Unassociated Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

OR

£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-31593

APOLLO GOLD CORPORATION
(Exact name of registrant as specified in its charter)

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

5655 South Yosemite St., Suite 200
Greenwood Village, Colorado 80111-3220
(Address of principal executive offices) (Zip code)

Registrant’s telephone number, including area code: (720) 886-9656

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

Large Accelerated Filer £
 
Accelerated Filer £ 
Non-Accelerated Filer £ (do not check if a smaller reporting company)
 
Smaller Reporting Company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes £ No x

At August 8, 2008, there were 202,860,257 common shares of Apollo Gold Corporation outstanding.
 





TABLE OF CONTENTS
 
       
Page
 
FINANCIAL INFORMATION
 
4
ITEM 1.
 
FINANCIAL STATEMENTS (Unaudited)
 
4
         
   
Condensed Consolidated Balance Sheets - As of June 30, 2008 and as of December 31, 2007
 
5
   
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2008 and 2007
 
6
   
Condensed Consolidated Statements of Shareholders’ Equity for the Year ended December 31, 2007 and the Six Months Ended June 30, 2008
 
7
   
Condensed Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30, 2008 and 2007
 
8
   
Notes to the Condensed Consolidated Financial Statements
 
9
         
ITEM 2.
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
32
ITEM 3.
 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
39
ITEM 4.
 
CONTROLS AND PROCEDURES
 
40
PART II
 
OTHER INFORMATION
 
40
ITEM 1.
 
LEGAL PROCEEDINGS
 
40
ITEM 1A.
 
RISK FACTORS
 
40
ITEM 2.
 
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
41
ITEM 3.
 
DEFAULTS UPON SENIOR SECURITIES
 
41
ITEM 4.
 
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
41
ITEM 5.
 
OTHER INFORMATION
 
42
ITEM 6.
 
EXHIBITS
 
42
INDEX TO EXHIBITS
 
44

Certification of CEO Pursuant to Section 302
Exhibit 31.1
Exhibit 31.2
Certification of CEO and CFO Pursuant to Section 906
Exhibit 32.1

2

 
STATEMENTS REGARDING FORWARD LOOKING INFORMATION
 
This Quarterly Report on Form 10-Q 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 expenditures, and exploration and development efforts. Forward-looking statements can be identified by the use of words such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “continue,” or the negative of such terms, or other comparable terminology. These statements include comments regarding:

 
·
plans for Black Fox and Huizopa, including development, exploration and drilling, and the ability to finance development
     
 
·
future financing of projects, including the contemplated $75 million debt financing for Black Fox
     
  · liquidity to support operations and debt repayment
     
  · operational results and future timing of cash flow from the Montana Tunnels mine;
     
  · the establishment and estimates of mineral reserves and resources;
     
  · production and production costs;
     
  · daily production and mill throughput rates;
     
  · cash operating costs;
     
  · total cash costs;
     
  · grades of ore mined and milled;
     
  · grade of concentrates produced;
     
  · anticipated expenditures for development, exploration, and corporate overhead;
     
  · timing and issue of permits;
     
  · expansion plans for existing properties;
     
  · estimates of closure costs;
     
  · estimates of environmental liabilities;
     
  · our ability to obtain financing to fund our estimated expenditure and capital requirements;
     
  · factors impacting our results of operations; and
     
  · the impact of adoption of new accounting standards.
 
These forward looking statements are subject to numerous risks, uncertainties and assumptions including: unexpected changes in business and economic conditions; significant increases or decreases in gold and zinc 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 properties; 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 future feasibility studies; joint venture relationships; 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 on reasonable terms or at all; and the factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2007 under the heading “Risk Factors.” Many of these factors are beyond our ability to control and predict. These factors are not intended to represent a complete list of the general or specific factors that may affect us. We disclaim any obligation to update forward looking statements, whether as a result of new information, future events or otherwise.
 
ACCOUNTING PRINCIPLES, REPORTING CURRENCY AND OTHER INFORMATION
 
Apollo Gold Corporation prepares its consolidated financial statements in accordance with accounting principles generally accepted in Canada and publishes its financial statements in United States dollars. This Quarterly Report on Form 10-Q should be read in conjunction with our condensed consolidated financial statements and related notes included in this quarterly report, as well as our annual financial statements for the fiscal year ended December 31, 2007 included in our Annual Report on Form 10-K.
 
3

 
Unless stated otherwise, all dollar amounts are expressed in United States dollars.
 
References to “we,” “our,” “us,” the “Company” or “Apollo” mean Apollo Gold Corporation and its consolidated subsidiaries, or to any one or more of them, as the context requires.
 
NON-GAAP FINANCIAL INFORMATION
 
In this Quarterly Report on Form 10-Q, Apollo uses 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 Regulation S-K Item 10 and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with U.S. GAAP. These terms are used by management to assess performance of individual operations and to compare Apollo’s 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.
 
This information differs from measures of performance determined in accordance with generally accepted accounting principles (GAAP) in Canada and the United States and should not be considered in isolation or a substitute for measures of performance prepared in accordance with GAAP. These measures are not necessarily indicative of operating profit or cash flow from operations as determined under GAAP and may not be comparable to similarly titled measures of other companies. See Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for a reconciliation of these non-GAAP measures to our Statements of Operations.
 
PART I
FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
 
These condensed consolidated financial statements should be read in conjunction with the financial statements, accompanying notes and other relevant information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 filed with the Securities and Exchange Commission on March 25, 2008.
 
4


APOLLO GOLD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars)
(Unaudited)
 
   
June 30,
2008
 
December 31,
2007
 
ASSETS
     
CURRENT
     
Cash and cash equivalents
 
$
602
 
$
4,852
 
Derivative instruments (Note 5)
   
1,368
   
2,101
 
Restricted certificates of deposit
   
1,000
   
1,000
 
Accounts receivable and other
   
2,285
   
1,846
 
Prepaids
   
44
   
509
 
Inventories (Note 6)
   
3,805
   
2,169
 
Total current assets
   
9,104
   
12,477
 
Long-term investments (Note 5)
   
1,300
   
1,467
 
Property, plant and equipment
   
52,774
   
48,378
 
Deferred stripping costs
   
3,025
   
4,787
 
Restricted certificates of deposit
   
7,880
   
6,715
 
Other long-term assets
   
1,722
   
84
 
Future income tax assets
   
-
   
1,165
 
TOTAL ASSETS
 
$
75,805
 
$
75,073
 
LIABILITIES
             
CURRENT
             
Accounts payable
 
$
4,472
 
$
2,748
 
Accrued liabilities
   
1,766
   
2,940
 
Property and mining taxes payable
   
1,268
   
957
 
Notes payable and other current debt (Note 13)
   
