephone number at that office is (867) 668-5252. Apollo Gold Corporation maintains its principal executive office at 5655 S. Yosemite Street, Suite 200, Greenwood Village, Colorado 80111-3220, and the telephone number at that office is (720) 886-9656. Our internet address is http://www.apollogold.com. Information contained on our website is not a part of this Annual Report on Form 10-K.
 
Apollo is engaged in gold mining including extraction, processing, refining and the production of by-product metals, as well as related activities including exploration and development. The Company owns and operates the Montana Tunnels mine, an open pit mine and mill currently producing gold doré and lead-gold and zinc-gold concentrates from stockpiled, low grade ore. See Item 2 “Description of Properties” for further information. In March 2006, the Company adopted a plan to dispose of Montana Tunnels Mining, Inc., the company which operates the Montana Tunnels mine.
 
On November 18, 2005, Apollo sold Florida Canyon Mining, Inc., Standard Gold Mining, Inc. and Apollo Gold Exploration, Inc. (collectively, the “Nevada Assets”) to a wholly owned subsidiary of Jipangu, Inc., for $14 million. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further information.
 
With the plan of disposal of the Montana Tunnels mine, Apollo's future focus is on its development property, the Black Fox project, which is located near the Township of Matheson in the Province of Ontario, Canada. Apollo also owns Mexican subsidiaries which own or have the right to acquire concessions at the Huizopa exploration project, located in the Sierra Madre gold belt in Chihuahua, Mexico.
 
BACKGROUND
 
Apollo Gold Corporation
 
The following chart illustrates the operations and principal operating subsidiaries and their jurisdictions of incorporation. Apollo owns 100% of the voting securities of each subsidiary.
 

- 13 -



 
APOLLO GOLD GROUP 
(as of March 24, 2006) 


 


APOLLO GOLD CORPORATION: American Stock Exchange and Toronto Stock Exchange listed holding company which owns and operates the Black Fox development property.
 
APOLLO GOLD, INC.: Holding company, employs executive officers and furnishes corporate services to Apollo Gold Corporation and its subsidiaries.
 
MINERA SOL DE ORO S.A. de C.V.: Holds rights to the Huizopa exploration property.
 
MONTANA TUNNELS MINING, INC.: Owns and operates the Montana Tunnels mine and owns the Diamond Hill mine.
 
MINE DEVELOPMENT FINANCE INC.: Provides intercompany loans and other financial services to affiliated companies.
 
MINAS de ARGONAUTAS, S. de R.L de C.V.: Conducts exploration at the Huizopa exploration property in Mexico.
 
Financial Information
 
Segmented information is contained in note 19 of the “Notes to the Consolidated Financial Statements” contained within this Annual Report on Form 10-K.

- 14 -



Products
 
The Montana Tunnels mine produces gold, zinc, silver, and lead in gold doré and lead-gold and zinc-gold concentrates. The metals produced are sold to custom smelters, refiners and metals traders. The percentage of sales contributed by each class of product is reflected in the following table.
 
 
Year Ended
December 31,
Product Category
2005
2004
2003
Gold
46%
37%
55%
Zinc
34%
34%
29%
Silver, lead and other metals
20%
29%
16%
 
The table below summarizes Montana Tunnels’ metals production and average metals prices for the periods indicated.
 
   
Year Ended December 31,
 
   
2005
 
2004
 
2003
 
Production Summary
             
Gold ounces
   
44,099
   
33,743
   
44,124
 
Silver ounces
   
524,722
   
970,751
   
411,216
 
Lead pounds
   
10,428,061
   
10,064,265
   
10,843,184
 
Zinc pounds
   
22,380,136
   
26,222,805
   
21,792,452
 
 
Average metals prices
                   
Gold - London Bullion Mkt. ($/ounce)
 
$
445
 
$
409
 
$
364
 
Silver - London Bullion Mkt. ($/ounce)
 
$
7.31
 
$
6.66
 
$
4.88
 
Lead - LME Cash ($/pound)
 
$
0.44
 
$
0.40
 
$
0.23
 
Zinc - LME Cash ($/pound)
 
$
0.63
 
$
0.48
 
$
0.38
 

Gold
 
Montana Tunnels produced 44,099, 33,743, and 44,124 ounces of gold during the years ended December 31, 2005, 2004, and 2003, respectively.
 
The majority of our gold revenue is derived from the sale of gold contained within the lead-gold and zinc-gold concentrates. See Item 2 “Description of Properties - Montana Tunnels Mine” for further information. The balance of the gold revenue is derived from the sale of refined gold in the form of doré bars. Because doré is an alloy consisting primarily of gold but also containing silver and other metals, bars are sent to refiners to produce bullion that meets the required market standard of 99.99% pure gold. Under the terms of our refining contracts, the bars are refined for a fee, and our share of the refined gold and the separately recovered silver is paid to us.
 
Gold Uses
 
Gold has two primary uses: product fabrication and bullion investment. Fabricated gold has a variety of end uses, including jewelry, electronics, dentistry, industrial and decorative uses, medals, medallions and official coins. Gold investors purchase gold bullion, official coins and high-carat jewelry.
 

- 15 -



 
Gold Supply
 
The worldwide supply of gold consists of a combination of new production from mining and existing stocks of bullion and fabricated gold held by governments, financial institutions, industrial organizations and private individuals.
 
Gold Price History
 
The price of gold is volatile and is affected by numerous factors beyond our control such as the sale or purchase of gold by various central banks and financial institutions, inflation or deflation, fluctuation in the value of the US dollar and foreign currencies, global and regional demand, and the political and economic conditions of major gold-producing countries throughout the world.
 
The following table presents the high, low and average afternoon fixing prices for gold per ounce on the London Bullion Market over the past ten years:
 
Year
 
High
 
Low
 
Average
 
1996
 
$
415
 
$
367
 
$
388
 
1997
   
362
   
283
   
331
 
1998
   
313
   
273
   
294
 
1999
   
326
   
253
   
279
 
2000
   
313
   
264
   
279
 
2001
   
293
   
256
   
271
 
2002
   
349
   
278
   
310
 
2003
   
416
   
320
   
364
 
2004
   
454
   
375
   
409
 
2005
   
537
   
411
   
445
 
 

Data Source: www.kitco.com
 
As of March 15, 2006, the high, low, and average afternoon fixing prices for gold per ounce on the London Bullion Market were $572, $525 and $553 per ounce, respectively.
 
Zinc
 
Production from the Montana Tunnels mine also includes the extraction, processing and sale of zinc and lead contained in sulfide concentrates. The mine produced approximately 22,400,000, 26,200,000 and 21,800,000 pounds of payable zinc in 2005, 2004 and 2003, respectively.
 
Due to its corrosion resisting property, zinc is used primarily as the coating in galvanized steel. Galvanized steel is widely used in construction of infrastructure, housing and office buildings. In the automotive industry, zinc is used for galvanizing and die-casting and in the vulcanization of tires. Smaller quantities of various forms of zinc are used in the chemical and pharmaceutical industries, including fertilizers, food supplements and cosmetics, and in specialty electronic applications such as satellite receivers.

 
Annual Global Supply/ Demand Balance for Zinc, 2001-2005
 
 
 
2005
 
2004
 
2003
 
2002
 
2001
 
   
(000 tonnes)
 
Refined Consumption
   
10,638
   
10,470
   
9,832
   
9,388
   
8,917
 
Refined Production
   
10,271
   
10,170
   
9,871
   
9,712
   
9,228
 
Release of Inv. Stocks
   
25
   
12
   
7
   
3
   
23
 
Increase (Decrease) World Stock
   
(342
)
 
(288
)
 
46
   
327
   
334
 
LME Stocks      - Total
   
394
   
629
   
740
   
651
   
433
 
- Weeks’ consumption
   
1.9
   
3.1
   
3.9
   
3.6
   
2.5
 
Reported Stocks       - Total
   
801
   
1,020
   
1,202
   
1,095
   
946
 
- Weeks’ consumption
   
3.9
   
5.1
   
6.4
   
6.1
   
5.5
 
LME cash price        - $/tonne
   
1,380
   
1,048
   
828
   
779
   
886
 
- cents/lb
   
62.6
   
47.5
   
37.6
   
35.3
   
40.2
 

Data Source: Standard Bank Metals Report.
 
- 16 -

Zinc Price History
 
The following table sets forth for the periods indicated the London Metals Exchange high and low settlement prices of zinc in U.S. dollars per pound:
 
 
Zinc
Year
High
Low
2001
0.48
0.33
2002
0.42
0.33
2003
0.46
0.34
2004
0.56
0.42
2005
0.86
0.53
2006*
1.08
0.87

* Through March 15, 2006
 
Silver
 
Montana Tunnels produced 524,722, 970,751 and 411,216 ounces of silver in the years ended December 31, 2005, 2004 and 2003, respectively. The silver production is derived from the gold doré as well as the lead and zinc concentrates.
 
Silver has traditionally served as a medium of exchange, much like gold. While silver continues to be used for currency, the current principal uses of silver are for industrial uses, primarily for electrical and electronic components, photography, jewelry and silverware. Silver’s strength, malleability, ductility, thermal and electrical conductivity, sensitivity to light and ability to endure extreme changes in temperature combine to make silver a widely used industrial metal. Specifically, it is used in photography, batteries, computer chips, electrical contacts, and high technology printing. Silver’s anti-bacterial properties also make it valuable for use in medicine and in water purification.
 
Silver Price History
 
The following table sets forth for the periods indicated the London Metals Exchange high and low settlement prices of silver in U.S. dollars per ounce.
 
 
Silver
Year
High
Low
2001
4.83
4.03
2002
5.13
4.22
2003
5.99
4.35
2004
8.29
5.49
2005
9.22
6.39
2006*
10.26
8.83

* Through March 15, 2006
 
- 17 -

Lead
 
Production from Montana Tunnels also includes the extraction, processing and sale of lead contained in sulfide concentrates. Montana Tunnels produced approximately 10,400,000, 10,100,000 and 10,800,000 pounds of payable lead in 2005, 2004 and 2003, respectively.
 
The primary use of lead is in motor vehicle batteries, but it is also used in cable sheathing, solder in printed wiring circuits, shot for ammunition and alloying. Lead in chemical form is used in alloys, glass and plastics.
 
