Unassociated Document


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

FORM 10-Q

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

For the quarterly period ended September 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 R 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 R

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

At November 10, 2008, there were 219,860,257 common shares of Apollo Gold Corporation outstanding.




TABLE OF CONTENTS
       
     
Page
 
       
   
   
   
   
   
       
 
 
 
 
 
 
 
 
 
 
   
Certification of CEO Pursuant to Section 302
Exhibit 31.1
   
Certification of CFO Pursuant to Section 302
Exhibit 31.2
   
Certification of CEO and CFO Pursuant to Section 906
Exhibit 32.1
 
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:
 
2

 
· plans for Black Fox and Huizopa, including development, exploration and drilling, and the ability to finance development;
 
· future financing of projects, including the contemplated $60 to $70 million debt financing for Black Fox and the approximately $70 million financing required for the M-Pit expansion at Montana Tunnels;
 
· the cessation of ore mining at the Montana Tunnels mine, the amount of stockpiled ore upon cessation of mining and the timing of the processing thereof, future notices to employees at the Montana Tunnels mine and the amount of time required to conduct the pre-stripping program prior to production of ore at the M Pit;
 
· liquidity to support operations and debt repayment;
 
· timing and amount of future cash flows 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, including the permits necessary to conduct the M-Pit expansion at Montana Tunnels;
 
· 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, including the recent significant deterioration in global financial and capital markets; significant increases or decreases in gold and zinc prices; changes in interest and currency exchange rates; changes in availability and cost of financing; 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 and development 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.
 
3

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.
 
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)

   
September 30,
2008
 
December 31,
2007
 
ASSETS
     
CURRENT
     
Cash and cash equivalents
 
$
7,612
 
$
4,852
 
Derivative instruments (Note 6)
   
605
   
2,101
 
Restricted certificates of deposit
   
1,000
   
1,000
 
Accounts receivable and other
   
2,556
   
1,846
 
Prepaids
   
600
   
509
 
Inventories (Note 7)
   
4,941
   
2,169
 
Total current assets
   
17,314
   
12,477
 
Long-term investments (Note 6)
   
1,215
   
1,467
 
Property, plant and equipment
   
75,809
   
48,378
 
Deferred stripping costs
   
1,958
   
4,787
 
Restricted certificates of deposit
   
9,581
   
6,715
 
Other long-term assets
   
1,161
   
84
 
Future income tax assets
   
-
   
1,165
 
TOTAL ASSETS
 
$
107,038
 
$
75,073
 
LIABILITIES
             
CURRENT
             
Accounts payable
 
$
3,605
 
$
2,748
 
Accrued liabilities 
   
1,787
   
2,940
 
Property and mining taxes payable
   
1,280
   
957
 
Notes payable and other current debt (Notes 8 and 15)
   
7,506
   
7,617
 
Convertible debentures
   
6,728
   
-
 
Total current liabilities
   
20,906
   
14,262
 
Accrued long-term liabilities
   
309
   
289
 
Notes payable
   
70
   
159
 
Convertible debentures
   
-
   
5,537
 
Accrued site closure costs
   
11,589
   
9,442
 
Deferred gain (Note 5)
   
1,027
   
2,511
 
TOTAL LIABILITIES
   
33,901
   
32,200
 
         
Continuing operations (Note 1)
             
Commitments and contingencies (Note 13)
             
               
SHAREHOLDERS’ EQUITY
             
Share capital (Note 9)
   
190,192
   
166,424
 
Equity component of convertible debentures
   
1,987
   
2,238
 
Note warrants
   
2,234
   
2,292
 
Contributed surplus
   
18,523
   
14,591
 
Deficit
   
(139,799
)
 
(142,672
)
TOTAL SHAREHOLDERS’ EQUITY
   
73,137
   
42,873
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
107,038
 
$
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
(U.S. dollars and shares in thousands, except per share amounts)
(Unaudited)

   
Three months ended
September 30,
 
Nine months ended
September 30,
 
   
2008
 
2007
 
2008
 
2007
 
Revenue from sale of minerals
 
$
12,764
 
$
11,863
 
$
38,685
 
$
27,594
 
Operating expenses
                         
Direct operating costs
   
9,978
   
7,285
   
28,508
   
18,280
 
Depreciation and amortization
   
406
   
377
   
1,165
   
1,007
 
General and administrative expenses
   
826
   
902
   
2,914
   
2,901
 
Accretion expense - accrued site closure costs
   
177
   
126
   
532
   
380
 
Amortization of deferred gain
   
(560
)
 
(345
)
 
(1,484
)
 
(774
)
Exploration and business development
   
754
   
291
   
2,511
   
2,028
 
     
11,581
   
8,636
   
34,146
   
23,822
 
Operating income
   
1,183
   
3,227
   
4,539
   
3,772
 
Other income (expenses)
                         
Interest income
   
100
   
146
   
309
   
485
 
Interest expense (Note 10)
   
(1,143
)
 
(1,584
)
 
(3,312
)
 
(4,197
)
Financing costs
   
(70
)
 
-
   
(70
)
 