4,390
   
7,617
 
Convertible debentures
   
5,710
   
-
 
Total current liabilities
   
17,606
   
14,262
 
Accrued long-term liabilities
   
302
   
289
 
Notes payable
   
96
   
159
 
Convertible debentures
   
-
   
5,537
 
Accrued site closure costs
   
9,812
   
9,442
 
Deferred gain (Note 4)
   
1,587
   
2,511
 
TOTAL LIABILITIES
   
29,403
   
32,200
 
         
Continuing operations (Note 1)
             
Commitments and contingencies (Note 11)
             
               
SHAREHOLDERS’ EQUITY
             
Share capital (Note 7)
   
167,556
   
166,424
 
Equity component of convertible debentures
   
1,987
   
2,238
 
Note warrants
   
2,234
   
2,292
 
Contributed surplus
   
14,972
   
14,591
 
Deficit
   
(140,347
)
 
(142,672
)
TOTAL SHAREHOLDERS’ EQUITY
   
46,402
   
42,873
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
75,805
 
$
75,073
 
 
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
 
5


APOLLO GOLD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(U.S. dollars and shares in thousands, except per share amounts)
(Unaudited)

   
Three months ended
June 30,
 
Six months ended
June 30,
 
   
2008
 
2007
 
2008
 
2007
 
Revenue from sale of minerals
 
$
10,019
 
$
12,841
 
$
25,921
 
$
15,731
 
Operating expenses
                         
Direct operating costs
   
9,469
   
7,932
   
18,530
   
10,995
 
Depreciation and amortization
   
355
   
380
   
759
   
630
 
General and administrative expenses
   
1,159
   
859
   
2,088
   
1,999
 
Accretion expense - accrued site closure costs
   
178
   
127
   
355
   
254
 
Amortization of deferred gain
   
(369
)
 
(358
)
 
(924
)
 
(429
)
Exploration and business development
   
1,001
   
185
   
1,757
   
1,737
 
     
11,793
   
9,125
   
22,565
   
15,186
 
Operating (loss) income
   
(1,774
)
 
3,716
   
3,356
   
545
 
Other income (expenses)
                         
Interest income
   
83
   
151
   
209
   
339
 
Interest expense (Note 8)
   
(1,021
)
 
(1,468
)
 
(2,169
)
 
(2,613
)
Financing costs
   
-
   
-
   
-
   
(480
)
Realized gains on derivative contracts
   
1,432
   
-
   
1,950
   
-
 
Unrealized gains (losses) on derivative contracts
   
122
   
-
   
(733
)
 
-
 
Foreign exchange loss and other
   
(108
)
 
37
   
(225
)
 
(2
)
(Loss) income from continuing operations before income taxes
   
(1,266
)
 
2,436
   
2,388
   
(2,211
)
Income taxes
   
(63
)
 
-
   
(63
)
 
-
 
Net (loss) income and comprehensive income (loss) income for the period
 
$
(1,329
)
$
2,436
 
$
2,325
 
$
(2,211
)
                           
Basic and diluted net (loss) income per share (Note 10)
 
$
(0.01
)
$
0.02
 
$
0.01
 
$
(0.02
)
                           
Basic weighted-average number of shares outstanding
   
161,169
   
143,467
   
160,252
   
143,072
 
Diluted weighted-average number of shares
   
161,169
   
144,746
   
165,885
   
143,072
 
 
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
 
6


APOLLO GOLD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(U.S. dollars and shares in thousands)
(Unaudited)
 
   
Share Capital
 
Equity Component
                 
   
Number
of
Shares
 
Amount
 
of
Convertible
Debentures
 
Note Warrants
 
Contributed
Surplus
 
Deficit
 
Total
 
Balance January 1, 2007, as adjusted
   
142,282
 
$
159,029
 
$
1,809
 
$
1,062
 
$
11,166
 
$
(145,088
)
$
27,978
 
                                             
Shares issued for services
   
120
   
52
   
-
   
-
   
-
   
-
   
52
 
Shares issued for Huizopa settlement
   
1,000
   
540
   
-
   
-
   
-
   
-
   
540
 
Shares issued for Black Fox mineral rights
   
1,058
   
527
   
-
   
-
   
-
   
-
   
527
 
Flow-through shares issued for cash and related compensation warrants
   
7,455
   
3,857
   
-
   
-
   
58
   
-
   
3,915
 
Income tax benefits renounced to shareholders of flow-through units issued in 2006
   
-
   
(234
)
 
-
   
-
   
-
   
-
   
(234
)
Equity component of convertible debentures
   
-
   
-
   
2,292
   
-
   
-
   
-
   
2,292
 
Note warrants
   
-
   
-
   
-
   
2,292
   
-
   
-
   
2,292
 
Debenture compensation warrants
   
-
   
-
   
-
   
-
   
467
   
-
   
467
 
Note warrants exercised
   
3,933
   
2,506
   
-
   
(1,062
)
 
129
   
-
   
1,573
 
Conversion of debentures
   
400
   
147
   
(54
)
 
-
   
-
   
-
   
93
 
Redemption of debentures
   
-
   
-
   
(1,809
)
 
-
   
1,809
   
-
   
-
 
Stock-based compensation
   
-
   
-
   
-
   
-
   
962
   
-
   
962
 
Net income and comprehensive income
   
-
   
-
   
-
   
-
   
-
   
2,416
   
2,416
 
Balance, December 31, 2007
   
156,248
   
166,424
   
2,238
   
2,292
   
14,591
   
(142,672
)
 
42,873
 
Warrants exercised
   
3,272
   
1,463
   
-
   
(58
)
 
(1
)
 
-
   
1,404
 
Conversion of debentures
   
1,884
   
834
   
(251
)
 
-
   
-
   
-
   
583
 
Income tax benefits renounced to shareholders of flow-through units issued in 2007
   
-
   
(1,165
)
 
-
   
-
   
-
   
-
   
(1,165
)
Stock-based compensation
   
-
   
-
   
-
   
-
   
382
   
-
   
382
 
Net income and comprehensive income
   
-
   
-
   
-
   
-
   
-
   
2,325
   
2,325
 
Balance, June 30, 2008
   
161,404
 
$
167,556
 
$
1,987
 
$
2,234
 
$
14,972
 
$
(140,347
)
$
46,402
 
 
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
 
7


APOLLO GOLD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
(Unaudited)

   
Three months ended
June 30,
 
Six months ended
June 30,
 
   
2008
 
2007
 
2008
 
2007
 
Operating activities
                 
Net (loss) income for the period
 
$
(1,329
)
$
2,436
 
$
2,325
 
$
(2,211
)
Items not affecting cash:
                         
Depreciation and amortization
   
355
   
380
   
759
   
630
 
Amortization of deferred stripping costs
   
704
   
558
   
1,762
   
661
 
Financing costs
   
-
   
-
   
-
   
174
 
Stock-based compensation
   
240
   
189
   
382
   
387
 
Shares issued for services and settlement of claims
   
-
   
-
   
-
   
550
 
Accretion expense - accrued site closure costs
   
178
   
127
   
355
   
254
 
Accretion expense - convertible debentures
   
877
   
1,203
   
1,770
   
2,000
 
Interest paid on convertible debentures
   
-
   
(264
)
 
