Unassociated Document
 


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

FORM 10-Q

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

For the quarterly period ended March 31, 2009

OR

o           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 þ       No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes £       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,” “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 May 8, 2009, there were 233,811,195 common shares of Apollo Gold Corporation outstanding.
 


 
 
 

 
 
TABLE OF CONTENTS
 
       
Page
   
   
         
     
     
     
     
     
       
 
   
   
   
   
   
   
   
   
   
   
 
   
Certification of CEO Pursuant to Section 302
 
 
   
Certification of CFO Pursuant to Section 302
 
 
   
Certification of CEO and CFO Pursuant to Section 906
 
 
 
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 expenditure, 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 the development of and production at the Black Fox project including, without limitation, the timing of the development of the underground mine at Black Fox;
 
·
estimates of future production and the timing of gold pours at Black Fox;
 
·
contemplated drawdowns under the Black Fox project finance facility and our ability to meet our repayment obligations under the Black Fox project finance facility;
 
2

 
 
·
our ability to finance exploration at Huizopa;
 
·
our ability to repay the convertible debentures issued to RAB Special Situations (Master) Fund Limited (“RAB”) due February 23, 2010;
 
·
the future effect of recent issuances and registration for immediate resale of a significant number of common share purchase warrants on our share price;
 
·
future financing of projects, including the financing required for the M Pit expansion at Montana Tunnels;
 
·
costs associated with placing the Montana Tunnels mine and mill on care and maintenance and the decision to undertake the M Pit expansion;
 
·
liquidity to support operations and debt repayment;
 
·
completion of a Canadian National Instrument 43-101 for the Huizopa project;
 
·
the establishment and estimates of mineral reserves and resources;
 
·
daily production, mineral recovery rates and mill throughput rates;
 
·
total production costs;
 
·
cash operating costs;
 
·
total cash costs;
 
·
grade of ore mined and milled from Black Fox and cash flows therefrom;
 
·
anticipated expenditures for development, exploration, and corporate overhead;
 
·
timing and issue of permits, including permits necessary to conduct phase II of open pit mining at Black Fox;
 
·
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 including the LIBOR rate; timing and amount of production; unanticipated changes in grade of ore; unanticipated recovery or production problems; changes in operating costs; operational problems at our mining properties; metallurgy, processing, access, availability of materials, equipment, supplies and water; determination of reserves; costs and timing of development of new reserves; results of current and future exploration and development activities; 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 at reasonable rates or at all; and the factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2008 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, 2008 included in our Annual Report on Form 10-K.  Certain prior period figures have been reclassified to conform to the current period presentation.  In particular, for the three months ended March 31, 2008, $0.5 million that was recorded as cash inflows from investing activities has been reclassified to operating activities in connection with proceeds from the sale of derivative contracts.
 
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.
 
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, 2008 filed with the Securities and Exchange Commission on March 27, 2009.

 
4

 

APOLLO GOLD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars)
(Unaudited)

   
March 31,
2009
   
December 31,
 2008
 
ASSETS
     
CURRENT
     
Cash and cash equivalents
  $ 5,192     $ 3,097  
Derivative instruments (Note 5)
          552  
Restricted cash
    1,477       10,000  
Accounts receivable and other
    3,478       3,134  
Prepaids
    1,120       546  
Inventories (Note 6)
    1,729       4,154  
Total current assets
    12,996       21,483  
Long-term investments (Note 7)
    1,036       1,081  
Property, plant and equipment
    117,975       95,881  
Deferred stripping costs
    184       1,052  
Restricted certificates of deposit
    15,473       12,030  
Other long-term assets
    103       103  
TOTAL ASSETS
  $ 147,767     $ 131,630  
LIABILITIES
               