(480
)
Realized gains on derivative contracts
   
1,556
   
-
   
3,506
   
-
 
Unrealized losses on derivative contracts
   
(763
)
 
-
   
(1,496
)
 
-
 
Foreign exchange (loss) gain and other
   
(283
)
 
33
   
(508
)
 
31
 
     
(603
)
 
(1,405
)
 
(1,571
)
 
(4,161
)
Income (loss) before income taxes
   
580
   
1,822
   
2,968
   
(389
)
Income taxes (Note 11)
   
(32
)
 
295
   
(95
)
 
295
 
Net income (loss) and comprehensive income (loss) for the period
 
$
548
 
$
2,117
 
$
2,873
 
$
(94
)
                           
Basic and diluted earnings (loss) per share (Note 12)
 
$
0.00
 
$
0.01
 
$
0.02
 
$
(0.00
)
                           
Basic weighted-average number of shares outstanding
   
199,748
   
143,922
   
173,374
   
143,359
 
Diluted weighted-average number of shares
   
199,914
   
145,202
   
175,052
   
143,359
 

 
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
                     
 
 
 Number
of Shares
 
 Amount
 
 Equity Component 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
 
Shares issued for services (Note 9(a)(i))
   
650
   
351
   
-
   
-
   
-
   
-
   
351
 
Units issued for cash and related compensation warrants (Note 9(a)(ii))
   
40,806
   
14,885
   
-
   
-
   
3,247
   
-
   
18,131
 
Flow-through shares issued for cash and related compensation warrants (Note 9(a)(iii))
   
17,000
   
7,400
   
-
   
-
   
79
   
-
   
7,480
 
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
   
-
   
-
   
-
   
-
   
607
   
-
   
607
 
Net income and comprehensive income
   
-
   
-
   
-
   
-
   
-
   
2,873
   
2,873
 
Balance, September 30, 2008
   
219,860
 
$
190,192
 
$
1,987
 
$
2,234
 
$
18,523
 
$
(139,799
)
$
73,137
 
 

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
September 30,
 
Nine months ended
September 30,
 
   
2008
 
2007
 
2008
 
2007
 
Operating activities
                 
Net income (loss) for the period
 
$
548
 
$
2,117
 
$
2,873
 
$
(94
)
Items not affecting cash:
                         
Depreciation and amortization
   
406
   
377
   
1,165
   
1,007
 
Amortization of deferred stripping costs
   
1,066
   
597
   
2,828
   
1,258
 
Financing costs
   
-
   
-
   
-
   
174
 
Stock-based compensation
   
225
   
208
   
607
   
595
 
Shares issued for services and settlement of claims
   
-
   
-
   
-
   
550
 
Accretion expense - accrued site closure costs
   
177
   
126
   
532
   
380
 
Accretion expense - convertible debentures
   
1,017
   
787
   
2,787
   
1,729
 
Interest paid on convertible debentures
   
-
   
265
   
(1,016
)
 
794
 
Amortization of deferred gain
   
(560
)
 
(345
)
 
(1,484
)
 
(774
)
Net change in value of derivative instruments
   
(793
)
 
-
   
(2,010
)
 
-
 
Income taxes
   
-
   
(295
)
 
-
   
(295
)
Other
   
392
   
(21
)
 
607
   
(23
)
Net change in non-cash operating working capital items (Note 14)
   
(2,345
)
 
797
   
(3,124
)
 
433
 
Net cash provided by operating activities
   
133
   
4,613
   
3,765
   
5,734
 
                           
Investing activities
                         
Property, plant and equipment expenditures
   
(22,841
)
 
(2,072
)
 
(26,485
)
 
(5,749
)
Proceeds from settlement of derivative contracts
   
1,556
   
-
   
3,506
   
-
 
Deferred stripping costs
   
-
   
(1,937
)
 
-
   
(5,685
)
Restricted certificate of deposit and other assets
   
(1,170
)
 
(600
)
 
(3,929
)
 
(1,492
)
Net cash used in investing activities
   
(22,455
)
 
(4,609
)
 
(26,908
)
 
(12,926
)
                           
Financing activities
                         
Proceeds on issuance of shares and warrants
   
25,611
   
-
   
25,611
   
-
 
Proceeds on issuance of convertible debentures and note warrants, net
   
-
   
-
   
-
   
8,062
 
Proceeds from exercise of warrants
   
-
   
13
   
1,404
   
79
 
Proceeds from notes payable and other current debt
   
6,198
   
-
   
7,153
   
1,250
 
Payments of notes payable
   
(2,098
)
 
(475
)
 
(7,842
)
 
(1,960
)
Notes receivable from Elkhorn Tunnels, LLC
   
-
   
-
   
-
   
1,865
 
Net cash provided by (used in) financing activities
   
29,711
   
(462
)
 
26,326
   
9,296
 
                           
Effect of exchange rate changes on cash and cash equivalents
   
(379
)
 
19
   
(423
)
 
21
 
                           
Net increase (decrease) in cash and cash equivalents
   
7,010
   
(439
)
 
2,760
   
2,125
 
Cash and cash equivalents, beginning of period
   
602
   
7,076
   
4,852
   
4,512
 
Cash and cash equivalents, end of period (Note 14)
 