Annual Global Supply/ Demand Balance for Lead, 2001-2005
 
   
2005
 
2004
 
2003
 
2002
 
2001
 
   
(000 tonnes)
 
Refined Consumption
   
7,543
   
7,068
   
6,814
   
6,656
   
6,476
 
Refined Production
   
7,375
   
6,857
   
6,798
   
6,690
   
6,622
 
Release of Stock
   
50
   
56
   
60
   
6
   
41
 
Increase (Decrease) Stock
   
(118
)
 
(155
)
 
55
   
40
   
187
 
LME Stocks - Total
   
44
   
40
   
109
   
184
   
98
 
- Weeks’ consumption
   
0.3
   
0.3
   
0.8
   
1.4
   
0.8
 
Reported Stocks - Total
   
0325
   
298
   
393
   
483
   
436
 
- Weeks’ consumption
   
2.2
   
2.2
   
3.0
   
3.8
   
3.5
 
LME cash price - $/tonne
   
976
   
887
   
516
   
453
   
476
 
- cents/lb
   
44.3
   
40.2
   
23.4
   
20.5
   
21.6
 

Data Source: Standard Bank Metals Report.
 
Lead Price History
 
The following table sets forth for the periods indicated the London Metals Exchange high and low settlement prices for lead in U.S. dollars per pound.
 
 
Lead
Year
High
Low
2001
0.24
0.20
2002
0.24
0.18
2003
0.34
0.19
2004
0.45
0.29
2005
0.49
0.41
2006*
0.66
0.50

* Through March 15, 2006
 
The price of silver, lead and zinc is affected by numerous factors that are beyond our control. See “Risk Factors.”
 
Smelting and Refining Process
 
We have an agreement with Johnson Matthey to refine gold doré to a final finished product. Johnson Matthey receives $0.50 for each ounce of gold doré it refines, in addition to receiving a fee of 0.5% of the payable metal for silver and 0.1% of the payable metal for gold, with a minimum charge of $500 per delivery.
 
The lead and zinc concentrates are shipped by rail for smelting to Teck Cominco Metals Ltd. in Trail, British Columbia, Canada, approximately five hours from the Montana Tunnels mine. Our contract with Teck Cominco expires in March 2007. See Item 2 “Description of Properties - Montana Tunnels Mine” for further information.
 
- 18 -

2006 Operating Outlook
 
Following the sale in November 2005 to Jipangu Inc. of Apollo’s Nevada Assets, we have three remaining properties: the Montana Tunnels mine, the Black Fox project and the Huizopa project. Below is a summary of our expectations for these three properties in 2006.

Montana Tunnels mine. Open pit mining activity was suspended on October 21, 2005. Currently the mill continues to operate, processing low grade stockpiled ore and is expected to continue milling through the end of April 2006.  In March 2006, we adopted a plan to dispose of Montana Tunnels Mining, Inc., which owns the Montana Tunnels and Diamond Hill mines.

Black Fox project, a development property. The Company's focus is on developing our Black Fox project. We expect to publish updated reserves in April 2006 and issue an NI 43-101 report within 45 days of publishing the reserves. We expect that the NI 43-101 report will reflect an increase from the 2004 reserve numbers previously disclosed. We also expect to complete the feasibility study by the end of 2006. Estimated expenditures at Black Fox for 2006 are $3.1 million. Additionally, we will continue to evaluate financing opportunites in order to extend the drilling program at Black Fox given that the mineralization is still open along strike and at depth.

Huizopa project, an exploration property. In 2006, we expect to continue mapping, trenching, sampling, and conducting geophysical studies on the property including the selection of several primary targets for drill sites and the commencement of a drilling program.  The costs of the project is expected to be approximately $2.3 million for the year 2006.

Development and Exploration.
 
During 2005, we drilled at Black Fox 160 underground holes totaling 34,456 meters plus 51 surface holes totaling 9,813 meters, bringing the total number of underground holes to 370 (75,521 meters) and surface holes to 449 (135,712 meters), giving a total number of holes of 819 (211,233 meters). Work continued throughout the year on progressing the permitting of a combined open pit and underground mine, with a 1,500 tonnes per day mill on site. The updated reserves are expected to be published in April 2006 followed by an NI 43-101 report. Completion of the feasibility study is currently scheduled for the end of 2006.
 
Mineral Reserves
 
Our proven and probable mineral reserves are estimated in conformance with definitions set out in NI 43-101 and on a basis consistent with the definition of proven and probable mineral reserves set forth in SEC Industry Guide 7. See our “Glossary of Terms.”
 
The estimates of our mineral reserves are prepared by Apollo based on information compiled and/or validated by Mr. Richard F. Nanna, our employee and Senior Vice President of Exploration. Mr. Nanna is a qualified professional geologist with 32 years of experience and a registered Professional Geologist in the State of Washington. Mr. Nanna is considered a qualified person under NI 43-101.
 
- 19 -

 
Since we report our mineral reserves to both NI 43-101 and SEC Industry Guide 7 standards, it is possible for our reserve figure to vary between the two. Where such a variance occurs it will arise from the differing requirements for reporting mineral reserves. For example, the NI 43-101 has a minimum requirement that reserves be supported by a pre-feasibility study, whereas SEC Industry Guide 7 requires support from a full feasibility study done to bankable standards. The Black Fox project thus reports reserves under NI 43-101, but reports no reserves under SEC Industry Guide 7 as a final bankable feasibility study has not been completed. No reconciliation between NI 43-101 and SEC Industry Guide 7 is included for Montana Tunnels as there are no material differences.
 
The proven and probable mineral reserves as of December 31, 2005, for Montana Tunnels have been estimated at an economic cut-off grade based on a gold price of $425 per ounce, and at a three-year rolling average gold price of $406 per ounce.
 
The proven and probable mineral reserves estimates disclosed below for Black Fox were in an NI 43-101 report completed in March 2004 and were calculated based on a gold price of $375 per ounce. At the present time, we expect to update the reserves in April 2006 and issue an NI 43-101 report within 45 days of publishing the reserves for Black Fox. We expect the NI 43-101 report to reflect an increase in reserves based on the extensive drilling programs conducted during 2004 and 2005. In addition, a feasibility study is underway, which we expect to complete by the end of 2006.
 
Proven and Probable Reserves - Gold Ounces
 
   
Year Ended December 31,
 
Mines
 
2005
 
2004
 
2003
 
Montana Tunnels (1)
   
535,900
   
643,800
   
692,500
 
Black Fox Project
   
457,100
   
457,100
   
457,100
 
Apollo Gold - Total
   
993,000
   
1,100,900
   
1,149,600
 

(1) In March 2006 the Company adopted a plan to dispose of the Montana Tunnels mine.
 
Montana Tunnels Reserves
 
Montana Tunnels Mine Reserve Statement at December 31, 2005(1)(2)
 
Pit (Imperial Summary)
 
Classification
 
Tons
000’s
 
Grade oz Au/t
 
Ag oz
Ag/t
 
Pb %
 
Zn %
 
Ounces Au
000’s
 
L8J5 (L Pit)
   
Proven
   
10,089.2
   
0.016
   
0.173
   
0.218
   
0.591
   
163.6
 
M4A (M Pit)
   
Proven
                                     
Mill Stockpile
   
Proven
   
36.0
   
0.009
   
0.180
   
0.080
   
0.190
   
0.3
 
Subtotal
   
Proven
   
10,125.2
   
0.016
   
0.173
   
0.217
   
0.589
   
163.9
 
L8J5 (L Pit)
   
Probable
   
217.4
   
0.016
   
0.175
   
0.208
   
0.508
   
3.5
 
M4A (M Pit)
   
Probable
   
22,898.0
   
0.016
   
0.230
   
0.170
   
0.600
   
368.5
 
Subtotal
   
Probable
   
23,115.4
   
0.016
   
0.230
   
0.171
   
0.600
   
372.0
 
Total
   
Proven + Probable
   
33,240.6
   
0.016
   
0.212
   
0.185
   
0.596
   
535.9
 

(1) Recovery rates are expected to be 80% for gold, 71% for silver, 85% for lead, and 84% for zinc.
 
(2) In March 2006 the Company adopted a plan to dispose of the Montana Tunnels mine.
 
Black Fox Reserves
 
    Pit optimization studies were completed using the following parameters for the deposit:

·  
Cut-off grade- 1.27 Au g/tonne (or 0.037 oz Au/t);
·  
Overburden mining cost - $1.00 per tonne of material;
·  
Rock mining cost - $1.25 per tonne of material
·  
Processing cost - $9.00 per tonne ore;
·  
General and administrative cost - $3.50 per tonne ore;
·  
Plant gold recovery - 96%;
·  
Assume 50% of existing underground workings backfilled with material having a density of 2.0;
·  
Pit slopes - 48 degree overall in rock with ramp; 19 degree overburden
 
 
Black Fox Reserve Statement at December 31, 2005
 
Classification (Imperial Summary)
 
Tons
000’s
 
Grade
oz Au/t
 
Ounces Au
000’s
 
Tons Waste
000’s
 
Strip
Ratio
 
Proven
   
2,418.0
   
0.141
   
341.6
             
Probable
   
837.4
   
0.138
   
115.5
             
Total - Proven + Probable
   
3,255.5
   
0.140
   
457.1
   
60,734.5
   
18.66
 

Waste includes 12.18 million tons of overburden.
 
- 20 -

Employee Relations
 
As of December 31, 2005, we had approximately 129 employees and contract employees, including 10 employees at our principal executive office in Greenwood Village, Colorado.  If we sell Montana Tunnels or cease milling, we expect to have approximately 30 employees and contract employees, including 6 employees at our principal executive office.
 
Competition
 
We compete with major mining companies and other natural mineral resource companies in the acquisition, exploration, financing and development of new prospects. Many of these companies are larger and better capitalized than we are. There is significant competition for the limited number of gold acquisition and exploration opportunities. Our competitive position depends upon our ability to successfully and economically explore, acquire and develop new and existing mineral prospects. Factors that allow producers to remain competitive in the market over the long term include the quality and size of their orebodies, costs of operation, and the acquisition and retention of qualified employees. We also compete with other mining companies for skilled mining engineers, mine and processing plant operators and mechanics, geologists, geophysicists and other technical personnel. This could result in higher turnover and greater labor costs.
 
Available Information
 
We make available, free of charge, on or through our Internet website links to our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our Internet address is www.apollogold.com. Our Internet website and the information contained therein or connected thereto are not incorporated into this Annual Report on Form 10-K.
 