(1,016
)
 
(529
)
Amortization of deferred gain
   
(369
)
 
(358
)
 
(924
)
 
(429
)
Net change in value of derivative instruments
   
(1,554
)
 
-
   
(1,217
)
 
-
 
Other
   
160
   
(6
)
 
215
   
(2
)
Net change in non-cash operating working capital items (Note 12)
   
3,468
   
(762
)
 
(779
)
 
(364
)
Net cash provided by operating activities
   
2,730
   
3,503
   
3,632
   
1,121
 
                           
Investing activities
                         
Property, plant and equipment expenditures
   
(2,388
)
 
(802
)
 
(3,644
)
 
(3,677
)
Proceeds from settlement of derivative contracts
   
1,432
   
-
   
1,950
   
-
 
Deferred stripping costs
   
-
   
(1,496
)
 
-
   
(3,748
)
Restricted certificate of deposit and other assets
   
(2,183
)
 
(499
)
 
(2,759
)
 
(892
)
Net cash used in investing activities
   
(3,139
)
 
(2,797
)
 
(4,453
)
 
(8,317
)
                           
Financing activities
                         
Proceeds on issuance of convertible debentures and note warrants, net
   
-
   
-
   
-
   
8,062
 
Proceeds from exercise of warrants
   
-
   
-
   
1,404
   
66
 
Proceeds from notes payable and other current debt
   
955
   
-
   
955
   
1,250
 
Payments of notes payable
   
(2,782
)
 
(1,125
)
 
(5,744
)
 
(1,485
)
Notes receivable from Elkhorn Tunnels, LLC
   
-
   
-
   
-
   
1,865
 
Net cash (used in) provided by financing activities
   
(1,827
)
 
(1,125
)
 
(3,385
)
 
9,758
 
                           
Effect of exchange rate changes on cash and cash equivalents
   
(30
)
 
6
   
(44
)
 
2
 
                           
Net (decrease) increase in cash and cash equivalents
   
(2,266
)
 
(413
)
 
(4,250
)
 
2,564
 
Cash and cash equivalents, beginning of period
   
2,868
   
7,489
   
4,852
   
4,512
 
Cash and cash equivalents, end of period (Note 12)
 
$
602
 
$
7,076
 
$
602
 
$
7,076
 
                           
SUPPLEMENTAL CASH FLOW INFORMATION
                         
Interest paid
 
$
114
 
$
334
 
$
1,502
 
$
604
 
Income taxes paid
 
$
-
 
$
-
 
$
-
 
$
-
 
 
See Note 12 for additional supplemental cash flow information.
 
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
 
8


APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Six month period ended June 30, 2008
(Stated in U.S. dollars; tabular amounts in thousands except share and per share data)
(Unaudited)

1.            CONTINUING OPERATIONS
 
These condensed consolidated financial statements are prepared on the basis of a going concern which assumes that Apollo Gold Corporation (“Apollo” or the “Company”) will realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. To date the Company has funded its operations through issuance of debt and equity securities, joint venture contributions from Elkhorn Tunnels, LLC (“Elkhorn”) and cash generated by the Montana Tunnels joint venture (Note 4). The Company’s ability to continue as a going concern is dependent on its ability to generate cash flow from the Montana Tunnels joint venture and/or continue to issue debt and equity securities.
 
If the Company is unable to generate sufficient cash flow from the Montana Tunnels joint venture and/or secure additional financing (see Note 16), it may be unable to continue as a going concern and material adjustments would be required to the carrying value of assets and liabilities and balance sheet classifications used.
 
2.            NATURE OF OPERATIONS
 
Apollo is engaged in gold mining including extraction, processing, refining and the production of other co-product metals, as well as related activities including exploration and development. The Company is the operator of the Montana Tunnels mine (the “Mine”), which is a 50% joint venture with Elkhorn. The Mine is an open pit mine and mill located in the State of Montana that produces gold dore and lead-gold and zinc-gold concentrates. The Company owns the Diamond Hill mine, which is also located in Montana and is currently under care and maintenance.
 
Apollo has a development property, the Black Fox development project (the “Black Fox Project”), which is located near the Township of Matheson in the Province of Ontario, Canada. Apollo also owns Mexican subsidiaries that own concessions at the Huizopa exploration project (the “Huizopa Project”), which is located in the Sierra Madres in Chihuahua, Mexico.
 
3.            SIGNIFICANT ACCOUNTING POLICIES
 
(a)  These unaudited condensed consolidated interim financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”) and except as described in Note 15, conform in all material respects with accounting principles generally accepted in the United States (“U.S. GAAP”). The accounting policies followed in preparing these financial statements are those used by the Company as set out in the audited financial statements for the year ended December 31, 2007, except as disclosed in (b) below. Certain information and note disclosures normally included in consolidated financial statements prepared in accordance with Canadian GAAP have been omitted. These interim financial statements should be read together with the Company’s audited financial statements for the year ended December 31, 2007.
 
In the opinion of management, all adjustments considered necessary for fair presentation have been included in these financial statements. Interim results are not necessarily indicative of the results expected for the fiscal year.
 
9


APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Six month period ended June 30, 2008
(Stated in U.S. dollars; tabular amounts in thousands except share and per share data)
(Unaudited)

3.            SIGNIFICANT ACCOUNTING POLICIES (continued)
 
(b)  Changes in accounting policies
 
Effective January 1, 2008, the Company adopted three new presentation and disclosure standards that were issued by the Canadian Institute of Chartered Accountants: Handbook Section 1535, Capital Disclosures (“Section 1535”), Handbook Section 3862, Financial Instruments - Disclosures (“Section 3862”) and Handbook Section 3863, Financial Instruments - Presentation (“Section 3863”). Section 1535 requires the disclosure of both qualitative and quantitative information that enables users of financial statements to evaluate (i) an entity’s objectives, policies and processes for managing capital; (ii) quantitative data about what the entity regards as capital; (iii) whether the entity has complied with any externally imposed capital requirements; and (iv) if it has not complied, the consequences of such non-compliance. Sections 3862 and 3863 replace Handbook Section 3861, Financial Instruments - Disclosure and Presentation, revising and enhancing its disclosure requirements and carrying forward unchanged its presentation requirements for financial instruments. Sections 3862 and 3863 place increased emphasis on disclosures about the nature and extent of risks arising from financial instruments and how the entity manages those risks.

Effective January 1, 2008, the Company adopted Handbook Section 3031 - Inventories, which replaces the former Section 3030 - Inventories. Section 3031 establishes standards for the measurement and disclosure of inventories, including the measurement of inventories at the lower of cost and net realizable value, consistent use of either first-in, first-out (FIFO) or weighted average cost formulas and the reversal of inventory write-downs previously recognized. The Company has applied the new standard retrospectively, without restatement. The adoption of Section 3031 on January 1, 2008, did not have a material impact on the Company’s financial condition, operating results, or the opening balance of Inventories.