$
7,612
 
$
6,637
 
$
7,612
 
$
6,637
 
                           
SUPPLEMENTAL CASH FLOW INFORMATION
                         
Interest paid
 
$
90
 
$
867
 
$
1,592
 
$
1,471
 
Income taxes paid
 
$
63
 
$
-
 
$
63
 
$
-
 
 
See Note 14 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
Nine month period ended September 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 and cash generated by the Montana Tunnels joint venture (Note 5). The Company’s ability to continue as a going concern is dependent on its ability to (1) continue to issue debt and/or equity securities, (2) generate cash flow from the Montana Tunnels joint venture and/or (3) generate cash flow from the Black Fox mine.
 
As of September 30, 2008, the Company has a working capital deficiency of $3.6 million and an accumulated deficit of $139.8 million. In addition, as at September 30, 2008, the Company held cash and cash equivalents of $7.6 million, had unexpended flow-through share funds of $7.8 million, had current debt obligations of $10.2 million consisting of the outstanding principal of the Series 2007-A convertible debentures of $7.4 million due in February 2009 and other debt obligations of $2.8 million due in installments in March 2009 and June 2009 (Notes 8 and 18(a)). Additionally, as of November 10, 2008, the Company has committed to make capital expenditures of approximately $32 million for the development of Black Fox (Notes 13(a) and 18(b)). Based on the current cash balance and expected cash flows of the Montana Tunnels joint venture, the Company will not have sufficient funds to (1) repay the full amount of the $7.4 million principal amount of the Debentures and interest due of $1.3 million in February 2009, (2) fund the capital commitments for the development of Black Fox, (3) repay the $2.8 million debt facility and (4) fund corporate expenditures. The Company plans to meet these obligations by arranging additional debt and capital lease financing and may also consider the need to issue equity and/or refinance the Series 2007-A convertible debentures. The Company’s ability to issue debt and/or equity securities or refinance the convertible debentures may be negatively affected by the current volatile economic financial market conditions which could significantly increase issuance costs and/or lead to the Company being unable to issue debt or equity securities.
 
If the Company is unable to generate sufficient cash flow from the activities listed above, 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 Tunnels, LLC (“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 17, 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
Nine month period ended September 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 all 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.             PURCHASE OF THE STOCK MILL COMPLEX FROM ST ANDREW
 
 On July 28, 2008, the Company completed the purchase of the Stock Mill Complex (the “Purchase”) from St Andrew Goldfields Ltd. (“St Andrew”), a significant shareholder of the Company, for a purchase price of $19.9 million cash (Cdn$20.1 million). The Stock Mill Complex includes a mill and related land, equipment, infrastructure, laboratory and tailings facilities, located near Timmins, Ontario (collectively, the “Stock Mill Complex”). The Company intends to use the Stock Mill Complex to process ore mined at the Black Fox Mine, which is approximately 30 kilometers from the Stock Mill Complex. 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 acquisition and is required to refund St Andrew its bonding commitment for the Stock Mill Complex in the amount of approximately $1.1 million (Cdn$1.2 million) by July 28, 2009. As of July 28 and September 30, 2008, St Andrew held approximately 30.6 million and 29.5 million common shares of the Company, respectively (14.0% and 13.4% of the outstanding common shares, respectively).
 
 The Purchase has been accounted for as a purchase of assets and assumption of liabilities of the Stock Mill Complex. The allocation of the purchase consideration is as follows:
 
10


APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Nine month period ended September 30, 2008
(Stated in U.S. dollars; tabular amounts in thousands except share and per share data)
(Unaudited)
 
4.            PURCHASE OF THE STOCK MILL COMPLEX FROM ST ANDREW (continued)

Cash paid to St Andrew (Cdn$20.134 million)
 
$
19,870
 
Transaction costs, including $0.35 million fair value of common shares issued (Note 9(a)(i))
   
1,039
 
Purchase consideration
 
$
20,909
 
         
Net assets acquired
       
Property, plant and equipment
 
$
22,119
 
Accrued site closure costs
   
(1,210
)
   
$
20,909
 

5.            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 received 55% and Apollo received 45% of the positive free cash flow, as defined in the JV agreement, from the Mine until July 8, 2008 when Elkhorn had received cash flow of $13 million (at which time Apollo had received $10.6 million). Since July 8, 2008, Apollo receives 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 was entitled to a 10% interest distribution (reduced from 12% effective April 1, 2007) charged to the joint venture as interest expense (Note 10) on its initial contribution of $13 million until it received cash flow of $13 million on July 8, 2008. The interest distribution was based on the declining balance of this cash flow of $13 million. As of September 30, 2008, Elkhorn had received cash flow of $13.7 million from the joint venture and Apollo had received $11.7 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.
 
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 $0.6 million and $1.5 million for the three and nine months ended September 30, 2008 and $0.3 million and $0.8 million for the three and nine months ended September 30, 2007, respectively.
 