RISK FACTORS
 
ITEM 1A.
 
In addition to historic information, the information in this Annual Report on Form 10-K contains “forward looking” statements about our future business and performance. Our actual operating results and financial performance may be very different from what we expect as of the date of this Annual Report on Form 10-K. The risks below address some of the factors that may affect our future operating results and financial performance.
 
We have identified a material weakness in our internal controls over financial reporting.
 
We identified a material weakness for the year ended December 31, 2004. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. We lacked appropriate review of non-routine or complex accounting matters, related accounting entries, and appropriate documentation, disclosure and application of Canadian and U.S. GAAP, primarily due to a lack of sufficient personnel with a level of technical accounting expertise commensurate with our reporting requirements.
 
The following actions were taken in 2005 to remediate this material weakness. We established a Financial Disclosure Policy Committee to review all non-routine accounting matters and disclosure and application of Canadian and U.S. GAAP. We added additional technical accounting expertise to the accounting staff. We implemented formal policies addressing the internal controls over non-routine or complex accounting matters, accounting entries, appropriate documentation, and disclosures. However, in January 2006 a major restructuring and streamlining at the corporate office significantly changed the design and structure of the internal controls and procedures at the corporate level. As of this date management has not had sufficient time to evaluate these controls and therefore believes this material weakness still exists.
 
- 21 -

Additionally, related to the reduction in staffing at the Montana Tunnels mine in mid October 2005, our controls at that location are not operating as previously designed related to segregation of duties over procurement, inventory control and accounting duties. Corporate management has increased its involvement with day-to-day oversight and management of the Montana Tunnels mine, but as of this date, management has not had sufficient time to evaluate these controls and therefore believes the change in controls is significant enough to be reported as a material weakness. In an effort to address this material weakness, staffing requirements and other changes in control are being evaluated as the future operational requirements of the Montana Tunnels mine is being determined.
 
As a result of the issuance of the SEC's Release No 33-8644, "Revisions to Accelerated Filer Definition and Accelerated Deadlines for Filing Periodic Reports" the Company exited accelerated filer status for its year ended December 31, 2005. As a non-accelerated filer compliance with the internal control reporting requirements of Section 404 of the Sarbanes-Oxley Act of 2002 have been deferred and we may be subject to the requirements in our Annual Report  on Form 10-K for fiscal year 2006 and will be for fiscal year 2007.
 
The market price of our common shares could experience volatility and could decline significantly.
 
Our common shares are listed on the American Stock Exchange and the Toronto Stock Exchange. Our share price has declined significantly since 2004. Securities of small-cap companies have experienced substantial volatility in the past, often based on factors unrelated to the financial performance or prospects of the companies involved. These factors include macroeconomic developments in North America and globally and market perceptions of the attractiveness of particular industries. Our share price is also likely to be significantly affected by short-term changes in gold prices or in our financial condition or results of operations as reflected in our quarterly earnings reports. As a result of any of these factors, the market price of our common shares at any given point in time might not accurately reflect our long-term value. Securities class action litigation often has been brought against companies following periods of volatility in the market price of their securities. We could in the future be the target of similar litigation. Securities litigation could result in substantial costs and damages and divert management’s attention and resources.
 
If we complete additional equity financings, then our existing shareholders may experience dilution.
 
Any additional equity financing that we obtain would involve the sale of our common shares and/or sales of securities that are convertible or exercisable into our common shares, such as share purchase warrants or convertible notes. There is no assurance that we will be able to complete equity financings that are not dilutive to our existing shareholders.
 
The existence of outstanding rights to purchase common shares may impair our ability to raise capital.
 
As of March 24, 2006, approximately 30 million additional common shares are issuable on exercise of warrants, options or other rights to purchase common shares at prices ranging from $0.20 to $2.34. In addition, there are approximately 11.7 million common shares issuable upon the conversion of the $8,731,000 outstanding principal amount of our Series B Convertible Debentures at the option of the holder at a conversion price of $0.75 per share. During the term of the warrants, options and other rights, the holders are given an opportunity to profit from a rise in the market price of our common shares with a resulting dilution in the interest of the other shareholders. Our ability to obtain additional financing during the period such rights are outstanding may be adversely affected, and the existence of the rights may have an adverse effect on the price of our common shares. The holders of the warrants, options and other rights can be expected to exercise them at a time when we would, in all likelihood, be able to obtain any needed capital by a new offering of securities on terms more favorable than those provided by the outstanding rights.
 
- 22 -

There may be certain tax risks associated with investments in our company.
 
Potential investors that are United States taxpayers should consider that we could be considered to be a “passive foreign investment company” (“PFIC”) for federal income tax purposes. Although we believe that we currently are not a PFIC and do not expect to become a PFIC in the near future, the tests for determining PFIC status are dependent upon a number of factors, some of which are beyond our control, and we can not assure you that we will not become a PFIC in the future. If we were deemed to be a PFIC, then a United States taxpayer who disposes or is deemed to dispose of our shares at a gain, or who received a so-called “excess distribution” on the shares, generally would be required to treat such gain or excess distribution as ordinary income and pay an interest charge on a portion of the gain or distribution unless the taxpayer makes a timely qualified electing fund election (a “QEF” election). A United States taxpayer who makes a QEF election generally must report on a current basis his or her share of any of our ordinary earnings and net capital gain for any taxable year in which we are a PFIC, whether or not we distribute those earnings. Special estate tax rules could be applicable to our shares if we are classified as a PFIC for income tax purposes.
 
We have a history of losses and we expect to incur losses in the future.
 
Since our inception through a merger in June 2002, we have incurred significant losses and we expect significant losses to continue for the foreseeable future. Our net losses were $22,208,000, $31,007,000 and $14,090,000 for the years ended December 31, 2005, 2004 and 2003, respectively. There can be no assurance that we will achieve or sustain profitability in the future.
 
We have a limited operating history on which to evaluate our potential for future success.
 
We were formed as a result of a merger in June 2002 and have only a limited operating history upon which you can evaluate our business and prospects. During this period, we have not generated sufficient revenues to cover our expenses and costs. If we are unsuccessful in addressing these risks and uncertainties, our business, results of operations and financial condition will be materially and adversely affected.
 
We are dependent on certain key personnel.
 
We are currently dependent upon the ability and experience of R. David Russell, our President and Chief Executive Officer; Richard F. Nanna, our Senior Vice President-Exploration; and Melvyn Williams, our Chief Financial Officer and Senior Vice President-Finance and Corporate Development. We believe that our success depends on the continued service of our key officers and there can be no assurance that we will be able to retain any or all of such officers. We currently do not carry key person insurance on any of these individuals, and the loss of one or more of them could have a material adverse effect on our operations.
 
- 23 -

Our earnings may be affected by metals price volatility, specifically the volatility of gold and zinc prices.
 
We derive all of our revenues from the sale of gold, silver, lead and zinc and our development and exploration activities are focused on gold. As a result, our earnings are directly related to the prices of these metals. Changes in the price of gold significantly affect our profitability. Gold prices historically have fluctuated widely, based on numerous industry factors including:
 
· industrial and jewelry demand;
 
· central bank lending, sales and purchases of gold;
 
· forward sales of gold by producers and speculators;
 
· production and cost levels in major gold-producing regions; and
 
· rapid short-term changes in supply and demand because of speculative or hedging activities.
 
Gold prices are also affected by macroeconomic factors, including:
 
· confidence in the global monetary system;
 
· expectations of the future rate of inflation (if any);
 
· the strength of, and confidence in, the U.S. dollar (the currency in which the price of gold is generally quoted) and other currencies;
 
· interest rates; and
 
· global or regional political or economic events, including but not limited to acts of terrorism.
 
The current demand for, and supply of, gold also affects gold prices. The supply of gold consists of a combination of new production from mining and existing shares of bullion held by government central banks, public and private financial institutions, industrial organizations and private individuals. As the amounts produced by all producers in any single year constitute a small portion of the total potential supply of gold, normal variations in current production do not usually have a significant impact on the supply of gold or on its price. Mobilization of gold held by central banks through lending and official sales may have a significant adverse impact on the gold price.
 
The market prices for silver, zinc and lead are also volatile and are affected by numerous factors beyond our control, including global or regional consumptive patterns, speculative activities, and general global political and economic conditions.
 
All of the above factors are beyond our control and are impossible for us to predict. If the market prices for gold, silver, zinc or lead fall below our costs to produce them for a sustained period of time, we will experience additional losses and we could also be required by our reduced revenue to discontinue exploration, development and/or mining at one or more of our properties.
 
- 24 -

Our reserve estimates are potentially inaccurate.
 
We estimate our reserves on our properties as either “proven reserves” or “probable reserves.” Our ore reserve figures and costs are primarily estimates and are not guarantees that we will recover the indicated quantities of these metals. We estimate proven reserve quantities based on sampling and testing of sites conducted by us and by independent companies hired by us. Probable reserves are based on information similar to that used for proven reserves, but the sites for sampling are less extensive, and the degree of certainty is less. Reserve estimation is an interpretive process based upon available geological data and statistical inferences and is inherently imprecise and may prove to be unreliable.
 
Our reserves are reduced as existing reserves are depleted through production. Reserves may be reduced due to lower than anticipated volume and grade of reserves mined and processed and recovery rates.
 
Reserve estimates are calculated using assumptions regarding metals prices. These prices have fluctuated widely in the past. Declines in the market price of metals, as well as increased production costs, capital costs and reduced recovery rates, may render reserves uneconomic to exploit. Any material reduction in our reserves may lead to increased net losses, reduced cash flow, asset write-downs and other adverse effects on our results of operations and financial condition. Reserves should not be interpreted as assurances of mine life or of the profitability of current or future operations. No assurance can be given that the amount of metal estimated will be produced or the indicated level of recovery of these metals will be realized.
 
We may not achieve our production estimates.
 
We prepare estimates of future production for our operations. We develop our estimates based on, among other things, mining experience, reserve estimates, assumptions regarding ground conditions and physical characteristics of ores (such as hardness and presence or absence of certain metallurgical characteristics) and estimated rates and costs of mining and processing. In the past, our actual production from time to time has been lower than our production estimates and this may be the case in the future.
 