CURRENT
               
Accounts payable
  $ 12,922     $ 13,827  
Accrued liabilities
    1,718       1,449  
Property and mining taxes payable
    1,089       1,146  
Derivative instruments (Note 5 and Note 8(b))
    3,600        
Current portion of debt (Note 8(a))
    24,001       20,636  
Convertible debentures (Note 9)
    3,827       3,356  
Total current liabilities
    47,157       40,414  
Accrued long-term liabilities 
    323       316  
Derivative instruments (Note 5 and Note 8(b)) 
    14,266        
Debt (Note 8(a))
    12,501       1,012  
Convertible debentures
          4,571  
Accrued site closure costs
    11,569       10,563  
Future income tax liability
    362       447  
Deferred gain (Note 4)
    97       552  
TOTAL LIABILITIES
    86,275       57,875  
                 
Continuing operations (Note 1)
               
Commitments and contingencies (Note 14)
               
                 
SHAREHOLDERS’ EQUITY
               
Share capital (Note 10)
    191,562       188,927  
Equity component of convertible debentures
    584       1,987  
Debenture note warrants
          2,234  
Contributed surplus
    35,175       21,683  
Deficit
    (165,829 )     (141,076 )
TOTAL SHAREHOLDERS’ EQUITY
    61,492       73,755  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 147,767     $ 131,630  

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 March 31,
 
   
2009
   
2008
 
Revenue from sale of minerals
  $ 7,370     $ 15,902  
Operating expenses
               
Direct operating costs
    8,403       9,061  
Depreciation and amortization
    311       404  
General and administrative expenses
    932       929  
Accretion expense – accrued site closure costs
    181       177  
Amortization of deferred gain
    (455 )     (555 )
Exploration and business development
    227       756  
      9,599       10,772  
Operating (loss) income
    (2,229 )     5,130  
Other income (expenses)
               
Interest income
    47       126  
Interest expense (Note 11)
    (1,027 )     (1,148 )
Debt transaction costs (Note 8(a) and (c))
    (1,811 )      
Loss on modification of convertible debentures (Note 9)
    (1,969 )      
Realized gains on derivative contracts
    368       518  
Unrealized losses on derivative contracts
    (18,418 )     (855 )
Foreign exchange loss and other
    97       (117 )
(Loss) income before income taxes
    (24,942 )     3,654  
Income taxes (Note 12)
    189        
Net (loss) income and comprehensive (loss) income for the period
  $ (24,753 )   $ 3,654  
                 
Basic and diluted net (loss) income per share (Note 13)
  $ (0.11 )   $ 0.02  
                 
Basic weighted-average number of shares outstanding
    226,459       159,336  
Diluted weighted-average number of shares outstanding (Note 13)
    226,459       165,023  
 
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)

                Equity                          
                Component of     Debenture                    
    Number of     Share     Convertible     Note     Contributed              
   
Shares
   
Capital
   
Debentures
   
Warrants
   
Surplus
   
Deficit
   
Total
 
(U.S. dollars and shares in thousands)
 
Balance, December 31, 2007
    156,248     $ 166,424     $ 2,238     $ 2,292     $ 14,591     $ (142,672 )   $ 42,873  
Shares issued for services
    650       351                               351  
Units issued for cash and related compensation warrants
    40,806       14,885                   3,247             18,132  
Flow-through shares issued for cash and related compensation warrants
    20,000       8,028                   104             8,132  
Warrants issued for services
                            2,907             2,907  
Warrants exercised
    3,272       1,463             (58 )     (1 )           1,404  
Conversion of debentures
    1,884       834       (251 )                       583  
Income tax benefits renounced in connection with issuance of flow-through shares
          (3,058 )                             (3,058 )
Stock-based compensation
                            835             835  
Net income and comprehensive income
                                  1,596       1,596  
Balance, December 31, 2008
    222,860       188,927       1,987       2,234       21,683       (141,076 )     73,755  
                                                         