11


APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Nine month period ended September 30, 2008
(Stated in U.S. dollars; tabular amounts in thousands except share and per share data)
(Unaudited)
 
5.             MONTANA TUNNELS JOINT VENTURE (continued)
 
Apollo’s 50% share of the assets and liabilities of the Montana Tunnels joint venture is as follows:
 
   
September 30,
2008
 
December 31,
2007
 
Current
         
Cash and cash equivalents
 
$
1,327
 
$
306
 
Other non-cash current assets
   
5,920
   
3,190
 
     
7,247
   
3,496
 
Property, plant and equipment
   
8,909
   
9,167
 
Deferred stripping costs
   
1,958
   
4,787
 
Restricted certificates of deposit
   
7,406
   
5,435
 
Total assets
 
$
25,520
 
$
22,885
 
               
Current liabilities 
   
5,291
   
3,573
 
Notes payable
   
70
   
145
 
Accrued site closure costs
   
9,262
   
8,314
 
Total liabilities
 
$
14,623
 
$
12,032
 

Apollo’s 50% share of the results of operations and cash flows of the Montana Tunnels joint venture is as follows:

   
Three months ended
September 30,
 
Nine months ended
September 30,
 
   
2008
 
2007
 
2008
 
2007
 
                   
Revenue from sale of minerals
 
$
12,764
 
$
11,863
 
$
38,685
 
$
27,594
 
Direct operating costs
   
9,978
   
7,283
   
28,504
   
18,278
 
Depreciation and amortization
   
380
   
351
   
1,085
   
929
 
Accretion expense - accrued site closure costs
   
165
   
114
   
494
   
345
 
     
10,523
   
7,748
   
30,083
   
19,552
 
Operating income
   
2,241
   
4,115
   
8,602
   
8,042
 
Interest income
   
38
   
60
   
128
   
157
 
Interest expense
   
(45
)
 
(199
)
 
(259
)
 
(786
)
Income from continuing operations
 
$
2,234
 
$
3,976
 
$
8,471
 
$
7,413
 
                           
Net cash provided by operating activities
 
$
2,248
 
$
5,508
 
$
11,059
 
$
8,773
 
Net cash used in investing activities
 
$
(911
)
$
(3,235
)
$
(2,272
)
$
(8,090
)
Net cash (used in) provided by financing activities
 
$
(463
)
$
(2,895
)
$
(7,766
)
$
139
 

Cash used in financing activities includes cash distributed to the joint venture partners, Apollo and Elkhorn. These cash flows eliminate upon consolidation.
 
12


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

6.
FAIR VALUE OF DERIVATIVE INSTRUMENTS AND LONG-TERM INVESTMENTS 
   
The fair value of the Company’s derivative instruments (see Note 8), which are comprised of gold, silver, lead and zinc contracts, are $0.6 million and $2.1 million as of September 30, 2008 and December 31, 2007, respectively. The cost basis of these instruments at September 30, 2008 and December 31, 2007 is $nil and, as a result, the Company has recorded unrealized gains of $0.6 million and $2.1 million as of September 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. During the three and nine months ended September 30, 2008, there were no purchases, sales or settlements of these ARS. The Company has recorded an other than temporary impairment on its ARS, within foreign exchange (loss) gain and other in the consolidated statement of operations, of $0.1 million and $0.3 million during the three and nine months ended September 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 September 30, 2008 are $1.2 million. See Note 15(b). The ARS are pledged as collateral for a $0.9 million margin loan.

7.
INVENTORIES
 
Inventories consist of:
 
   
September 30,
2008
 
December 31,
2007
 
Concentrate inventory
 
$
377
 
$
341
 
Doré inventory
   
-
   
56
 
Stockpiled ore inventory
   
3,510
   
749
 
Materials and supplies
   
1,054
   
1,023
 
   
$
4,941
 
$
2,169
 

8.
CREDIT FACILITY AND DErIVATIVE CONTRACTS
 
On July 1, 2008, the Company entered into a $5.15 million extension of an existing credit facility (the “Credit Facility Extension”). The Credit Facility Extension, which was fully drawn on July 1, 2008, matures on June 30, 2009 and bears interest at LIBOR plus 2.0%, and is repayable in three quarterly payments beginning December 31, 2008 (see Note 18(a)). The lender received a $0.1 million arrangement fee and 650,000 common shares of the Company. The loan is secured by all of the assets of Montana Tunnels Mining, Inc. and the Black Fox property.

The Credit Facility Extension agreement required the Company to use proceeds from the loan as follows: (i) first, to make a down payment of $3.9 million (Cdn$4.0 million) for the purchase of the Stock Mill Complex (see Note 4) and the $0.1 million arrangement fee, and (ii) second, for general working capital purposes.