Each of these factors also applies to future development properties and to any future recommencement of mining at Montana Tunnels. In the case of mines we may develop in the future, we do not have the benefit of actual experience in our estimates, and there is a greater likelihood that the actual results will vary from the estimates. In addition, development and expansion projects are subject to unexpected construction and start-up problems and delays.
 
Our future profitability depends in part, on actual economic returns and actual costs of developing mines, which may differ significantly from our estimates and involve unexpected problems, costs and delays.
 
From time to time we will engage in the development of new ore bodies. Our ability to sustain or increase our present level of production is dependent in part on the successful exploration and development of new ore bodies and/or expansion of existing mining operations. Decisions about the development of Black Fox and other future projects are subject to the successful completion of feasibility studies, issuance of necessary governmental permits and receipt of adequate financing.
 
Development projects have no operating history upon which to base estimates of future cash flow. Our estimates of proven and probable ore reserves and cash operating costs are, to a large extent, based upon detailed geologic and engineering analysis. We also conduct feasibility studies that derive estimates of capital and operating costs based upon many factors.
 
- 25 -

It is possible that actual costs and economic returns may differ materially from our best estimates. It is not unusual in the mining industry for new mining operations to experience unexpected problems during the start-up phase and to require more capital than anticipated. There can be no assurance that the Black Fox property will be profitable.
 
Exploration in general, and gold exploration in particular, are speculative and are frequently unsuccessful.
 
Mineral exploration, particularly for gold and silver, is highly speculative in nature, capital intensive, involves many risks and frequently is nonproductive. There can be no assurance that our mineral exploration efforts will be successful. If we discover a site with gold or other mineralization, it will take a number of years from the initial phases of drilling until production is possible, during which time the economic feasibility of production may change. Substantial expenditures are required to establish ore reserves through drilling, to determine metallurgical processes to extract the metals from the ore and, in the case of new properties, to construct mining and processing facilities. As a result of these uncertainties, no assurance can be given that our exploration programs will result in the expansion or replacement of existing ore reserves that are being depleted by current production.
 
We have experienced operational problems at our Montana Tunnels mine.
 
All of our revenues are currently derived from our milling operations at the Montana Tunnels mine, which is a low-grade mine. Historically, the Montana Tunnels mine has been unprofitable. During 2004 we experienced problems related to the milling of low-grade ore at the Montana Tunnels mine, which negatively affected our revenues and earnings and throughout 2005 we experienced operational problems, particularly in the open pit, leading to the suspension of mining on October 21, 2005, for safety reasons due to increased wall activity in the open pit.  Since suspension of mining the Company has continued to produce gold doré, lead-gold and zinc-gold concentrates from milling low grade stockpiled ore.  The Montana Tunnels mine plans to continue milling this ore through the end of April 2006.  In March 2006, the Company adopted a plan to dispose of the Montana Tunnels mine.
 
We do not currently have and may not be able to raise the funds necessary to explore and develop our Black Fox and Huizopa properties and our other properties.
 
We do not currently have sufficient funds to complete all of our planned exploration activities at Black Fox and Huizopa or to develop a mine at Black Fox. The development of Black Fox, and exploration of Huizopa and our other properties will require significant capital expenditures. Sources of external financing may include bank and nonbank borrowings and future debt and equity offerings. There can be no assurance that financing will be available on acceptable terms, or at all. The failure to obtain financing would have a material adverse effect on our growth strategy and our results of operations and financial condition.
 
Our Black Fox property is pledged to the holders of our 12% Series 2004-B Secured Convertible Debentures and we may not be able to obtain financing from an asset based lender.
 
Our Black Fox property is pledged to the holders of our 12% Series 2004-B Secured Convertible Debentures as security for our obligations under these debentures. It may be difficult for us to raise additional external funds through banks, asset based lenders, or other types of lenders, which may require us to raise additional funds through future debt and equity offerings. In addition, the inability to pledge any additional significant assets may make it difficult or impossible to obtain financing on acceptable terms, or at all. The failure to obtain acceptable financing would have a material adverse effect on our growth strategy and our results of operations and financial condition.
 
- 26 -

Possible hedging activities could expose us to losses.
 
In the future, we may enter into precious and/or base metals hedging contracts that may involve outright forward sales contracts, spot-deferred sales contracts, the use of options which may involve the sale of call options and the purchase of all these hedging instruments. There can be no assurance that we will be able to successfully hedge against price, currency and interest rate fluctuations. In addition, our ability to hedge against zinc and lead price risk in a timely manner may be adversely affected by the smaller volume of transactions in both the zinc and lead markets. Further, there can be no assurance that the use of hedging techniques will always be to our benefit. Some hedging instruments may prevent us from realizing the benefit from subsequent increases in market prices with respect to covered production. This limitation would limit our revenues and profits. Hedging contracts are also subject to the risk that the other party may be unable or unwilling to perform its obligations under these contracts. Any significant nonperformance could have a material adverse effect on our financial condition and results of operations.
 
We face substantial governmental regulation.
 
Safety. Our U.S. mining operation is subject to inspection and regulation by the Mine Safety and Health Administration of the United States Department of Labor (“MSHA”) under the provisions of the Mine Safety and Health Act of 1977. The Occupational Safety and Health Administration (“OSHA”) also has jurisdiction over safety and health standards not covered by MSHA. Our policy is to comply with applicable directives and regulations of MSHA and OSHA. We have made and expect to make in the future, significant expenditures to comply with these laws and regulations.
 
Current Environmental Laws and Regulations. We must comply with environmental standards, laws and regulations that may result in increased costs and delays depending on the nature of the regulated activity and how stringently the regulations are implemented by the regulatory authority. The costs and delays associated with compliance with such laws and regulations could stop us from proceeding with the exploration of a project or the operation or future exploration of a mine. Laws and regulations involving the protection and remediation of the environment and the governmental policies for implementation of such laws and regulations are constantly changing and are generally becoming more restrictive. We have made, and expect to make in the future, significant expenditures to comply with such laws and regulations.
 
Some of our properties are located in historic mining districts with past production and abandoned mines. The major historical mine workings and processing facilities owned (wholly or partially) by us in Montana are being targeted by the Montana Department of Environmental Quality (“MDEQ”) for publicly funded cleanup, which reduces our exposure to financial liability. We are participating with the MDEQ under Voluntary Cleanup Plans on those sites. Our cleanup responsibilities have been completed at the Corbin Flats Facility and at the Gregory Mine site, both located in Jefferson County, Montana, under programs involving cooperative efforts with the MDEQ. MDEQ is also contemplating remediation of the Washington Mine site at public expense under the Surface Mining Control and Reclamation Act of 1977 (“SMCRA”). In February 2004, we consented to MDEQ’s entry onto the portion of the Washington Mine site owned by us to undertake publicly funded remediation under SMCRA. In March 2004, we entered into a definitive written settlement agreement with MDEQ and the Bureau of Land Management (“BLM”) under which MDEQ will conduct publicly funded remediation of the Wickes Smelter site under SMCRA and will grant us a site release in exchange for our donation of the portion of the site owned by us to BLM for use as a waste repository. However, there can be no assurance that we will continue to resolve disputed liability for historical mine and ore processing facility waste sites on such favorable terms in the future. We remain exposed to liability, or assertions of liability, that would require expenditure of legal defense costs, under joint and several liability statutes for cleanups of historical wastes that have not yet been completed.
 
- 27 -

Environmental laws and regulations may also have an indirect impact on us, such as increased costs for electricity due to acid rain provisions of the Clean Air Act Amendments of 1990. Charges by refiners to which we sell our metallic concentrates and products have substantially increased over the past several years because of requirements that refiners meet revised environmental quality standards. We have no control over the refiners’ operations or their compliance with environmental laws and regulations.
 
Potential Legislation. Changes to the current laws and regulations governing the operations and activities of mining companies, including changes to the U.S. General Mining Law of 1872, and permitting, environmental, title, health and safety, labor and tax laws, are actively considered from time to time. We cannot predict which changes may be considered or adopted and changes in these laws and regulations could have a material adverse impact on our business. Expenses associated with the compliance with new laws or regulations could be material. Further, increased expenses could prevent or delay exploration or mine development projects and could therefore affect future levels of mineral production.
 
We are subject to environmental risks.
 
Environmental Liability. We are subject to potential risks and liabilities associated with environmental compliance and the disposal of waste rock and materials that could occur as a result of our mineral exploration and production. To the extent that we are subject to environmental liabilities, the payment of such liabilities or the costs that we may incur to remedy any non-compliance with environmental laws would reduce funds otherwise available to us and could have a material adverse effect on our financial condition or results of operations. If we are unable to fully remedy an environmental problem, we might be required to suspend operations or enter into interim compliance measures pending completion of the required remedy. The potential exposure may be significant and could have a material adverse effect on us. We have not purchased insurance for environmental risks (including potential liability for pollution or other hazards as a result of the disposal of waste products occurring from exploration and production) because it is not generally available at a reasonable price or at all.
 
Environmental Permits. All of our exploration, development and production activities are subject to regulation under one or more of the various state, federal and provincial environmental laws and regulations in Canada, Mexico and the U.S. Many of the regulations require us to obtain permits for our activities. We must update and review our permits from time to time, and are subject to environmental impact analyses and public review processes prior to approval of the additional activities. It is possible that future changes in applicable laws, regulations and permits or changes in their enforcement or regulatory interpretation could have a significant impact on some portion of our business, causing those activities to be economically reevaluated at that time. Those risks include, but are not limited to, the risk that regulatory authorities may increase bonding requirements beyond our financial capabilities. The posting of bonding in accordance with regulatory determinations is a condition to the right to operate under all material operating permits, and therefore increases in bonding requirements could prevent our operations from continuing even if we were in full compliance with all substantive environmental laws.
 
We face strong competition from other mining companies for the acquisition of new properties.
 
Mines have limited lives and as a result, we may seek to replace and expand our reserves through the acquisition of new properties. In addition, there is a limited supply of desirable mineral lands available in the United States, Canada and Mexico and other areas where we would consider conducting exploration and/or production activities. Because we face strong competition for new properties from other mining companies, some of which have greater financial resources than we do, we may be unable to acquire attractive new mining properties on terms that we consider acceptable.
 
- 28 -

The titles to some of our properties may be uncertain or defective.
 