4.             MONTANA TUNNELS JOINT VENTURE
 
On July 28, 2006, Apollo entered into a joint venture agreement with Elkhorn (the “JV Agreement”) in respect of the Montana Tunnels mine. Elkhorn contributed $13 million in return for a 50% interest in the Mine and Montana Tunnels Mining, Inc., a wholly owned subsidiary of Apollo (“MTMI”), contributed all of its assets and liabilities related to the Mine into the joint venture for a 50% interest in the Mine. Effective December 31, 2006, the Mine became a 50/50 joint venture. MTMI is the operator of the Mine. A separate committee consisting of two designees from each of MTMI and Elkhorn oversees the joint venture.
 
Elkhorn receives 55% and Apollo receives 45% of the positive free cash flow, as defined in the JV agreement, from the Mine until such time as Elkhorn has received cash flow of $13 million (at which time Apollo will have received $10.6 million). At that time, Apollo will become entitled to 60% and Elkhorn 40% of the positive free cash flow from the Mine, until both parties have received an equal amount (at which time Apollo and Elkhorn will have each received $17.7 million). Thereafter, the sharing will be 50/50. Additionally, Elkhorn is entitled to a 10% interest distribution (reduced from 12% effective April 1, 2007) charged to the joint venture as interest expense (Note 8) on its initial contribution of $13 million until it has received cash flow of $13 million. The interest distribution is based on the declining balance of this cash flow of $13 million and, as of June 30, 2008, Elkhorn had received cash flow of $12.4 million from the joint venture and Apollo had received $10.1 million. These cash flows to Elkhorn and Apollo are included in net cash used in financing activities below but are eliminated in the consolidated cash flow.
 
10


APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Six month period ended June 30, 2008
(Stated in U.S. dollars; tabular amounts in thousands except share and per share data)
(Unaudited)
 
4.             MONTANA TUNNELS JOINT VENTURE (continued)
 
Apollo accounts for its 50% interest in the Montana Tunnels joint venture using the proportionate consolidation method. As of December 31, 2006, the Company recorded a deferred gain on the transfer of assets and liabilities to the joint venture of $3.8 million. The deferred gain is amortized using the units-of-production method over the expected life of the operation based on the estimated recoverable gold equivalent ounces. Amortization of the deferred gain was $0.4 million and $0.9 million for the three and six months ended June 30, 2008 and $0.4 million and $0.4 million for the three and six months ended June 30, 2007, respectively.
 
Apollo’s 50% share of the assets and liabilities of the Montana Tunnels joint venture is as follows:

   
June 30,
2008
 
December 31,
2007
 
Current
         
Cash and cash equivalents
 
$
454
 
$
306
 
Other non-cash current assets
   
3,950
   
3,190
 
     
4,404
   
3,496
 
Property, plant and equipment
   
8,712
   
9,167
 
Deferred stripping costs
   
3,025
   
4,787
 
Restricted certificates of deposit
   
6,617
   
5,435
 
Total assets
 
$
22,758
 
$
22,885
 
               
Current liabilities
   
3,871
   
3,573
 
Notes payable
   
96
   
145
 
Accrued site closure costs
   
8,643
   
8,314
 
Total liabilities
 
$
12,610
 
$
12,032
 
 
11

 
APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Six month period ended June 30, 2008
(Stated in U.S. dollars; tabular amounts in thousands except share and per share data)
(Unaudited)
 
4.             MONTANA TUNNELS JOINT VENTURE (continued)
 
Apollo’s 50% share of the results of operations and cash flows of the Montana Tunnels joint venture is as follows:
 
   
Three months ended
June 30,
 
Six months ended
June 30,
 
   
2008
 
2007
 
2008
 
2007
 
Revenue from sale of minerals
 
$
10,019
 
$
12,841
 
$
25,921
 
$
15,731
 
Direct operating costs
   
9,467
   
7,932
   
18,526
   
10,995
 
Depreciation and amortization
   
326
   
354
   
705
   
578
 
Accretion expense - accrued site closure costs
   
164
   
116
   
329
   
232
 
     
9,957
   
8,402
   
19,560
   
11,805
 
Operating income
   
62
   
4,439
   
6,361
   
3,926
 
Interest income
   
38
   
52
   
90
   
97
 
Interest expense
   
(102
)
 
(239
)
 
(214
)
 
(587
)
(Loss) income from continuing operations
 
$
(2
)
$
4,252
 
$
6,237
 
$
3,436
 
                           
Net cash provided by operating activities
 
$
3,987
 
$
2,299
 
$
8,811
 
$
3,265
 
Net cash used in investing activities
 
$
(684
)
$
(2,128
)
$
(1,361
)
$
(4,855
)
Net cash (used in) provided by financing activities
 
$
(3,164
)
$
1,150
 
$
(7,303
)
$
3,034
 

Cash used in financing activities includes cash distributed to the joint venture partners, Apollo and Elkhorn. These cash flows eliminate upon consolidation.

5.             FAIR VALUE OF DERIVATIVE INSTRUMENTS AND LONG-TERM INVESTMENTS
 
The fair value of the Company’s derivative instruments, which are comprised of lead and zinc contracts, are $1.4 million and $2.1 million as of June 30, 2008 and December 31, 2007, respectively. The cost basis of these instruments at June 30, 2008 and December 31, 2007 is $nil and, as a result, the Company has recorded unrealized gains of $1.4 million and $2.1 million as of June 30, 2008 and December 31, 2007, respectively.
 
The Company acquired auction rate securities (“ARS”) in 2007, which are recorded in Long-term investments, with a face value of $1.5 million. The Company has recorded an other than temporary impairment on its ARS in the consolidated statement of $0.1 million and $0.2 million during the three and six months ended June 30, 2008, respectively, and as such, no amounts have been recorded in other comprehensive income. The adjusted cost basis and fair value of ARS at June 30, 2008 are $1.3 million. See Note 13(b). On June 4, 2008, the ARS were pledged as collateral for a $0.96 million margin loan.
 
12

 
APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Six month period ended June 30, 2008
(Stated in U.S. dollars; tabular amounts in thousands except share and per share data)
(Unaudited)
 
6.            INVENTORIES
 
Inventories consist of:
 
   
June 30,
2008
 
December 31,
2007
 
Concentrate inventory
 
$
491
 
$
341
 
Doré inventory
   
-
   
56
 
Stockpiled ore inventory
   
2,317
   
749
 
Materials and supplies
   
997
   
1,023
 
   
$
3,805
 
$
2,169
 

7.            SHARE CAPITAL
 
(a)  Shares issued in 2008
 
For the six months ended June 30, 2008, there were 3,271,834 shares issued upon exercise of warrants for proceeds of $1.4 million and 1,883,800 shares issued upon conversion of $0.9 million face value of February 2007 Series-A convertible debentures.
 