Shares issued for services (Note 10(a)(ii and iii))
    5,173       1,553                               1,553  
Shares issued in settlement of interest (Note 9)
    2,445       772                               772  
Warrants issued for services (Notes 8(a) and 10(a)(ii and iii))
                            9,089             9,089  
Warrants exercised (Note 10(a)(i))
    2,833       499                               499  
Expiration of note warrants
                      (2,234 )     2,234              
Redemption of debentures
                (1,987 )           1,987              
Equity component of convertible debentures (Note 9)
                584                         584  
Income tax benefits renounced in connection with issuance of flow-through shares
          (189 )                             (189 )
Stock-based compensation
                            182             182  
Net loss and comprehensive loss
                                  (24,753 )     (24,753 )
Balance, March 31, 2009
    233,311     $ 191,562     $ 584     $     $ 35,175     $ (165,829 )   $ 61,492  
 
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 March 31,
 
   
2009
   
2008
 
Operating activities
           
Net (loss) income for the period
  $ (24,753 )   $ 3,654  
Items not affecting cash:
               
Depreciation and amortization
    311       404  
Amortization of deferred stripping costs
    868       1,058  
Stock-based compensation
    182       142  
Shares and warrants issued for services and payment of interest
    4,020        
Accretion expense – accrued site closure costs
    181       177  
Accretion expense – convertible debentures
    970       893  
Interest paid on convertible debentures
    (567 )     (1,016 )
Amortization of deferred gain
    (455 )     (555 )
Unrealized losses on derivative instruments
    18,418       855  
Other
    38       55  
Income taxes
    (189 )      
Net change in non-cash operating working capital items (Note 15)
    2,532       (4,247 )
Net cash provided by operating activities
    1,556       1,420  
                 
Investing activities
               
Property, plant and equipment expenditures
    (21,866 )     (1,256 )
Restricted cash and certificates of deposit
    5,080       (576 )
Net cash used in investing activities
    (16,786 )     (1,832 )
                 
Financing activities
               
Proceeds from exercise of warrants
    499       1,404  
Proceeds from debt
    38,034        
Repayments of debt
    (21,204 )     (2,962 )
Net cash provided by (used in) financing activities
    17,329       (1,558 )
                 
Effect of exchange rate changes on cash
    (4 )     (14 )
                 
Net increase (decrease) in cash and cash equivalents
    2,095       (1,984 )
Cash and cash equivalents, beginning of period
    3,097       4,852  
Cash and cash equivalents, end of period
  $ 5,192     $ 2,868  
                 
SUPPLEMENTAL CASH FLOW INFORMATION
               
Interest paid
  $ 925     $ 1,388  
Income taxes paid
  $ 25     $  
 
See Note 15 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
Three month period ended March 31, 2009
(Stated in U.S. dollars, unless indicated otherwise; 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 4).  The Company’s ability to continue as a going concern is dependent on its ability to continue to issue debt and/or equity securities, and/or generate cash flow from the Black Fox mine.
 
As of March 31, 2009, the Company has a working capital deficiency of $34.2 million and an accumulated deficit of $165.8 million.  In addition, as at March 31, 2009, the Company held cash and cash equivalents of $5.2 million and had current debt obligations of $27.8 million consisting of (1) the current portion of the project financing facility of $19.7 million due in quarterly installments beginning on September 30, 2009 (Note 8(a)), (2) the current portion of the outstanding principal of the Series 2007-A convertible debentures of $3.8 million due in February 2010 (Note 9), and (3) $4.3 million for other current debt.  Additionally, as of March 31, 2009, the Company has committed to make capital expenditures of approximately $14.0 million for the development of Black Fox (Note 14(a)) and has committed to post $5.1 million (Cdn$6.4 million) cash for environmental bonding at Black Fox (Note 14(b)).  Based on the current cash balance, projected cash flows from Black Fox, which the Company expects to commence production of gold in the second quarter of 2009, and amounts available for drawdown under the $70 million financing facility, the Company expects to have sufficient funds to (1) repay the $27.8 million current debt obligations listed above, (2) fund the capital commitments for the development of Black Fox, and (3) fund corporate expenditures.