Certain of our United States mineral rights consist of “unpatented” mining claims created and maintained in accordance with the U.S. General Mining Law of 1872. Unpatented mining claims are unique U.S. property interests, and are generally considered to be subject to greater title risk than other real property interests because the validity of unpatented mining claims is often uncertain. This uncertainty arises, in part, out of the complex federal and state laws and regulations that supplement the General Mining Law. Also, unpatented mining claims and related rights, including rights to use the surface, are subject to possible challenges by third parties or contests by the federal government. The validity of an unpatented mining claim, in terms of both its location and its maintenance, is dependent on strict compliance with a complex body of federal and state statutory and decisional law. In addition, there are few public records that definitively control the issues of validity and ownership of unpatented mining claims.
 
In recent years, the U.S. Congress has considered a number of proposed amendments to the General Mining Law. Although no such legislation has been adopted to date, there can be no assurance that such legislation will not be adopted in the future. If ever adopted, such legislation could, among other things, impose royalties on gold production from unpatented mining claims located on federal lands or impose fees on production from patented mining claims. If such legislation is ever adopted, it could have an adverse impact on earnings from our operations, could reduce estimates of our reserves and could curtail our future exploration and development activity on federal lands or patented claims.
 
While we have no reason to believe that the existence and extent of any of our properties are in doubt, title to mining properties are subject to potential claims by third parties claiming an interest in them.
 
We may lose rights to properties if we fail to meet payment requirements or development or production schedules.
 
We derive the rights to most of our mineral properties from unpatented mining claims, leaseholds, joint ventures or purchase option agreements which require the payment of maintenance fees, rents, or purchase price installments, exploration expenditures, or other fees. If we fail to make these payments when they are due, our rights to the property may lapse. There can be no assurance that we will always make payments by the requisite payment dates. In addition, some contracts with respect to our mineral properties require development or production schedules. There can be no assurance that we will be able to meet any or all of the development or production schedules. Our ability to transfer or sell our rights to some of our mineral properties requires government approvals or third party consents, which may not be granted.
 
Our operations may be adversely affected by risks and hazards associated with the mining industry.
 
Our business is subject to a number of risks and hazards including adverse environmental effects, technical difficulties due to unusual or unexpected geologic formations, and pit wall failures.
 
Such risks could result in personal injury, environmental damage, damage to and destruction of production facilities, delays in mining and liability. For some of these risks, we maintain insurance to protect against these losses at levels consistent with our historical experience and industry practice. However, we may not be able to maintain current levels of insurance, particularly if there is a significant increase in the cost of premiums. Insurance against environmental risks is generally too expensive or not available for us and other companies in our industry, and, therefore, we do not maintain environmental insurance. To the extent we are subject to environmental liabilities, we would have to pay for these liabilities. Moreover, in the event that we are unable to fully pay for the cost of remedying an environmental problem, we might be required to suspend or significantly curtail operations or enter into other interim compliance measures.
 
- 29 -

You could have difficulty or be unable to enforce certain civil liabilities on us, certain of our directors and our experts.
 
We are a Yukon Territory, Canada, corporation. Substantially all of our assets are located inside of Canada and our head office is located in the United States. Additionally, a number of our directors and the experts named in this Annual Report on Form 10-K are residents of Canada. Although we have appointed Lackowicz, Shier & Hoffman as our agents for service of process in the Yukon Territory, it might not be possible for investors to collect judgments obtained in Canadian courts predicated on the civil liability provisions of securities legislation. It could also be difficult for you to effect service of process in connection with any action brought in the United States upon such directors and experts. Execution by United States courts of any judgment obtained against us, or any of the directors, executive officers or experts named in this Annual Report on Form 10-K, in United States courts would be limited to the assets or the assets of such persons or corporations, as the case might be, in the United States. The enforceability in Canada of United States judgments or liabilities in original actions in Canadian courts predicated solely upon the civil liability provisions of the federal securities laws of the United States is doubtful.
 
- 30 -

ITEM 2. DESCRIPTION OF PROPERTIES
 
Maps of Operations and Properties
 
The maps below show the locations of the Montana Tunnels mine, the Black Fox project and the Huizopa project in North America. These properties are described in further detail below.

Figure 1 - Property locations in North America
- 31 -


Montana Tunnels Mine
 
The mine was originally owned, constructed and operated in 1987 by Pegasus Gold (“Pegasus”), a mining company incorporated in Canada. In 1998, Pegasus filed for bankruptcy and in 2002, Apollo purchased Montana Tunnels Mining, Inc., the owner and operator of the Montana Tunnels mine.
 
Figure 2 - Montana Tunnels mine location in Montana, U.S.


- 32 -


Location
 
The Montana Tunnels mine is an open pit, poly-metallic mine and mill located about five miles west of Jefferson City, Montana. The mine is located in the historic “Wickes-Corbin” mining district in Section 8 of Township 7 North, Range 4 West, Jefferson County. The mine’s elevations range from 5,200 to 6,300 feet with moderately mountainous topography that is cut by conveyers with steeper slopes. The mine is easily accessible by way of interstate highway and paved roads. The mine and mill receive power supply from Northwestern Energy from overland power lines.
 
Production
 
For the year ended December 31, 2005, a total of 44,682 ounces of gold, 544,613 ounces of silver, 10,428,061 lbs of lead and 22,380,136 lbs of zinc were produced. Most of this production was from modeled and unmodeled “fringe” ores mined from the open pit through mid October, 2005. 
 
Mining was suspended mid October 2005 as a result of pit wall instability in September and early October 2005 along the upper East Wall of the open pit. The instability is the result of a complex interaction between relatively weak, altered Lowland Creek Volcanic (LCV) rock units, steeply dipping faults and joints, and occasional zones of relatively less altered and more competent sub-vertical rock zones. Toppling type displacement patterns were evident where the more resistant rock outcrops within weak, sheared LCV rock units on the upper East Wall. The pattern of displacements that occurred during September and October 2005 was consistent with previous slope performance when active mining unloads the toe of the slope.

The on-going slope deformations resulted in too steep a slope between the ramps and weakening of the rock mass, creating localized instabilities along the haul ramp that reduced ramp width and increased the frequency of rock falls. We therefore decided on October 22, 2005, for safety reasons, to cease mining and retain a third party consultant to review mine design criteria and determine scenarios under which mining the pit could safely resume.

The consultant focused on geotechnical issues associated with the East Wall area and upper access ramp location for the open pit, completing its work in late November. The consultant developed several alternative mine designs and plans for ramp relocation, unloading the upper benches and remediation. Each plan calls for additional unloading of up to 4.6 million tons from upper benches of the East Wall to mitigate rock fall hazards by reducing slope deformation and rock mass degradation in the weak rock units exposed along the upper East Wall. The plans also call for a new, wider haul ramp to reduce the potential for haul ramp instability along the East Wall. In addition, mining practices would be changed to increase the rate at which upper benches are unloaded during mining operations. The estimated cost of completing the East Wall remediation, waste material removal, ramp relocation and widening is approximately $12 million.
 
Since the open pit mine operations were suspended, the mill has been producing gold doré and lead-gold and zinc-gold concentrate from low grade ore stockpiles. On January 31, 2006, we gave a Workers Adjustment and Retraining Notification (“WARN”) Act Notice to all hourly and salaried Montana Tunnels Mining, Inc. employees. The WARN Act requires companies to give employees 60 days’ notice prior to a plant shutdown or mass layoff. We now expect to postpone a mass layoff until late April 2006 as we continue to mill low grade stockpiled ore. In March 2006 the Company adopted a plan to dispose of the Montana Tunnels mine. The following table sets forth annual production levels for gold, silver, lead and zinc at the Montana Tunnels mine since 2003.
 
Montana Tunnels Mine Production History
 
Year Ended December 31,
 
Year
 
Milled
Tons
000’s
 
Au Oz Au/t
 
Oz Au
000’s
 
Ag Oz Ag/t
 
Oz Ag
000’s
 
Pb
%
 
Tons Pb
000’s
 
Zn
%
 
Tons Zn
000’s
 
2005
   
4,955
   
0.0129
   
44.6
   
0.19
   
544.6
   
0.15
   
5.2
   
0.34
   
11.6
 
2004
   
5,394
   
0.0096
   
33.7
   
0.32
   
970.8
   
0.14
   
5.0
   
0.37
   
13.1
 
2003
   
4,663
   
0.0157
   
44.1
   
0.22
   
411.2
   
0.19
   
5.4
   
0.44
   
10.9
 

   
Year Ended December 31,
 
Payable Metal
 
2005
 
2004
 
2003
 
Gold (oz)
   
44,682
   
33,743
   
44,124
 
Silver (oz)
   
544,613
   
970,751
   
411,216
 
Lead (lb)
   
10,515,148
   
10,064,265
   
10,843,184
 
Zinc (lb)
   
23,255,833
   
26,222,805
   
21,792,452
 
 
     
Year Ended December 31, 
 
     
2005 
   
2004 
   
2003 
 
Total Cost/ Ton Ore Processed
 
$
9.46
 
$
9.47
 
$
7.10
 
Cash Operating Cost/Oz Gold
 
$
529.36
 
$
797.91
 
$
432.42
 
Total Cash Cost/Oz Gold
 
$
562.96
 
$
838.54
 
$
456.96
 
Total Production Cost/Oz Gold
 
$
617.77
 
$
913.43
 
$
595.66
 
 
In 2006 the Montana Tunnels mine continues to produce metals by milling low grade ore stockpiles and plans to continue through the end of April 2006. Production at Montana Tunnels is not currently cash positive. The revenue generated does pay for the variable cost of production and contributes to the fixed costs of the mine. In March 2006, the Company adopted a plan to dispose of the Montana Tunnels mine.
 
The mine produced the following aggregate amounts of the listed metals from its inception in 1987 through December 31, 2005.
 
 
   
 Production
 
 Gold     1,503,000 ozs  
 Silver     27,678,000 ozs  
 Lead     354,000,000 lbs.  
 Zinc     946,800,000 lbs.  
 

- 33 -



Description of Land, Geology, Process and Equipment
 
About half of Section 8 lands are our owned fee lands. Mining claims that cover the pit are listed in the table below.
 