(b)  Warrants
 
The following summarizes outstanding warrants as at June 30, 2008:
 
Date Issued
 
Number of Warrants and of
Shares Issuable upon Exercise
 
Exercise Price
 
Expiry Date
       
Exercisable in US$
   
November 8, 2006
 
8,678,943
 
0.50
 
November 8, 2009
February 23, 2007
 
17,933,200
 
0.50
 
February 23, 2009
   
26,612,143
 
 
   
       
Exercisable in Cdn$
   
October 30, 2006
 
1,111,111
 
Cdn$ 1.15
 
October 30, 2008
March 31, 2008
 
5,250
 
Cdn$ 1.15
 
October 30, 2008
October 31, 2007
 
372,727
 
Cdn$ 0.55
 
April 30, 2009
   
1,489,088
       
   
28,101,231
       

In addition, 156,166 broker compensation warrants are outstanding which were issued on October 30, 2006. Each broker compensation warrant is exercisable at Cdn$0.45 for two years into one common share of the Company and one-half of one share purchase warrant, with each whole share purchase warrant exercisable into one common share of the Company at Cdn$1.15. The broker compensation warrants expire on October 30, 2008.
 
13

 
APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Six month period ended June 30, 2008
(Stated in U.S. dollars; tabular amounts in thousands except share and per share data)
(Unaudited)
 
7.            SHARE CAPITAL (continued)
 
(c)  Options
 
A summary of information concerning outstanding stock options at June 30, 2008 is as follows:

 
 
   
Number of
Common
Shares
 
Weighted
Average
Exercise
Price Per Share
 
Balance, December 31, 2007
   
6,227,503
 
$
0.81
 
Options granted
   
2,152,488
   
0.66
 
Options forfeited
   
(84,358
)
 
0.59
 
Balance, June 30, 2008
   
8,295,633
 
$
0.77
 

The following table summarizes information concerning outstanding and exercisable stock options at June 30, 2008:
 
Options Outstanding
 
Options Exercisable
 
Number
Outstanding
 
Expiry Date
 
Weighted Average
Exercise
Price Per Share
 
Weighted Average
Remaining Contractual Life (in years)
 
Number
Exercisable
 
Weighted Average
Exercise
Price Per Share
 
 
100,000
   
September 1, 2011
 
$
0.46
   
3.2
   
50,000
 
$
0.46
 
 
678,200
   
February 18, 2013
   
2.24
   
4.6
   
678,200
   
2.24
 
 
260,000
   
March 10, 2014
   
2.05
   
5.7
   
260,000
   
2.05
 
 
25,000
   
May 19, 2014
   
1.44
   
5.9
   
25,000
   
1.44
 
 
21,200
   
August 10, 2014
   
0.95
   
6.1
   
21,200
   
0.95
 
 
1,162,000
   
March 10, 2015
   
0.65
   
6.7
   
1,162,000
   
0.65
 
 
100,000
   
August 4, 2015
   
0.27
   
7.1
   
100,000
   
0.27
 
 
300,000
   
December 12, 2015
   
0.20
   
7.5
   
300,000
   
0.20
 
 
125,000
   
March 28, 2016
   
0.65
   
7.7
   
125,000
   
0.65
 
 
200,000
   
May 23, 2016
   
0.53
   
7.9
   
200,000
   
0.53
 
 
108,000
   
August 10, 2016
   
0.48
   
8.1
   
54,000
   
0.48
 
 
40,000
   
November 9, 2016
   
0.32
   
8.4
   
20,000
   
0.32
 
 
2,994,920
   
February 6, 2017
   
0.57
   
8.6
   
1,497,460
   
0.57
 
 
49,825
   
August 13, 2017
   
0.46
   
9.1
   
-
   
-
 
 
2,131,488
   
March 27, 2018
   
0.66
   
9.7
   
-
   
-
 
 
8,295,633
       
$
0.77
   
8.0
   
4,492,860
 
$
0.90
 

(d)  Stock-based compensation
 
The fair value of each option granted is estimated at the time of grant using the Black-Scholes option pricing model with weighted average assumptions for grants as follows:

   
Six months ended June 30,
 
   
2008
 
2007
 
Risk free interest rate
   
2.9%
 
 
4.0%
 
Dividend yield
   
0%
 
 
0%
 
Volatility
   
73%
 
 
71%
 
Expected life in years
   
6%
   
6%
 
Weighted average grant-date fair value of stock options
 
$
0.44
 
$
0.38
 
 
14


APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Six month period ended June 30, 2008
(Stated in U.S. dollars; tabular amounts in thousands except share and per share data)
(Unaudited)
 
8.            INTEREST EXPENSE
 
Interest expense consists of:
 
   
Three months ended
June 30,
 
Six months ended
June 30,
 
   
2008
 
2007
 
2008
 
2007
 
Accretion on convertible debentures
 
$
877
 
$
1,203
 
$
1,770
 
$
2,000
 
Interest related to Montana Tunnels joint venture agreement (Note 4)
   
22
   
171
   
101
   
449
 
Capital leases and other
   
122
   
94
   
298
   
164
 
   
$
1,021
 
$
1,468
 
$
2,169
 
$
2,613
 

9.             INCOME TAXES
 
The Company recorded $0.1 million in income tax expense for the period ended June 30, 2008 for alternative minimum taxes resulting on its income from U.S. operations. There was no other income tax expense recorded for the period since additional taxable income will be offset by a recovery of prior tax losses. The Company did not record a recovery for income taxes for the period ended June 30, 2007 as the net loss carry forwards are fully offset by a valuation allowance.

10.           EARNINGS PER SHARE
 
Basic earnings per share (“EPS”) is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS is calculated to reflect the dilutive effect of exercising outstanding warrants and stock options by applying the treasury stock method.
 
Earnings used in determining earnings per share are presented below.
 