As a requirement of the Credit Facility Extension, the Company entered into certain option contracts to buy and sell 5,973 ounces of gold, 50,238 ounces of silver, 1,026 tonnes (approximately 2,260,000 pounds) of lead and 2,784 tonnes (approximately 6,140,000 pounds) of zinc, which equates to approximately 50% of Apollo’s share of expected metal production from the Montana Tunnels Mine in the fourth quarter of 2008 and the first quarter of 2009. The option contracts are in the form of a no premium collar (buy a put, sell a call) at the following prices:
13


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

8.            CREDIT FACILITY AND DERIVATIVE CONTRACTS (continued)

 
Put
Call
Gold
$800 per ounce
$1,075 per ounce
Silver
$16.25 per ounce
$18.80 per ounce
Lead
$0.775 per lb
$0.835 per lb
Zinc
$0.80 per lb
$0.943 per lb
     
The Company did not apply hedge accounting to this transaction. As a result, the Company accounts for these derivative instruments as investments and records the changes in unrealized gains and losses in the statement of income each period. The fair value of these derivatives is recorded as a current asset or current liability at each balance sheet date (see Note 6). See Note 18 (a) for information regarding the termination of a portion of these option contracts.

9.            SHARE CAPITAL

(a)           Shares issued in 2008
 
(i) Shares issued for services
 
On July 1, 2008, the Company issued 650,000 common shares of the Company valued at $0.4 million, or $0.54 per common share in connection with the $5.15 million Credit Facility Extension. See Note 8.
 
(ii) Units issued for cash and related compensation warrants
 
On July 24, 2008, the Company issued 40,806,500 equity units at a price of Cdn$0.50 per unit (US$0.495 per unit for purchasers residing in the United States), for total gross proceeds of $20.0 million (Cdn$20.2 million and US$0.2 million). Net proceeds to the Company, after agency fees and other expenses, were approximately $18.1 million (Cdn$18.6 million and US$0.2 million). Each unit is comprised of one common share and one-half of one common share purchase warrant, with each whole warrant (the “Unit Warrants”) exercisable into one common share at a price of Cdn$0.65 per share for 36 months, expiring on July 24, 2011. The Unit Warrants were fair valued at $2.7 million, using an option pricing model with the following assumptions: no dividends are paid, a volatility of the Company’s share price of 74%, an expected life of the warrants of three years, and an annual risk-free rate of 3.4%.

The net proceeds of the offering were used to fund the Company’s acquisition of the Stock Mill Complex (see Note 4), the development of the Black Fox Project and for working capital and general corporate purposes.

The agents received the following compensation in consideration for their services: (1) a cash fee equal to Cdn$1.3 million or 6.5% of the gross proceeds of the offering; and (2) a non-transferable option to acquire up to 2,448,390 units (the “Agents’ Units”) at a price per unit of Cdn$0.60, which number of units is equal to 6% of the total number of units sold in the offering (the “Agents’ Compensation Option”). The Agents’ Compensation Option will be exercisable from January 20, 2009 to July 24, 2012. Each Agents’ Unit will be comprised of one common share and one-half of one common share purchase warrant (“Agents’ Warrant”), each whole Agents’ Warrant included in the Agents’ Unit entitling the Agent holding such warrant to purchase one common share of the Company at an exercise price of
 
14


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

Cdn$0.78 from January 20, 2009 to July 24, 2012. The Agents’ Units were fair valued at $0.4 million, using an option pricing model with the following assumptions: no dividends are paid, a volatility of the Company’s share price of 74%, an expected life of the warrants of four years, and an annual risk-free rate of 3.4%.
 
(iii) Flow-through common shares issued for cash and related compensation warrants
 
On August 21, 2008, the Company completed an offering of 17,000,000 flow-through common shares of the Company at Cdn$0.50 per common share for net proceeds of $7.5 million (Cdn$7.8 million) and fair value of broker compensation warrants of $0.1 million. In connection with this offering, 1,020,000 broker compensation warrants were issued to the agent. Each broker compensation warrant is immediately exercisable at Cdn$0.50 per common share of the Company and expires on February 21, 2010. The broker compensation warrants were fair valued using an option pricing model with the following assumptions: no dividends are paid, a volatility of the Company’s share price of 58%, an expected life of the warrants of 1.5 years, and an annual risk-free rate of 2.8%.

(iv) Warrants exercised and debentures converted
 
For the nine months ended September 30, 2008, there were (i) 3,271,834 shares issued upon exercise of warrants for proceeds of $1.4 million and (ii) 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 September 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 (1)
March 31, 2008
5,250
Cdn$ 1.15
October 30, 2008 (1)
October 31, 2007
372,727
Cdn$ 0.55
April 30, 2009
August 21, 2008
1,020,000
Cdn$ 0.50
February 21, 2010
July 24, 2008
20,403,250
Cdn$ 0.65
July 24, 2011
 
22,912,338
   
 
49,524,481
   
 
(1) Expired unexercised on October 30, 2008

In addition, 2,448,390 Agents’ Units are outstanding which were issued on July 24, 2008. Each Agents’ Unit is exercisable at Cdn$0.60 for four years into one common share of the Company and one- half of one Agents’ Warrant, with each whole Agents’ Warrant exercisable into one common share of the Company at Cdn$0.78. The Agent’s Units and Agents’ Warrants expire on July 24, 2012.
 