Claims Covering Montana Tunnels Mine
 
Patented Claims
 
Mineral
Survey
 
Unpatented
Claims
 
Geraldine C
   
9184
   
MF 1
 
P.Q.C
   
9184
   
F 14
 
Montana
   
9184
   
F 15
 
General Harris
   
2038
   
-
 
Black Rock No. 2
   
9184
   
-
 
Black Rock No. 3
   
8940
   
-
 
D.E.D
   
9184
   
-
 
Placer
   
258
   
-
 
Anna
   
8940
   
-
 

We own or lease an aggregate of 5,088 acres in fee and patented lands at the Montana Tunnels mine. The property consists of 139 wholly or partially owned patented claims (2,413.42 acres), three patented leased claims (45.19 acres) which we hold pursuant to a mining lease expiring on March 19, 2014, and 2,629.44 acres of owned fee lands. All patented claims and fee lands have been surveyed. In addition, 213 unpatented claims are maintained (4,260 acres). We estimate that 90% of the unpatented claims have been surveyed. A number of claims outside the contiguous mining claims and fee land are isolated.
 
None of the Montana Tunnels mine’s reserves are subject to royalties, but we do have three leased claims that contain mineralization, which will be subject to a 4.5% net smelter return royalty if they are mined. The annual holding costs of the Montana Tunnels properties, exclusive of property taxes, total $52,582.
 
The Montana Tunnels deposit is hosted in the central part of the diatreme, an upward-sloping passage forced through sedimentary rock by volcanic activity. The diatreme is a heterolithic breccia, characterized by a sand-size fragmented matrix of quartz latitic composition surrounding subangular to well-rounded fragments of Cretaceous Elkhorn Mountains Volcanics, Tertiary Lowland Creek Volcanics, and clasts derived from the Cretaceous Butte Quartz Monzonite pluton.
 
There are two main zones of mineralization at Montana Tunnels: (i) a central, pipe-like core of contiguous mineralization, and (ii)discontinuous zones of mineralization peripheral to the core deposit, termed fringe mineralization. The core of the deposit in plan view is oblong in shape and ranges from about 200 feet to 1000 feet in width, and from 1400 to 2000 feet in length, with a vertical extent of at least 2000 feet. The core zone strikes approximately N30 E and dips steeply (60 degrees to 80 degrees) to the northwest. Metallurgical projections are based on historical feed grade versus tails grade trends; mill throughput tonnage, ore properties relative to pit location and bench elevation; and ore blending requirements.
 
Prior to suspending mining in October 2005, open pit mining at Montana Tunnels was normally conducted 24 hours per day seven days per week. Mining was performed by two shovels, eight 150 ton and two 85 ton haul trucks in addition to ancillary equipment. While fully operational, mine production averaged approximately 40,000 tons per day of ore and waste.
 

- 34 -

 
When in full production we use a primary and secondary crusher, in series, to generate a coarse ore stockpile ahead of the concentrator. The crusher has a capacity of 16,500 tons per day. The grinding circuit consists of a SAG mill, ball mill and tertiary crusher (SABC circuit) followed by conventional differential flotation. A gravity circuit, in closed loop with the ball mill, recovers 12-15% of gold produced by the concentrator. The remainder of the mill’s production is in the form of concentrates: a zinc-gold concentrate and a lead-gold-silver concentrate. The dried concentrates are shipped, via rail, to a smelter. The original plant was constructed during 1986 and 1987, and is currently in good working order. In 2004, we increased mill capacity from 15,000 tons per day to 16,500 tons per day with the addition of a primary crusher.
 
Model Reconciliation
 
During 2005, in an effort to supply the mill with feed, larger ore zones of a lower grade were mined, most from outside of the modeled zones. The reconciliation to the model was skewed due to mining such large amounts of low grade ore outside the model to supply mill feed. In addition, the mill produces more gold than mine sampling can detect. Generally mined ounces of gold were as predicted but mined tons were higher and ore tons were lower.
 
The following table summarizes the reconciliation for the year ended December 31, 2005.
 
Summary of Operational Statistics for the Year Ended December 31, 2005
 
Entity
 
Tons
000’s
 
Au opt
 
Ag
opt
 
Pb
%
 
Zn
%
 
Au
Ozs.
 
Ag Ozs.
 
Pb
tons
 
Zn
tons
 
Model
   
2,933.8
   
0.0173
   
0.19
   
0.19
   
0.47
   
50,749
   
558,750
   
5,569
   
13,647
 
Mine
   
4,124.0
   
0.0130
   
0.21
   
0.20
   
0.46
   
53,410
   
860,237
   
8,224
   
18,825
 
Mill
   
4,010.9
   
0.0140
   
0.19
   
0.17
   
0.37
   
55,064
   
747,847
   
6,833
   
14,788
 

Note: The above comparison is for production through mid-October 2005.

- 35 -



Mineral Reserves
 
The table below shows the mineral reserves at Montana Tunnels.

Montana Tunnels Mine Reserve Statement at December 31, 2005(1)(2)
 
Pit (Imperial Summary)
 
Classification
 
Tons
000’s
 
Grade oz Au/t
 
Ag oz
Ag/t
 
Pb %
 
Zn %
 
Ounces Au
000’s
 
L8J5 (L Pit)
   
Proven
   
10,089.2
   
0.016
   
0.173
   
0.218
   
0.591
   
163.6
 
M4A (M Pit)
   
Proven
                                     
Mill Stockpile
   
Proven
   
36.0
   
0.009
   
0.180
   
0.080
   
0.190
   
0.3
 
Subtotal
   
Proven
   
10,125.2
   
0.016
   
0.173
   
0.217
   
0.589
   
163.9
 
L8J5 (L Pit)
   
Probable
   
217.4
   
0.016
   
0.175
   
0.208
   
0.508
   
3.5
 
M4A (M Pit)
   
Probable
   
22,898.0
   
0.016
   
0.230
   
0.170
   
0.600
   
368.5
 
Subtotal
   
Probable
   
23,115.4
   
0.016
   
0.230
   
0.171
   
0.600
   
372.0
 
Total
   
Proven + Probable
   
33,240.6
   
0.016
   
0.212
   
0.185
   
0.596
   
535.9
 

(1) Recovery rates are expected to be 80% for gold, 71% for silver, 85% for lead, and 84% for zinc.
(2) In March 2006 the Company adopted a plan to dispose of the Montana Tunnels mine.
 
Environmental
 
The permitted plan of operations allows mining of ore reserves from the L-Pit mine design. Unstable pit walls in the ramp sector on the east side of the mine closed down the open pit in October 2005, however, milling operations have continued processing stockpiled low grade ore. A pit wall layback and pit ramp reconstruction in the east sector of the open pit was subsequently developed using extensive geotechnical analysis to ensure stability and safety for ongoing mining operations. A permit revision for the pit wall layback and associated changes was approved by the Department of Environmental Quality in December 2005.
 
A major mine plan amendment (M-Pit) continues to progress through an Environmental Impact Statement permitting process. Approval for the M-Pit mine by the Montana Department of Environmental Quality and Bureau of Land Management will provide approximately 28 million tons of additional ore for processing.
 
The bonding requirements for the Montana Tunnels mine are met by the following bond instruments:
 
   
Year Ended December 31,
 
Type of Bonding
 
2005
 
2004
 
Partially secured surety bond issued by CNA pursuant to the Term Bonding Agreement described immediately below
 
$
14,987,688
 
$
14,987,688
 
Cash bond posted directly with the State of Montana
   
128,697
   
128,697
 
Real estate bond posted directly with State of Montana
   
1,264,893
   
772,570
 
Total Obligated Bonding Requirement Met
 
$
16,381,278
 
$
15,888,955
 
 
National Fire Insurance Company of Hartford, a unit of Continental Casualty Company (“CNA”), provides $14,987,688 of the total reclamation bonding for the Montana Tunnels mine plan of operations at a deferred bond premium cost of $14 per $1,000 of bonding under a Term Bonding Agreement dated August 1, 2002.
 
- 36 -

Bonding requirements are subject to adjustment by the State of Montana for various reasons from time to time. As noted above, the bonding requirement for the Montana Tunnels mine increased from $15,888,955 to $16,381,278 during 2005 as the result of a minor revision to the operating permit and a bond inflation adjustment.
 
Black Fox Project
 
Figure 3 - Black Fox project location along Destor-Porcupine Fault Zone in Province of Ontario, Canada
 

- 37 -


Location
 
The Black Fox project is located approximately five miles east of the township of Matheson and 40 miles east of Timmins, Ontario, Canada. Lake Abitibi is six miles northwest of the project site. The property encompasses over 1,983 acres within the Hislop and Beatty Townships. Access and surface rights are owned solely by Apollo. The property is easily accessible by interstate highway and power is supplied by Hydro One.
 
The Black Fox property was formerly known as the Glimmer mine. In April 1996, Exall Resources Ltd. (“Exall”) purchased 60% of the property from Hemlo Gold Inc., and Glimmer Resource Inc. (“Glimmer”) held the remaining 40%.
 
In September, 2002, we purchased all of the real estate and related assets of the Glimmer Mine from Exall and Glimmer. The mine, which ceased operations in May 2001, was renamed Black Fox. Apollo paid Exall and Glimmer an aggregate purchase price consisting of Cdn$3 million in cash and an aggregate of 2,080,000 of our common shares. Pursuant to the terms of the acquisition, an additional Cdn$3 million was payable to Exall and Glimmer. See subsequent event Note 21 of the “Notes to the Consolidated Financial Statements”.
 
Black Fox sits astride the Destor-Porcupine Fault Zone (DPFZ), which is a deep break in the Precambrian rocks of the Abitibi Greenstone Belt. This fault system hosts many of the deposits in the Timmins area. The system regionally strikes east-west and dips variably to the south. Black Fox lies on the southern limb of a large scale fold on a flexure in the DPFZ Fault where the strike changes from east-west to southeast. Folded and altered ultra mafic and mafic are the host rocks for mineralization. Gold occurs as free gold in quartz veining and stockworks in altered ultra mafics and in gold associated with pyrite in altered tholeiitic basalts.
 
From 1997 until 2001, the mine produced approximately 210,000 ounces of gold. In early 2003, we commenced a drilling program consisting of shallow holes to test the mine’s open pit potential. During 2003, 297 surface core holes were completed with depths varying from 200 to 500 meters. As a result of this drilling, proven and probable open pit gold reserves at Black Fox of 457,000 ounces were identified and we published such reserve estimates in an NI 43-101 report in March 2004.
 
We are in the process of updating our reserves, and expect to report new reserve estimates, which we expect to include underground reserves, in April 2006 and issue an NI 43-101 report within 45 days of publishing the new reserves.
 