If the Company is unable to utilize all of the $70.0 million financing facility or generate sufficient cash flow from the activities listed above or is otherwise unable to generate cash flow from Black Fox, 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.  Apollo owns Black Fox, an open pit mine and mill located near Matheson in the Province of Ontario, Canada (the “Black Fox Project”).  Mining of ores at the Black Fox Project began in March 2009 and milling operations commenced in April 2009.
 
The Company is the operator of the Montana Tunnels mine, which is a 50% joint venture with Elkhorn Tunnels, LLC (“Elkhorn”).  The Montana Tunnels mine is an open pit mine and mill located in the State of Montana that produced gold dore and lead-gold and zinc-gold concentrates.  As of April 30, 2009, the Montana Tunnels mine and mill were placed under care and maintenance.  The Company also owns the Diamond Hill mine, which is also located in the State of Montana and is currently under care and maintenance.
 
Apollo also owns Mexican subsidiaries which own concessions at the Huizopa exploration project (the “Huizopa Project”), located in the Sierra Madres in Chihuahua, Mexico.  The Huizopa Project is subject to an 80% Apollo/20% Mineras Coronado joint venture agreement.
 
9

 
APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Three month period ended March 31, 2009
(Stated in U.S. dollars, unless indicated otherwise; tabular amounts in thousands except share and per share data)
(Unaudited)
 
3. 
SIGNIFICANT ACCOUNTING POLICIES
 
(a)           These unaudited consolidated interim financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”) and except as described in Note 18, 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, 2008, 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, 2008.
 
In the opinion of management, all adjustments considered necessary for fair presentation have been included in these financial statements.  Interim results are not necessarily indicative of the results expected for the fiscal year.  Certain prior period figures have been reclassified to conform to the current period presentation.  In particular, for the three months ended March 31, 2008, $0.5 million that was recorded as cash inflows from investing activities has been reclassified to operating activities in connection with proceeds from the sale of derivative contracts.
 
(b)
Changes in accounting policies
 
Effective January 1, 2009, the Company adopted Handbook Section 3064, Goodwill and Intangible Assets, which replaces Section 3062, and establishes revised standards for recognition, measurement, presentation and disclosure of goodwill and intangible assets.  Concurrent with the introduction of this standard, the CICA restricted the application of EIC 27, Revenues and Expenditures in the Pre-operating Period (“EIC 27”).  The adoption of Section 3064 on January 1, 2009, did not have a material impact on the Company’s financial condition, operating results.

4.
MONTANA TUNNELS JOINT VENTURE
 
On July 28, 2006, Apollo entered into a JV Agreement with Elkhorn in respect of the Montana Tunnels mine (the “Mine”).  Elkhorn contributed $13 million in return for a 50% interest in the Mine and Montana Tunnels Mining, Inc. (“MTMI”) contributed all of its assets and liabilities related to the Mine into the joint venture for a 50% interest in the Mine.
 
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.
 
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 $0.5 million and $0.6 million for the three months ended March 31, 2009 and 2008, respectively.
 
10

 
APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Three month period ended March 31, 2009
(Stated in U.S. dollars, unless indicated otherwise; tabular amounts in thousands except share and per share data)
(Unaudited)
 
4. 
MONTANA TUNNELS JOINT VENTURE (continued)

Apollo’s 50% share of the assets and liabilities of the Montana Tunnels joint venture is as follows:

   
March 31,
2009
   
December 31,
 2008
 
Cash and cash equivalents
  $ 547     $ 12  
Other non-cash current assets
    3,114       5,323  
      3,661       5,335  
Property, plant and equipment
    7,325       7,647  
Deferred stripping costs
    184       1,052  
Restricted certificates of deposit
    7,593       7,587  
Total assets
  $ 18,763     $ 21,621  
                 
Current liabilities
  $ 3,625     $ 4,361  
Accrued site closure costs
    8,673       8,503  
Total liabilities
  $ 12,298     $ 12,864  

Apollo’s 50% share of the results of operations and cash flows of the Montana Tunnels joint venture for the three months ended March 31, 2009 and 2008 is as follows:

   
March 31,
2009
   
March 31,
2008
 
Revenue from sale of minerals
  $ 7,370     $ 15,902  
Direct operating costs
    8,402       9,059  
Depreciation and amortization
    300       379  
Accretion expense – accrued site closure costs
    170       165  
      8,872       9,603  
Operating (loss) income
    (1,502 )     6,299  
Interest income
    7       52  
Interest expense
    (29 )     (112 )
(Loss) income before income taxes
  $ (1,524 )   $ 6,239  
                 
Net cash provided by operating activities
  $ 1,207     $ 4,824  
Net cash used in investing activities
  $ (7 )   $ (677 )
Net cash used in (provided by) financing activities
  $ (667 )   $ (4,139 )

Cash used in financing activities includes cash distributed to the joint venture partners, Apollo and Elkhorn.  These cash flows eliminate upon consolidation.
 
11

 
APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Three month period ended March 31, 2009
(Stated in U.S. dollars, unless indicated otherwise; tabular amounts in thousands except share and per share data)
(Unaudited)
 
5.
DERIVATIVE INSTRUMENTS
 
Fair value of derivative instruments consists of:
 
   
March 31, 2009
   
December 31, 2008
 
   
Cost
Basis
   
Unrealized
Gain (Loss)
   
Fair
Value
   
Cost
Basis
   
Unrealized
Gain (Loss)
   
Fair
Value
 
Assets
                                   
Gold, silver and lead contracts
  $     $     $     $     $ 552     $ 552  
Liabilities
                                               
Gold forward sales contracts (Note 8(b))
  $     $ (16,106 )   $ (16,106 )   $     $     $  
Canadian dollar purchase contracts (Note 8(b))
          (1,760 )     (1,760 )                  
            (17,866 )     (17,866 )                  
Current portion
          (3,600 )     (3,600 )                  
    $     $ (14,266 )   $ (14,266 )   $     $     $  

6.
INVENTORIES
 
Inventories consist of:
 
   
March 31,
2009
   
December 31,
 2008
 
Concentrate inventory
  $ 386     $ 373  
Doré inventory
          21  
Stockpiled ore inventory
    699       2,983  
Materials and supplies
    644       777  
    $ 1,729     $ 4,154  

Inventories recognized as an expense in direct operating costs during the three months ended March 31, 2009 and 2008 were $6.5 million and $6.4 million, respectively.  Expenses related to the write down of the carrying value of inventories to net realizable value was $1.0 million and $nil for the three months ended March 31, 2009 and 2008, respectively.

7.
LONG-TERM INVESTMENTS
 
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, within foreign exchange loss and other in the consolidated statement of operations, of $0.05 million and $0.10 million for the three months ended March 31, 2009 and 2008, respectively, and as such, no amounts have been recorded in other comprehensive income.  The adjusted cost basis and fair value of ARS at March 31, 2009 and December 31, 2008 are $1.0 million and $1.1 million, respectively. See Note 16(g).  The ARS are pledged as collateral for a $0.9 million margin loan.
 
12

 
APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Three month period ended March 31, 2009
(Stated in U.S. dollars, unless indicated otherwise; tabular amounts in thousands except share and per share data)
(Unaudited)
 
8.
BLACK FOX PROJECT FINANCING FACILITY
 
(a)
Financing Agreement
 
On February 20, 2009, the Company entered into a $70 million project financing agreement (the “Project Facility”) with two banks (the “Banks”) relating to the Black Fox Project.  As of March 31, 2009, the Company had borrowed $41.5 million of the $70 million available under the Project Facility.  The Company used $15 million of the proceeds from the Project Facility to repay the $15.0 million bridge facility entered into on December 10, 2009 (the “Bridge Facility”) on February 23, 2009, and intends to draw the full $70 million and use $55 million to complete the development of the Black Fox Project and to provide for up to $7.0 million in agreed corporate expenditures.  As of May 8, 2009, the Company had borrowed $58.0 million of the Project Facility.