   
Three months ended
June 30,
 
Six months ended
June 30,
 
   
2008
 
2007
 
2008
 
2007
 
Net (loss) income
 
$
(1,329
)
$
2,436
 
$
2,325
 
$
(2,211
)
Weighted average number of shares, basic
   
161,168,592
   
143,467,186
   
160,252,248
   
143,072,061
 
Dilutive securities:
                         
Options
   
-
   
225,349
   
549,662
   
-
 
Warrants
   
-
   
1,053,341
   
5,083,533
   
-
 
Weighted average number of shares, diluted
   
161,168,592
   
144,745,876
   
165,885,443
   
143,072,061
 
Basic and diluted net (loss) income per share
 
$
(0.01
)
$
0.02
 
$
0.01
 
$
(0.02
)

For the calculation of EPS for the six months ended June 30, 2008, warrants and stock options to purchase 5.5 million shares of common stock at an average exercise price of $1.02 were outstanding, but were not included in the computation of diluted weighted average number of shares (the “EPS computation”) because the strike prices of the warrants and stock options exceeded the average price of the common shares. For the calculation of EPS for the three months ended June 30, 2007, warrants and stock options to purchase 36.3 million shares of common stock at an average exercise price of $0.58 were outstanding, but were not included in the EPS computation for the same reason. Due to a net loss for the three months ended June 30, 2008, 36.6 million warrants and stock options were excluded from the EPS computation because their effect would have been anti-dilutive and for the six months ended
 
15


APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Six month period ended June 30, 2008
(Stated in U.S. dollars; tabular amounts in thousands except share and per share data)
(Unaudited)
 
10.           EARNINGS PER SHARE (continued)
 
June 30, 2007, 43.2 million warrants and stock options were excluded from the EPS computation for the same reason. Also, for the three and six months ended June 30, 2008, outstanding convertible debentures that were convertible at $0.50 per share into 14.9 million common shares were not included in the EPS computation because their effect would have been anti-dilutive. For the three and six months ended June 30, 2007, outstanding convertible debentures that were convertible at an average of $0.60 per share into 28.8 million common shares were not included in the EPS computation because their effect would have been anti-dilutive.

11.          COMMITMENTS AND CONTINGENCIES
 
(a)  WARN Act litigation at Montana Tunnels
 
In May 2006, a purported class action lawsuit was filed in U.S. Federal Court Missoula Division of Montana by 14 former employees at the Montana Tunnels mine alleging (i) violations of the Worker Adjustment and Retraining Notification Act of 1988 (the “WARN Act”) and the Montana Wage Act and (ii) breach of contract. The allegations related to the termination of the employees following the cessation of mining in October 2005. Specifically, the plaintiffs alleged that the Company gave a deficient WARN Act notice in connection with the terminations and were seeking damages for back pay and benefits. A negotiated settlement was reached between the Company and the plaintiffs and a final cash settlement was paid on July 8, 2008.
 
(b)  Asset Purchase Agreement with St Andrew for Stock Mill Complex
 
On June 6, 2008, the Company entered into a binding asset purchase agreement (the “Binding Agreement”) with St Andrew Goldfields Ltd. (“St Andrew”), a significant shareholder of the Company, pursuant to which St Andrew agreed to sell its Stock Mill complex, including its mill and related equipment, infrastructure, laboratory and tailings facilities, located near Timmins, Ontario (collectively, the “Stock Mill Complex”), to Apollo for a purchase price of $19.6 million (Cdn$20 million) (the “Purchase Price”). In connection with the acquisition of the Stock Mill Complex, Apollo agreed to assume certain contractual liabilities of St Andrew and environmental liabilities relating to events after the closing of the transactions contemplated by the Binding Agreement. On June 30, 2008, the Company entered into an amending agreement (the “Amending Agreement”) to amend certain terms of the Binding Agreement. As of June 6 and 30, 2008, St Andrew held approximately 28.3 million common shares of the Company (17.5% of the outstanding common shares).
 
The Amending Agreement provides, among other things, that the purchase and sale of the Stock Mill Complex will take place on the date that the final payment is made by Apollo to St Andrew, being on or before August 29, 2008, with no further right of Apollo to extend such date. Apollo paid a $1.5 million (Cdn$1.5 million) deposit to St Andrew on June 10, 2008, recorded in Other long-term assets, and the Amending Agreement provides that the balance of the Purchase Price (the “Balance”) is due and payable as follows: (i) $3.9 million (Cdn$4.0 million) in cash is to be paid by Apollo to St Andrew on July 3, 2008; (ii) $5.9 million (Cdn$6.0 million) in cash is to be paid by Apollo to St Andrew on or before July 31, 2008; and (iii) $8.3 million (Cdn$8.5 million) (the “Final Payment”) is to be paid by Apollo to St Andrew on or before August 29, 2008.
 
16


APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Six month period ended June 30, 2008
(Stated in U.S. dollars; tabular amounts in thousands except share and per share data)
(Unaudited)

11.          COMMITMENTS AND CONTINGENCIES (continued)
 
The Final Payment was made on July 28, 2008 (see Note 16(c)). In addition, Apollo paid $0.1 million (Cdn$0.1 million) interest on the Balance from June 30, 2008, at a rate of 12% per annum in connection with the Final Payment.
 
12.          SUPPLEMENTAL CASH FLOW INFORMATION
 
(a)  Net changes in non-cash operating working capital items are:
 
   
Three months ended
June 30,
 
Six months ended
June 30,
 
   
2008
 
2007
 
2008
 
2007
 
(Increase) decrease in:
                 
Accounts receivable and other
 
$
1,579
 
$
(938
)
$
(439
)
$
(1,599
)
Prepaids
   
179
   
172
   
423
   
201
 
Inventories
   
282
   
(284
)
 
(1,636
)
 
(865
)
Increase (decrease) in:
                         
Accounts payable
   
2,416
   
(373
)
 
1,724
   
406
 
Accrued liabilities
   
(1,146
)
 
470
   
(1,162
)
 
1,365
 
Property and mining taxes payable
   
158
   
191
   
311
   
128
 
   
$
3,468
 
$
(762
)
$
(779
)
$
(364
)

(b)  Components of cash and cash equivalents are:
 
   
June 30,
2008
 
June 30,
2007
 
Cash
 
$
174
 
$
1,106
 
Cash equivalents
   
428
   
5,970
 
Cash and cash equivalents
 
$
602
 
$
7,076
 

(c)  Non-cash transactions
 
During the three and six months ended June 30, 2008, Series 2007-A convertible debentures with a face value of $0.2 million and $0.9 million, respectively, were converted into common shares of the Company and the Company recorded a reduction of $0.1 million and $0.6 million, respectively, in convertible debentures and a corresponding increase in equity. Also, during the three and six months ended June 30, 2008, property, plant and equipment totaling $1.4 million was acquired via issuance of a promissory note. During the six months ended June 30, 2008, future income tax assets of $1.2 million were transferred to share capital upon renouncement of expenditures in connection with a flow-through share offering completed in October 2007.
 
During the three and six months ended June 30, 2007, property, plant and equipment totaling $0.3 million and $0.3 million, respectively, was acquired via issuance of a promissory note. During the six months ended June 30, 2007, the Company issued agent’s compensation warrants with a value of $0.3 million for services rendered in connection with the issuance of the Series 2007-A convertible debentures.
 
17


APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Six month period ended June 30, 2008
(Stated in U.S. dollars; tabular amounts in thousands except share and per share data)
(Unaudited)
 
13.          FAIR VALUE OF FINANCIAL INSTRUMENTS
 
The Company examines the various financial instrument risks to which it is exposed and assesses the impact and likelihood of those risks. These risks may include credit risk, liquidity risk, currency risk, interest rate risk and commodity risk. Where material, these risks are reviewed and monitored by the Board of Directors.
 