15


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

(c)           Options
 
A summary of information concerning outstanding stock options at September 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
   
2,173,738
   
0.66
 
Options forfeited
   
(174,932
)
 
0.61
 
Balance, September 30, 2008
   
8,226,309
 
$
0.77
 

The following table summarizes information concerning outstanding and exercisable stock options at September 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
   
2.9
   
100,000
 
$
0.46
 
677,300
 
 
February 18, 2013
   
2.24
   
4.4
   
677,300
   
2.24
 
260,000
   
March 10, 2014
   
2.05
   
5.4
   
260,000
   
2.05
 
25,000
   
May 19, 2014
   
1.44
   
5.6
   
25,000
   
1.44
 
20,200
 
 
August 10, 2014
   
0.95
   
5.9
   
20,200
   
0.95
 
1,160,500
   
March 10, 2015
   
0.65
   
6.4
   
1,160,500
   
0.65
 
100,000
   
August 4, 2015
   
0.27
   
6.8
   
100,000
   
0.27
 
300,000
   
December 12, 2015
   
0.20
   
7.2
   
300,000
   
0.20
 
125,000
   
March 28, 2016
   
0.65
   
7.5
   
125,000
   
0.65
 
200,000
   
May 23, 2016
   
0.53
   
7.7
   
200,000
   
0.53
 
108,000
   
August 10, 2016
   
0.48
   
7.9
   
108,000
   
0.48
 
40,000
   
November 9, 2016
   
0.32
   
8.1
   
20,000
   
0.32
 
2,940,246
   
February 6, 2017
   
0.57
   
8.4
   
1,470,123
   
0.57
 
49,825
   
August 13, 2017
   
0.46
   
8.9
   
24,913
   
0.46
 
2,098,988
   
March 27, 2018
   
0.66
   
9.5
   
-
   
-
 
21,250
   
August 12, 2018
   
0.37
   
9.9
   
-
   
-
 
8,226,309
       
$
0.77
   
7.8
   
4,591,036
 
$
0.89
 

(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:
16


APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Nine month period ended September 30, 2008
(Stated in U.S. dollars; tabular amounts in thousands except share and per share data)
(Unaudited)
 
9.            SHARE CAPITAL (continued)
 
   
Nine months ended September 30,
 
   
2008
 
2007
 
Risk-free interest rate
   
2.9
%
 
4.1
%
Dividend yield
   
0
%
 
0
%
Volatility
   
73
%
 
71
%
Expected life in years
   
6
   
6
 
Weighted average grant-date fair value of stock options
 
$
0.44
 
$
0.37
 

10.          INTEREST EXPENSE
 
Interest expense consists of:
 
   
Three months ended
September 30,
 
Nine months ended
September 30,
 
   
2008
 
2007
 
2008
 
2007
 
Accretion on convertible debentures
 
$
1,017
 
$
1,328
 
$
2,787
 
$
3,328
 
Interest related to Montana Tunnels joint venture agreement (Note 5)
   
1
   
144
   
102
   
593
 
Capital leases and other
   
125
   
112
   
423
   
276
 
   
$
1,143
 
$
1,584
 
$
3,312
 
$
4,197
 

11.          INCOME TAXES
 
The Company recorded $0.03 million and $0.10 million in income tax expense for the three and nine months ended September 30, 2008, respectively, 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 recorded a $0.3 million recovery for income taxes for the three and nine months ended September 30, 2007 in connection with flow-through units issued in October 2006.
 
12.          EARNINGS (LOSS) PER SHARE
 
Basic earnings (loss) 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 (loss) used in determining earnings (loss) per share are presented below.
 
17


APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Nine month period ended September 30, 2008
(Stated in U.S. dollars; tabular amounts in thousands except share and per share data)
(Unaudited)
 
12.           EARNINGS (LOSS) PER SHARE (continued)
 
   
Three months ended
September 30,
 
Nine months ended
September 30,
 
   
2008
 
2007
 
2008
 
2007
 
Net income (loss)
 
$
548
 
$
2,117
 
$
2,873
 
$
(94
)
Weighted average number of shares, basic
   
199,747,625
   
143,922,308
   
173,373,528
   
143,358,591
 
Dilutive securities:
                         
Options
   
166,106
   
1,048,244
   
284,577
   
-
 
Warrants
   
-
   
231,453
   
1,394,042
   
-
 
Weighted average number of shares, diluted
   
199,913,731
   
145,202,005
   
175,052,147
   
143,358,591
 
Basic and diluted earnings (loss) per share
 
$
0.00
 
$
0.01
 
$
0.02
 
$
(0.00
)
                           
Option and warrants outstanding but not included in computation of diluted weighted average number of shares (“OWNI”) because the strike prices exceeded the average price of the common shares
   
59,815,346
   
36,343,852
   
31,847,962
   
36,235,852
 
Average exercise price of OWNI
 
$
0.60
 
$
0.58
 
$
0.69
 
$
0.58
 
 
Due to a net loss for the nine months ended September 30, 2007, 1.3 million warrants and stock options were excluded from the EPS computation because their effect would have been anti-dilutive. Also, for the three and nine months ended September 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 nine months ended September 30, 2007, outstanding convertible debentures that were convertible at an average of $0.60 per share into 28.4 million common shares were not included in the EPS computation because their effect would have been anti-dilutive.
 