Property, plant and equipment at the mine consists of an administration office, change house facilities, core sheds and surface infrastructure for the mine (pumps, heating, etc.), all of which are in good working condition, with an aggregate value of $1.0 million.
 
None of the currently defined reserves are subject to production royalties. However, the Ewen property (155 acres), purchased in 2003, is subject to a 3% net smelter return royalty if in the future any reserves are found on that property.
 
Mineral Reserves
 
The reserves reported in an NI 43-101 report in March 2004 of 457,000 ounces of gold were estimated based upon the 2003 exploration program and included a pre-feasibility study of developing an open pit mine on the Black Fox property. This study did not consider underground mining as an option. We report no reserves at Black Fox under SEC Industry Guide 7, which requires a final bankable feasibility study.
 
 
- 38 -


 
Black Fox Reserve Statement at December 31, 2005
 
Classification (Imperial Summary)
 
Tons
000’s
 
Grade
oz Au/t
 
Ounces Au
000’s
 
Tons Waste
000’s
 
Strip
Ratio
 
Proven
   
2,418.0
   
0.141
   
341.6
             
Probable
   
837.4
   
0.138
   
115.5
             
Total - Proven + Probable
   
3,255.5
   
0.140
   
457.1
   
60,734.5
   
18.66
 

Waste includes 12.18 million tons of overburden.
 
See the proven and probable mineral reserve table in Item 1 of this Annual Report on Form 10-K.
 
Exploration and Development 2004
 
In February 2004, a new drilling program commenced which first required the existing ramp system to be extended down to the 235 meter level and the construction of a 913 meter drift so as to allow drilling of the orebody from underground. During 2004, 210 underground holes totaling 41,065 meters were drilled.
 
Also in 2004, an additional 105 surface holes were completed, totaling another 43,284 meters. Our objectives for drilling these surface holes were to better define the open pit reserves; extend our resources along strike; extend resources in the eastern and western extensions of the main structure, bracketing or undercutting known gold-bearing zones; and explore known geophysical targets.
 
In April 2004, through surface exploration drilling we discovered a new orebody in the footwall of the DPFZ. The discovery hole was based on the extension of an induced polarization anomaly. There are two components to the mineralization, the quartz breccia veins and the massive sulfide mineralization (Pb, Zn, Ag). These appear to be two mineralizing events sharing the same “plumbing system.”
 
Exploration and Development 2005
 
During 2005 the surface and underground drilling programs continued with a total of 51 surface holes and 160 underground holes being completed. As of December 31, 2005, Apollo had completed a total of 449 surface diamond drill holes, totaling over 135,711 meters as well as 370 underground holes totaling 75,520.7 meters giving a to-date total for both of 211,232.6 meters as shown in the table below.
 
- 39 -

Drilling at Year Ended December 31, 2005
 
Drilling
 
Holes Completed
 
Meters
 
Surface 2005
   
51
   
9,813.6
 
UG 2005
   
160
   
34,455.8
 
Total All 2005 Drilling
   
211
   
44,269.4
 
Total Surface To Date
   
449
   
135,711.9
 
Total UG To Date
   
370
   
75,520.7
 
Grand Total All Drilling
   
819
   
211,232.6
 

 
Apollo’s drilling supplemented the data from the 284 surface and 720 underground drill holes drilled by the previous owners. A table of total drill holes is shown below.
 
Black Fox Project Drill Hole Database
 
Company
 
Period
 
Location
 
Number
 
Meters
 
Noranda
   
1989-1994
   
Surface
   
142
   
27,930
 
Exall
   
1995-1999
   
Surface
   
142
   
21,295
 
Exall
   
1996-2001
   
Underground
   
720
   
62,827
 
Apollo
   
2002-2003
   
Surface
   
297
   
82,622
 
Apollo
   
2004
   
Surface
   
105
   
43,280
 
Apollo
   
2004
   
Underground
   
210
   
41,065
 
Apollo
   
2005
   
Surface
   
51
   
9,813
 
Apollo
   
2005
   
Underground
   
160
   
34,456
 
Totals
               
1,823
   
323,288
 

In 2005, we began the permitting process for the project, which we anticipate will take approximately two years based on a plan for a combined open pit and underground mine with a 1,500 tonnes per day on-site mill. The estimated cost of the mine and mill is approximately $80 million.
 
Bonding
 
We met our bonding requirements, established by the Province of Ontario, for the Black Fox project through the following bonding instrument:
 
   
Year Ended December 31,
 
Type of Bonding
 
2005
 
2004
 
Letter of Credit issued by TD Canada Trust secured by pledged deposit account
   
Cdn$644,650
   
Cdn$489,200
 
Total Bonding Requirement met
   
Cdn$644,650
   
Cdn$489,200
 
 
The obligations to reimburse TD Canada Trust for any drawing under the letter of credit are secured by Apollo’s maintenance of an amount equal to the amount available for drawing in a deposit account pledged to TD Canada Trust. The annual letter of credit fee is 1% of the amount available for drawing. Interest is earned on the deposit account at a rate established by TD Canada Trust from time to time.
 
- 40 -

Exploration Stage Properties
 
Huizopa
 
We own Mexican subsidiaries which own or have the right to acquire concessions at the Huizopa exploration project. Pursuant to an agreement with the previous owner of one of those Mexican subsidiaries (the “Previous Owner”), if we exercise our right to acquire those concessions at the Huizopa project on which we currently hold an option, one of our Mexican subsidiaries and a Mexican company owned by the Previous Owner will enter into a joint venture agreement governing activities at the Huizopa project going forward, pursuant to which we can elect to ultimately retain up to an 80% interest in the Huizopa project. If our Mexican subsidiary chooses not to go forward with the Huizopa project, it is obligated to transfer a controlling interest in the subsidiary that holds the option back to the Previous Owner, and to transfer 91% of the concessions it owns at the Huizopa project back to the Previous Owner.
 
The Huizopa project is located in the northern part of the Sierra Madre Gold Belt in the state of Chihuahua, Mexico, near the border with the State of Sonora, and encompasses a block of mining concession claims of approximately 22 sq. km. Huizopa is located about 17 km southwest of the Dolores project and approximately 33 km to the northeast of the Mulatos project. Mulatos and Dolores are both multi-million ounce gold-silver deposits owned by other companies that are currently in development. Sporadic shallow underground mining limited to a few high-grade zones was done in the past but no mining has taken place at Huizopa since 1936. The property is very remote and will be accessed initially by helicopter. During 2004, we acquired new claims that completely surround the old Huizopa land position and, as a result, have expanded our land position to a total of 128 sq. km.
 
The geology is characterized by a series of parallel, low sulfidation gold-silver, quartz veins hosted by Tertiary-age volcanic rocks. Silver to gold ratios in the veins and from the material on historic mine dumps indicate the Huizopa area hosts an extensive gold-bearing hydrothermal system. Two major parallel quartz vein systems with north trending structures contain many single vein outcrops 7 to 10 meters thick suggesting a series of stacked veins. Strike lengths are over 2.0 km on the property with untested down dip potential. The stratigraphy of the Huizopa area has two sections of relatively mafic lava flows with intercalated volcaniclastics. The dominant strike azimuths of faults are 340º and 160º with dips ranging from vertical to 33º. Most of these structures, including the major faults with associated thick gouge or breccia zones, dip eastward. These east dipping faults are the faults associated with quartz veins, brecciation, and mineralization.
 
Initial favorable geochemical sampling and field studies by the Previous Owner in December 2003 were confirmed by us when we reviewed the data and conducted a field evaluation between February and March 2004.
 
Mapping of the mining concession began in June 2004 and continued throughout 2005. The results were compiled and transferred to our new topography maps and air photos as well as the Mexican government’s Chabacan topographical sheet which has been enlarged from 1:50,000 scale to 1:10,000. Geologic mapping suggests that the faults that host gold-silver mineralization may be more numerous and more continuous than earlier field work indicated. Petrographical examination revealed the presence of native gold, silver, and electrum in many samples and widespread vein features indicative of repeated boiling and explosive brecciation. Overall vein textures are consistent with high-level exposures of epithermal quartz-adularia and/or fault breccia veins.
 
Throughout 2006, we expect to continue mapping, trenching, sampling and conducting geophysical studies on the property, including the selection of several primary targets for drill sites and the commencement of a drilling program.  The cost of the project is expected to be approximately $2.3 million for the year 2006. 
 
- 41 -

Diamond Hill
 
The Diamond Hill mine, which has been on care and maintenance since 2000, is owned by Montana Tunnels Mining, Inc. The mine is an underground gold mine and is located approximately 28 miles southeast of Helena, Montana, in Broadwater County and on the east flank of the Elkhorn Mountains, within the Hassel Mining District. The Diamond Hill mine was in production from 1996 to 2000, during which time, 775,000 tons of ore were mined at an average grade of 0.233 ounces of gold per ton. In March 2006, the Company adopted a plan to dispose of Montana Tunnels Mining, Inc., which owns the Diamond Hill mine.
 
The Diamond Hill mine covers over 2,590 acres of patented and unpatented claims. We have 100% ownership of the main patented claims that contain the current deposits, subject to a 0.5 to 1% net smelter return and a 10% net profits royalty. We also have 50% ownership of four additional patented claims, which are peripheral to the main land package. As of December 31, 2005, we hold 103 unpatented claims and lease 19 unpatented claims. The current mine permit covers 270 acres with most of the disturbance within a 27 acre area.
 
The Diamond Hill orebodies and mine workings are in solid unfractured rock and accordingly are amenable to low cost sublevel open stoping methods. Ore was transported to the Montana Tunnels mill facility by truck where it was processed in a separate circuit designed for Diamond Hill ore. Most of the gold was recovered into a high grade pyrite concentrate and sold to Japanese smelters.
 
The deposit is classed as a skarn hosted sulfide deposit where the predominant ore mineralogy is gold associated with pyrite and lesser other metal sulfides. The bonding requirements for Diamond Hill, totaling approximately $623,000, are incorporated as part of the bonding at Montana Tunnels.
 
ITEM 3. LEGAL PROCEEDINGS
 
We are not currently subject to any material pending legal proceedings. We are, however, engaged in routine litigation incidental to our business. No material legal proceedings, involving us or our business are pending, or, to our knowledge, contemplated, by any governmental authority. We are not aware of any material events of noncompliance with environmental laws and regulations.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
No matters were submitted to a vote of security holders during the fourth quarter of 2005.
 