(a)  Capital Risk Management
 
The Company manages its capital to ensure that it will be able to continue as a going concern while maximizing the return to shareholders through the optimization of its debt and equity balance. The Company’s overall strategy remains unchanged from 2007.

The capital structure of the Company consists of cash and cash equivalents, notes payable and other current debt, convertible debentures and equity attributable to common shareholders, comprising issued share capital, equity component of convertible debentures, note warrants, contributed surplus and deficit.

(b)  Credit Risk
 
Credit risk on financial instruments arises from the potential for counterparties to default on their obligations to the Company. The Company’s credit risk is limited to cash and cash equivalents, trade receivables, restricted certificates of deposit, derivative instruments and auction rate securities in the ordinary course of business. Cash and cash equivalents, restricted certificates of deposit, derivative instruments and auction rate securities are placed with high quality financial institutions. The Company sells its metal production exclusively to large international organizations with strong credit ratings and the balance of trade receivables owed to the Company in the ordinary course of business is not significant. The carrying value of accounts receivable approximates fair value due to the relatively short periods to maturity on these instruments. Therefore, the Company is not exposed to significant credit risk and overall the Company’s credit risk has not changed significantly from 2007.
 
The Company assesses quarterly whether there has been an impairment of the financial assets of the Company. Other than disclosed in Note 5 related to ARS, the Company has not recorded an impairment on any of the financial assets of the Company during the six month period ended June 30, 2008. Apollo continues to maintain a portion of its investments in ARS, which are floating rate securities that are marketed by financial institutions with auction reset dates at 28 day intervals to provide short-term liquidity. All ARS were rated Aaa when purchased, pursuant to Apollo’s investment policy. Beginning in August 2007, a number of auctions began to fail and the Company is currently holding ARS with a par value of $1.5 million which currently lack liquidity. Apollo’s ARS were originally structured and marketed by Lehman Brothers, Inc., a major U.S. investment bank. All of Apollo’s ARS have continued to make regular interest payments. Apollo’s ARS were downgraded to Aa during the second quarter of 2008. If uncertainties in the credit and capital markets persist or Apollo experiences further downgrades on its ARS holdings, the Company may incur additional impairments, which may continue to be judged other than temporary. Apollo believes that the current illiquidity of its ARS will not have a material impact on Apollo’s ability to carry on its business.
 
18


APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Six month period ended June 30, 2008
(Stated in U.S. dollars; tabular amounts in thousands except share and per share data)
(Unaudited)

13.          FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

The Company’s maximum exposure to credit risk is represented by the carrying amount on the balance sheet, which has not changed significantly since December 31, 2007. The financial assets past due do net exceed 1% of total carrying value.

(c)  Liquidity Risk
 
Liquidity risk is the risk that the Company will not meet its financial obligations as they become due. The Company has a planning and budgeting process to monitor operating cash requirements including amounts projected for the existing capital expenditure program and plans for expansion, which are adjusted as input variables change. These variables include, but are not limited to, available bank lines, mineral production from existing operations, commodity prices, taxes and the availability of capital markets. As these variables change, liquidity risks may necessitate the need for the Company to conduct equity issues or obtain project debt financing.

Trade payables and accrued liabilities are paid in the normal course of business typically according to their terms, which are typically due thirty days or less. The Company ensures that there are sufficient committed loan facilities to meet its short-term business requirements, taking into account its anticipated cash flows from operations and its holdings of cash and cash equivalents. At June 30, 2008, the Company is in compliance with its debt covenants. The Company’s overall liquidity risk has not changed significantly from 2007.

In the normal course of business, the Company enters into contracts that give rise to commitments for future minimum payments. The following table summarizes the remaining contractual maturities of the Company’s financial liabilities:

   
 
Payment Due by Period
As of June 30, 2008
 
As of
December 31, 2007
 
   
Within
1 Year
 
1-3
Years
 
3-5
Years
 
Over
5 Years
 
 
Total
 
 
Total
 
Accounts payable, accrued liabilities and property and mining taxes payable
 
$
7,506
 
$
-
 
$
-
 
$
-
 
$
7,506
 
$
6,645
 
Notes payable and other current debt
   
4,390
   
96
   
-
   
-
   
4,486
   
7,776
 
Convertible debentures
   
7,438
   
-
   
-
   
-
   
7,438
   
8,380
 
Interest on Convertible debentures
   
1,339
   
-
   
-
   
-
   
1,339
   
2,711
 
Operating lease obligations
   
83
   
42
   
-
   
-
   
125
   
183
 
Capital expenditures
   
18,153
   
-
   
-
   
-
   
18,153
   
21
 
   
$
38,909
 
$
138
 
$
-
 
$
-
 
$
39,047
 
$
25,716
 

(d)  Currency Risk
 
Financial instruments that impact the Company’s net income or other comprehensive income due to currency fluctuations include: Canadian dollar denominated cash and cash equivalents and accounts payable. For the three and six months ended June 30, 2008, the sensitivity of the Company’s net income due to changes in the exchange rate between the Canadian dollar and the United States dollar would have impacted net income by $0.1 and $0.3 million, respectively, for a 10% increase or decrease in the Canadian dollar.
 
19


APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Six month period ended June 30, 2008
(Stated in U.S. dollars; tabular amounts in thousands except share and per share data)
(Unaudited)
 
13.           FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

(e)  Interest Rate Risk
 
The Company is exposed to interest rate risk on its outstanding borrowings and short-term investments. Currently, the Company’s outstanding borrowings consist of (1) a credit facility with a balance of $1.7 million at June 30, 2008, (2) the Series 2007-A convertible debentures (“the Debentures”) which have an aggregate $7.4 million face value at June 30, 2008 and (3) a margin loan, included within Notes payable and other current debt, with a balance of $0.9 million which is secured by an auction rate security (Note 5). The credit facility and the margin loan both have a floating interest rate based on LIBOR plus 1.25%, and the Debentures have a stated rate of 18% which increased from 12% on February 23, 2008 as part of the original terms. The Company monitors its exposure to interest rates and has not entered into any derivative contracts to manage this risk. The weighted average interest rate paid by the Company during the three and six months ended June 30, 2008 on its outstanding borrowings was 3.9% and 9.9%, respectively.

For the three and six months ended June 30, 2008, a 1% increase or decrease in floating interest rates would not have had a material impact on the amount of interest expense recorded during those periods.

(f)  Commodity Price Risk
 
The Company’s principal businesses include the sale of several commodities. Revenues, earnings and cash flows from the sale of gold, lead, zinc and silver are sensitive to changes in market prices, over which the Company has little or no control. The Company has the ability to address its price-related exposures through the limited use of options, future and forward contracts, but generally does not enter into such arrangements.
 