13.         COMMITMENTS AND CONTINGENCIES
 
(a)          Commitments for the development of Black Fox
 
As of September 30, 2008, the Company had made certain commitments to lease mining equipment for use at Black Fox and to make certain expenditures for improvements to the milling process at the Stock Mill Complex as follows:
 
Commitments to lease mining equipment
 
$
8,679
 
         
Commitments for expenditures to make improvements to the mill at the Stock Mill Complex
 
$
2,179
 
Less: Deposits made on commitments for expenditures
   
(1,063
)
   
$
1,116
 
 
See Note 18(b) for additional commitments made subsequent to September 30, 2008.
 
(b)          Black Fox bonding
 
In order to proceed with open pit mining at the Black Fox Project in the fourth quarter of 2008, the Company committed to post Cdn$6.8 million on bond, in addition to the Cdn$0.6 million already posted in previous years, for the benefit of the Ontario Ministry of Northern Development and Mines to cover estimated costs of site reclamation. As of September 30, 2008, Cdn$1.0 million had been placed on
 
18


APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Nine month period ended September 30, 2008
(Stated in U.S. dollars; tabular amounts in thousands except share and per share data)
(Unaudited)
 
13.          COMMITMENTS AND CONTINGENCIES (continued)

bond, included in restricted certificates of deposit, and the remaining amount of Cdn$5.8 million is scheduled to be posted as follows: (1) Cdn$2.0 million in November 2008, (2) Cdn$2.0 million in February 2009 and (3) Cdn$1.8 million in May 2009.
 
(c)            Stock Mill Complex bonding
 
Upon acquisition of the Stock Mill Complex (Note 4), the Company committed to replace the Cdn$1.2 million bond posted by St Andrew by July 28, 2009. When the existing bond is replaced, the cash on deposit will be released to Apollo and Apollo will be required to pay Cdn$1.2 million to St Andrew.
 
14.          SUPPLEMENTAL CASH FLOW INFORMATION
 
(a)           Net changes in non-cash operating working capital items are:
 
   
Three months ended
September 30,
 
Nine months ended
September 30,
 
   
2008
 
2007
 
2008
 
2007
 
(Increase) decrease in:
                 
Accounts receivable and other
 
$
(271
)
$
23
 
$
(710
)
$
(1,576
)
Prepaids
   
(112
)
 
39
   
311
   
240
 
Inventories
   
(1,136
)
 
50
   
(2,772
)
 
(815
)
Increase (decrease) in:
                         
Accounts payable
   
(867
)
 
791
   
857
   
1,197
 
Accrued liabilities
   
29
   
(245
)
 
(1,133
)
 
1,120
 
Property and mining taxes payable
   
12
   
139
   
323
   
267
 
   
$
(2,345
)
$
797
 
$
(3,124
)
$
433
 

(b)           Components of cash and cash equivalents are:
 
   
Sept. 30, 2008
 
Sept. 30, 2007
 
Cash
 
$
6,577
 
$
227
 
Cash equivalents
   
1,035
   
6,410
 
Cash and cash equivalents
 
$
7,612
 
$
6,637
 

Cash equivalents consist of term deposits with original maturity dates not in excess of 90 days.
 
(c)          Non-cash transactions
 
During the three and nine months ended September 30, 2008, the Company (i) recorded an increase of $1.6 million in property, plant and equipment related to the acquisition of the Stock Mill Complex and an increase in equity of $0.4 million for the issuance of common shares of the Company valued at $0.4 million for services rendered in connection with acquisition financing costs and a $1.2 million increase in accrued site closure costs for the assumption of a reclamation liability associated with the Stock Mill Complex, (ii) recorded a $0.5 million increase in its reclamation liability due to a change in estimates for the Montana Tunnels mine and a corresponding increase in the reclamation asset recorded in
 
19


APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Nine month period ended September 30, 2008
(Stated in U.S. dollars; tabular amounts in thousands except share and per share data)
(Unaudited)
 
14.           SUPPLEMENTAL CASH FLOW INFORMATION (continued)

property, plant and equipment and (iii) financed a portion of its insurance program included in prepaids by issuing notes payable of $0.4 million.
 
During the nine months ended September 30, 2008, Series 2007-A convertible debentures with a face value of $0.9 million were converted into common shares of the Company and the Company recorded a reduction of $0.6 million in convertible debentures and a corresponding increase in equity. Also, during the nine months ended September 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 nine months ended September 30, 2007, (i) Series 2007-A convertible debentures with a face value of $0.2 million were converted and the Company recorded a reduction of $0.1 million in convertible debentures and a corresponding increase in equity; (ii) property, plant and equipment totaling $0.5 million was acquired via issuance of common shares of the Company and (iii) the Company financed a portion of its insurance program included in prepaids by issuing notes payable of $0.7 million.
 
During the nine months ended September 30, 2007, property, plant and equipment totaling $0.3 million was acquired via issuance of a promissory note. Also, during the nine months ended September 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.
 