- 42 -

PART II - OTHER INFORMATION
 
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Our common shares are listed on the American Stock Exchange under the trading symbol “AGT” and on the Toronto Stock Exchange under the trading symbol “APG.” As of March 24, 2006, 121,396,859 common shares were outstanding, and we had 1,750 shareholders of record. On March 24, 2006, the closing price per share for our common shares as reported by the American Stock Exchange was $0.62 and as reported by the Toronto Stock Exchange was Cdn$0.69.
 
The following table sets forth, for the periods indicated, the reported high and low market closing prices per share of our common shares:
 
 
   
American Stock
Exchange
 
Toronto Stock
Exchange
 
   
High
 
Low
 
High
 
Low
 
   
($)
 
(Cdn$)
 
2005
                 
First Quarter
 
$
0.81
 
$
0.45
 
$
0.96
 
$
0.54
 
Second Quarter
   
0.47
   
0.26
   
0.56
   
0.30
 
Third Quarter
   
0.38
   
0.22
   
0.44
   
0.27
 
Fourth Quarter
   
0.32
   
0.16
   
0.37
   
0.18
 
2004
                         
First Quarter
   
2.61
   
1.80
   
3.30
   
2.40
 
Second Quarter
   
2.11
   
1.25
   
2.76
   
1.72
 
Third Quarter
   
1.41
   
0.54
   
1.85
   
0.67
 
Fourth Quarter
   
1.05
   
0.60
   
1.25
   
0.72
 

We have not declared or paid cash dividends on our common shares since our inception and we expect for the foreseeable future to retain all of our earnings from operations for use in expanding and developing our business. Future dividend decisions will consider our then current business results, cash requirements and financial condition.
 
ITEM 6. SELECTED FINANCIAL DATA
 
The following table sets forth selected historical consolidated financial data for Apollo Gold Corporation (formerly Pursuit) as of December 31, 2005, 2004, 2003, 2002 and 2001, derived from our audited financial statements. The financial information for the year ended December 31, 2002 differs significantly from the financial information for prior years as a result of the June 2002 acquisition of Nevoro. Financial information for 2001 and prior years is the historical financial information of Pursuit. On June 25, 2002, Pursuit acquired Nevoro and its wholly-owned subsidiary Apollo Gold, Inc.; accordingly, the statement of operations of the Company for the year ended December 31, 2002, includes the results of Pursuit for the year ended December 31, 2002, and Nevoro for the period from June 25, 2002 through December 31, 2002. Subsequent to June 25, 2002, substantially all of the gold mining and exploration business conducted by the Company consists of the gold mining and exploration operations of Apollo. The data set forth below should be read in conjunction with, and is qualified in its entirety by reference to, our financial statements and notes thereto included elsewhere in this Annual Report Form 10-K and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 

- 43 -



 
Summary of Financial Condition
 
   
Years Ended December 31,
($ U.S. dollars in thousands, except share data)
 
   
2005
 
2004
 
2003
 
2002
 
2001
 
Statements of Operations Data -
Cdn GAAP
                     
Revenue on sales of minerals
 
$
43,254
 
$
38,254
 
$
30,858
 
$
-
 
$
-
 
Direct Operating Costs
   
48,357
   
52,473
   
34,184
   
12,159
   
-
 
    Depreciation and Amortization
   
2,551
   
2,640
   
6,135
   
-
   
-
 
Exploration and Development
   
918
   
1,051
   
2,117
   
451
   
94
 
Operating Loss
   
(17,638
)
 
(26,592
)
 
(17,105
)
 
(15,811
)
 
(533
)
Loss from Continuing Operations
   
(15,961
)
 
(27,295
)
 
(15,790
)
 
(15,585
)
 
(454
)
(Loss) Income from Discontinued Operations
   
(6,247
)
 
(3,712
)
 
1,700
   
405
   
-
 
Net Loss
   
(22,208
)
 
(31,007
)
 
(14,090
)
 
(15,180
)
 
(454
)
Net Income (Loss) per share, basic and diluted
                               
Continuing Operations
   
(0.16
)
 
(0.34
)
 
(0.29
)
 
(0.81
)
 
(0.54
)
Discontinued Operations
   
(0.06
)
 
(0.05
)
 
0.03
   
0.02
   
-
 
Total
 
$ 
(0.22
)
$ 
(0.39
)
$ 
(0.26
)
$ 
(0.79
)
$
(0.54
)
Weighted Average number of shares outstanding
   
101,811,291
   
78,716,042
   
54,536,679
   
19,297,668
   
834,124
 
Balance Sheet Data - Cdn GAAP
                               
Total Assets
 
$
62,545
 
$
97,635
 
$
96,577
 
$
66,361
 
$
112
 
Total Shareholders’ Equity
   
32,441
   
47,221
   
57,857
   
29,685
   
(28
)
 
Summary of Financial Condition
 
   
Years Ended December 31,
($ U.S. dollars in thousands, except share data)
 
   
2005
 
2004
 
2003
 
2002
 
2001
 
Statements of Operations Data -
U.S. GAAP
                     
Revenue on sales of minerals
 
$
43,254
 
$
38,254
 
$
30,858
 
$
-
 
$
-
 
    Direct Operating Costs
   
48,357
   
52,473
   
34,184
   
12,159
   
-
 
Depreciation and Amortization
   
1,963
   
1,945
   
6,222
   
-
   
-
 
Exploration and Development
   
6,051
   
11,456
   
5,760
   
451
   
94
 
Operating Loss
   
(22,183
)
 
(36,302
)
 
(22,574
)
 
(23,871
)
 
(587
)
Loss from Continuing Operations
   
(19,826
)
 
(38,792
)
 
(21,021
)
 
(44,320
)
 
(508
)
Income (Loss) from Discontinued Operations
   
(4,907
)
 
308
   
(1,395
)
 
(1,860
)
 
-
 
Net Loss
   
(24,733
)
 
(38,484
)
 
(22,416
)
 
(46,180
)
 
(508
)
Net Income (Loss) per share, basic and diluted
                               
Continuing Operations
   
(0.19
)
 
(0.49
)
 
(0.38
)
 
(2.30
)
 
(0.61
)
Discontinued Operations
   
(0.05
)
 
-
   
(0.03
)
 
(0.09
)
 
-
 
Total
 
$
(0.24
)
$
(0.49
)
$
(0.41
)
$
(2.39
)
$
(0.61
)
Weighted Average number of shares outstanding
   
101,811,291
   
78,716,042
   
54,536,679
   
19,297,668
   
834,124
 
Balance Sheet Data - U.S. GAAP
                               
Total Assets
 
$
39,331
 
$
77,749
 
$
87,391
 
$
60,905
 
$
58
 
Total Shareholders’ Equity
   
7,714
   
25,014
   
43,311
   
21,726
   
(82
)

- 44 -

Summary Operational Statistics
 
   
Year Ended December 31,
 
   
2005
 
2004
 
2003
 
Production Summary
             
Gold ounces
   
44,099
   
33,743
   
44,124
 
Silver ounces
   
524,722
   
970,751
   
411,216
 
Lead pounds
   
10,428,061
   
10,064,265
   
10,843,184
 
Zinc pounds
   
22,380,136
   
26,222,805
   
21,792,452
 
Cash Cost Per Ounce
                   
Cash Operating Cost/oz
 
$
529.36
 
$
797.91
 
$
432.42
 
Total Cash Cost/oz
 
$
562.96
 
$
838.54
 
$
456.96
 
Total Production Cost/oz
 
$
617.77
 
$
913.43
 
$
595.66
 

The cash operating, total cash and total production costs are non-GAAP financial measures and are used by management to assess performance of individual operations as well as a comparison to other gold producers.
 
This information differs from measures of performance determined in accordance with Canadian and U.S. GAAP and should not be considered in isolation or a substitute for measures of performance prepared in accordance with GAAP. These measures are not necessarily indicative of operating profit or cash flow from operations as determined under GAAP and may not be comparable to similarly titled measures of other companies.
 
See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a reconciliation of these non-GAAP measures to our Statements of Operations.
 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and related notes. The financial statements have been prepared in accordance with generally accepted accounting principles in Canada (“Canadian GAAP”). For a reconciliation to generally accepted accounting principles in the U.S. (“U.S. GAAP”), see Note 20 to the attached consolidated financial statements. Unless stated otherwise, all dollar amounts are reported in U.S. dollars.
 
In this Annual Report on Form 10-K, the terms “cash operating cost”, “total cash cost” and “total production cost” are non-GAAP financial measures and are used on a per ounce of gold sold basis. Cash operating cost is equivalent to direct operating cost for the period as found on the Consolidated Statements of Operations, less production royalties expenses and mining taxes but includes by-product credits for payable silver, lead and zinc production. Total cash cost is equivalent to cash operating cost plus production royalties and mining taxes. Total production cost is equivalent to total cash cost plus non-cash costs including depreciation and amortization.
 
The Montana Tunnels’ results of operations have been restated for all periods presented as at and for the year ended December 31, 2004 and earlier to reflect a change in accounting policy with respect to stripping costs (see Critical Accounting Policies below).
 
Additionally, certain of the comparative figures have been reclassified to conform with the 2005 presentation. In particular, the results of operations of the Florida Canyon Mine and the Standard Mine for all periods presented have been classified as discontinued operations (see Note 4 to our Consolidated Financial Statements) and therefore the table below reflects Montana Tunnels statistics only.
 
- 45 -

RECONCILIATION OF CASH OPERATING AND TOTAL PRODUCTION COSTS PER OUNCE
 
   
Year Ended December 31,
 
   
2005
 
2004
 
2003
 
   
($ in thousands, except per ounce data)
 
Gold Ounces Sold
   
44,099
   
33,743
   
44,124
 
Direct Operating Costs
 
$
48,357
 
$
52,473
 
$
34,184
 
Less: Mining and Property Taxes
   
1,482
   
1,371
   
1,083
 
By-Product Credits
   
23,531
   
24,178
   
14,021
 
Cash Operating Cost
   
23,344
   
26,924
   
19,080
 
Cash Operating Cost per Ounce
   
529
   
798
   
432
 
Cash Operating Cost
   
23,344
   
26,924
   
19,080
 
Add: Mining and Property Taxes
   
1,482
   
1,371