On October 15, 2007, in order to meet certain loan criteria of the credit facility mentioned in (e) above, the Company entered into certain option contracts to buy and sell 2,267 tonnes (approximately 5,000,000 pounds) of lead and 3,418 tonnes (approximately 7,500,000 pounds) of zinc which equates to approximately 65% and 40%, respectively, of Apollo's share of lead and zinc production from the Mine during the 12-month term of the facility. Approximately one quarter of the contracts remain outstanding at June 30, 2008. The lead and zinc option contracts are in the form of a no premium collar (buy a put, sell a call) at the following prices: Lead - put $1.40 per lb, call $1.90 per lb.; Zinc - put $1.20 per lb, call $1.54 per lb. (See Note 16(a)).

(g)  Fair Value Estimation
 
The fair value of financial instruments that are not traded in an active market (such as derivative instruments) is determined using a Black-Scholes model based on assumptions that are supported by observable current market conditions. Changes in these assumptions to reasonably possible alternative assumptions would not significantly affect the Company’s results.
 
The carrying value less impairment provision, if necessary, of cash and cash equivalents, restricted certificates of deposit, long-term investments, trade receivables and trade payables approximate their fair values. In addition, as the interest rate on the Company’s credit facility is floating and has no unusual rights or terms, the carrying value approximates its fair value.
 
20


APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Six month period ended June 30, 2008
(Stated in U.S. dollars; tabular amounts in thousands except share and per share data)
(Unaudited)
 
14.          SEGMENTED INFORMATION
 
Apollo operates the Montana Tunnels mine (a 50% joint venture) in the United States and the Black Fox development project in Canada. The reportable segments have been determined at the level where decisions are made on the allocation of resources and capital and where performance is measured. The segment information for Montana Tunnels assets and liabilities and the results of operations are reported under the proportionate consolidation method as a result of the JV Agreement (Note 4). The Montana Tunnels assets and liabilities and results of operations of the Montana Tunnels joint venture disclosed in Note 4 differ from the amounts below due to the inclusion of assets and liabilities and results of operations of Montana Tunnels Mining, Inc. not pertaining to the Montana Tunnels joint venture which primarily relate to the Diamond Hill mine. The accounting policies for these segments are the same as those followed by the Company as a whole.
 
Amounts as at June 30, 2008 are as follows:
   
Montana
Tunnels
 
Black
Fox
 
Corporate
and Other
 
Total
 
Cash and cash equivalents
 
$
454
 
$
41
 
$
107
 
$
602
 
Other non-cash current assets
   
4,008
   
122
   
4,372
   
8,502
 
     
4,462
   
163
   
4,479
   
9,104
 
Long-term investments
   
-
   
-
   
1,300
   
1,300
 
Property, plant and equipment
   
8,720
   
40,964
   
3,090
   
52,774
 
Deferred stripping costs
   
3,025
   
-
   
-
   
3,025
 
Restricted certificates of deposit
   
7,240
   
632
   
8
   
7,880
 
Other long-term assets
   
-
   
1,722
   
-
   
1,722
 
Total assets
 
$
23,447
 
$
43,481
 
$
8,877
 
$
75,805
 
                           
Current liabilities
 
$
3,881
 
$
633
 
$
13,092
 
$
17,606
 
Notes payable and other long-term liabilities
   
96
   
-
   
302
   
398
 
Accrued site closure costs
   
9,349
   
463
   
-
   
9,812
 
Deferred gain
   
1,587
   
-
   
-
   
1,587
 
Total liabilities
 
$
14,913
 
$
1,096
 
$
13,394
 
$
29,403
 

Amounts as at June 30, 2007 are as follows:
 
   
Montana
Tunnels
 
Black
Fox
 
Corporate
and Other
 
Total
 
Cash and cash equivalents
 
$
306
 
$
(39
)
$
4,585
 
$
4,852
 
Other non-cash current assets
   
3,206
   
171
   
4,248
   
7,625
 
     
3,512
   
132
   
8,833
   
12,477
 
Long-term investments
   
-
   
-
   
1,467
   
1,467
 
Property, plant and equipment
   
9,176
   
36,100
   
3,102
   
48,378
 
Deferred stripping costs
   
4,787
   
-
   
-
   
4,787
 
Restricted certificates of deposit
   
6,057
   
650
   
8
   
6,715
 
Other long-term assets
   
-
   
84
   
-
   
84
 
Future income tax assets
   
-
   
-
   
1,165
   
1,165
 
Total assets
 
$
23,532
 
$
36,966
 
$
14,575
 
$
75,073
 
                           
Current liabilities
 
$
3,580
 
$
688
 
$
9,994
 
$
14,262
 
Notes payable and other long term liabilities
   
145
   
14
   
5,826
   
5,985
 
Accrued site closure costs
   
8,995
   
447
   
-
   
9,442
 
Deferred gain
   
2,511
   
-
   
-
   
2,511
 
Total liabilities
 
$
15,231
 
$
1,149
 
$
15,820
 
$
32,200
 
 
21


APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Six month period ended June 30, 2008
(Stated in U.S. dollars; tabular amounts in thousands except share and per share data)
(Unaudited)

14.          SEGMENTED INFORMATION (continued)

Amounts for the three and six month periods ended June 30, 2008 and 2007, respectively, are as follows: 
 
   
Three months ended June 30, 2008
 
   
Montana
Tunnels
 
Black Fox
 
Corporate and Other
 
Total
 
Revenue from sale of minerals
 
$
10,019
 
$
-
 
$
-
 
$
10,019
 
Direct operating costs
   
9,469
   
-
   
-
   
9,469
 
Depreciation and amortization
   
327
   
-
   
28
   
355
 
General and administrative expenses
   
-
   
-
   
1,159
   
1,159
 
Accretion expense - accrued site closure costs
   
178
   
-
   
-
   
178
 
Amortization of deferred gain
   
(369
)
 
-
   
-
   
(369
)
Exploration and business development
   
-
   
25
   
976
   
1,001
 
     
9,605
   
25
   
2,163
   
11,793
 
Operating income (loss)
   
414
   
(25
)
 
(2,163
)
 
(1,774
)
Interest income
   
38
   
-
   
45
   
83
 
Interest expense
   
(102
)
 
-
   
(919
)
 
(1,021
)
Realized gains on derivative contracts
   
-
   
-
   
1,432
   
1,432
 
Unrealized gains on derivative contracts
   
-
   
-
   
122
   
122
 
Foreign exchange loss and other
   
-
   
-
   
(108
)
 
(108
)
Income (loss) from continuing operations
 
$
350
 
$
(25
)
$
(1,591
)
$
(1,266
)
Investing activities
                         
Property, plant and equipment expenditures and deferred stripping expenditures
 
$
98
 
$
3,673
 
$
42
 
$
3,813
 
 
   
Six months ended June 30, 2008
 
   
Montana
Tunnels
 
Black Fox
 
Corporate and Other
 
Total
 
Revenue from sale of minerals
 
$
25,921