15.          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
 
20


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

instruments and auction rate securities are placed with high-credit quality financial institutions. The Company sells its metal production exclusively to large international organizations with strong credit ratings. 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. 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 6 related to ARS, the Company has not recorded an impairment on any of the financial assets of the Company during the nine month period ended September 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 at the time. Auction rate securities are no longer allowed to be purchased under the Company’s current 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. 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’s ARS experience further downgrades, 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 financial condition.

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 not 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, the Company may be required to conduct equity issues or obtain project debt financing.

Trade payables and accrued liabilities are paid in the normal course of business generally 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 September 30, 2008, the Company is in compliance with its debt covenants. As of September 30, 2008, the outstanding principal balance of the Series 2007-A convertible debentures (“2007 Debentures”) is $7.4 million. The 2007 Debentures are convertible at $0.50 per share which is considerably higher than the price of the Company’s common shares on the American Stock Exchange on November 10, 2008 of $0.15. Additionally, as of November 10, 2008, the Company has committed to expend approximately $32 million for the development of Black Fox and will be required to repay the outstanding balance of the

21


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

Credit Facility Extension of $2.8 million (Notes 8 and 18(a)) due in installments in March 2009 and June 2009. Based on the current cash balance and expected cash flows of the Montana Tunnels joint venture, the Company will not have sufficient funds to (1) repay the full amount of the $7.4 million principal amount of the Debentures and interest due of $1.3 million on February 23, 2009, (2) fund the commitments for the development of Black Fox, (3) repay the Credit Facility Extension and (4) fund corporate expenditures. Therefore, the Company is currently considering its financing options to meet the obligations listed above which include debt financing, capital leasing arrangements, additional equity issuances and refinancing the Series 2007-A convertible debentures. The Company’s financing options may be significantly affected by the current volatile economic financial market conditions which could significantly increase costs of financing or the Company may be unable to issue debt or equity securities at all.

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 September 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
 
$
6,672
 
$
-
 
$
-
 
$
-
 
$
6,672
 
$
6,645
 
Notes payable and other current debt
   
7,506
   
70
   
-
   
-
   
7,576
   
7,776
 
Convertible debentures
   
7,438
   
-
   
-
   
-
   
7,438
   
8,380
 
Interest on convertible debentures
   
1,339
   
-
   
-
   
-
   
1,339
   
2,711
 
Operating lease obligations
   
86
   
61
   
-
   
-
   
147
   
183
 
Capital expenditures
   
9,795
   
-
   
-
   
-
   
9,795
   
21
 
   
$
32,836
 
$
131
 
$
-
 
$
-
 
$
32,967
 
$
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 nine months ended September 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 $0.3 and $0.6 million, respectively, for a 10% increase or decrease in the Canadian dollar.

(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 $4.8 million at September 30, 2008, (2) the Series 2007-A convertible debentures (“the Debentures”) which have an aggregate $7.4 million face value at September 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 auction rate securities (Note 6). The credit facility and the margin loan both have a floating
 
22


APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Nine month period ended September 30, 2008
(Stated in U.S. dollars; tabular amounts in thousands except share and per share data)
(Unaudited)
 
15.          FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
 
interest rate based on LIBOR plus 2.0% for the credit facility and plus 1.25% for the margin loan, 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 nine months ended September 30, 2008 on its outstanding borrowings was 4.5% and 8.5%, respectively.

For the three and nine months ended September 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 and future and forward contracts, but generally does not enter into such arrangements except as required to obtain favorable financing terms.
 
On July 1, 2008, in order to meet certain loan criteria of the credit facility mentioned in (e) above, the Company entered into certain option contracts. See Note 8 for details.

(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.

16.          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 5). The Montana Tunnels assets and liabilities and results of operations of the Montana Tunnels joint venture disclosed in Note 5 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.

23


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

Amounts as at September 30, 2008 are as follows:

   
Montana
Tunnels
 
Black
Fox
 
Corporate
and Other
 
Total
 
Cash and cash equivalents
 
$
1,327
 
$
341
 
$
5,944
 
$
7,612
 
Other non-cash current assets
   
5,964
   
376
   
3,362
   
9,702
 
     
7,291
   
717
   
9,306
   
17,314
 
Long-term investments
   
-
   
-
   
1,215
   
1,215
 
Property, plant and equipment
   
8,917
   
63,829
   
3,063
   
75,809
 
Deferred stripping costs
   
1,958
   
-
   
-
   
1,958
 
Restricted certificates of deposit
   
8,028
   
1,545
   
8
   
9,581
 
Other long-term assets
   
-
   
98
   
1,063
   
1,161
 
Total assets
 
$
26,194
 
$
66,189
 
$
14,655
 
$
107,038
 
                           
Current liabilities
 
$
5,304
 
$
1,102
 
$
14,500
 
$
20,906
 
Notes payable and other long-term liabilities
   
70
   
-
   
309
   
379
 
Accrued site closure costs
   
9,911
   
1,678
   
-
   
11,589
 
Deferred gain
   
1,027
   
-
   
-
   
1,027
 
Total liabilities
 
$
16,312
 
$
2,780
 
$
14,809
 
$
33,901
 

Amounts as at December 31, 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
   
-
   
-