The terms of the Project Facility include:  (i) a commitment by the Banks to lend to the Company up to $70 million available for drawdown between February 20, 2009 and June 30, 2009; (ii) interest on the outstanding principal amount accruing at a rate equal to the London interbank offered rate (“LIBOR”) plus 7% per annum and payable in monthly installments commencing March 31, 2009 (interest is currently payable monthly but may be monthly, quarterly or such other period as may be agreed to by the Banks and the Company); (iii) scheduled repayment of the principal amount in unequal quarterly amounts commencing September 30, 2009 with the final repayment no later than March 31, 2013; and (iv) an arrangement fee of $3.5 million, which was paid by the Company to the Banks in cash on February 23, 2009.  The average monthly LIBOR rate charged to the Company during the three months ended March 31, 2009 was 0.5%.

Borrowings under the Project Facility are secured by substantially all of the Company’s assets, including the Black Fox Project, and the stock of its subsidiaries.  The Project Facility contains various financial and operational covenants that impose limitations on the Company which include, among other requirements, the following:  maintenance of certain financial coverage ratios and minimum project reserves, satisfaction of a minimum tangible net worth test, the operation of the Black Fox project in compliance with an agreed cash flow budgeting and operational model.  As at March 31, 2009, the Company was in compliance with the various financial and operational covenants of the Project Facility.

In consideration for providing the financing, the Banks were issued an aggregate of 34,836,111 warrants (“Banks’ Compensation Warrants”) at an exercise price of $0.201 (Cdn$0.252) per share (subject to anti-dilution adjustments) that expire on February 20, 2013.  The Banks’ Compensation Warrants are in addition to the 42,614,254 common share purchase warrants issued to the Banks in connection with the Bridge Facility.  The Banks’ Compensation Warrants were assigned a fair value of $7.4 million, using an option pricing model with the following assumptions:  no dividends are paid, a volatility of the Company’s share price of 81%, an expected life of the warrants of four years, and an annual risk-free rate of 1.9%.

The Company recorded a $10.9 million discount on the Project Facility, comprised of the $3.5 million arrangement fee and the $7.4 million fair value of the Banks’ Compensation Warrants, which discount will be accreted over the life of the loan using the effective interest method and charged to interest expense.  The accreted interest for the three months ended March 31, 2009 was capitalized to the Black Fox Project.  Additionally, the Company recorded $0.6 million of debt transactions costs that were expensed immediately.

The drawn amounts on the Project Facility as of March 31, 2009 are repayable by the Company as shown in the table below.  The amounts due on the Project Facility at March 31, 2009 are included within current and long-term portion of debt, which balance includes notes payable, leases payable and other debt.

 
13

 
 
APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Three month period ended March 31, 2009
(Stated in U.S. dollars, unless indicated otherwise; tabular amounts in thousands except share and per share data)
(Unaudited)
 
8. 
BLACK FOX PROJECT FINANCING FACILITY (continued)

2009 (9 months)
  $ 15,300  
2010
    13,800  
2011
    10,200  
2012
    2,200  
Amount drawn on facility
    41,500  
Less unamortized debt discount
    (10,675 )
Total of project facility included within debt on the balance sheet
    30,825  
Less current portion
    (19,700 )
Long-term portion
  $ 11,125  

(b)
Derivative Program in Connection with the Project Facility
 
As a part of the Project Facility, the Company and the Banks have entered into a derivative program covering both gold sales and part of the Company’s Canadian dollar operating costs (Note 5).  The Company has entered into a 250,430 ounce gold forward sales program which will be allocated across the four year term of the Project Facility.  The weighted average price of the sales program is $876 per ounce of gold.  The foreign exchange derivative program will be for the Canadian dollar equivalent of $58 million over a period covering the four year term of the Project Facility.  Settlements of gold forward sales contracts and Canadian dollar foreign exchange contracts are as follows (table not in thousands):

   
Gold Forward Sales Contracts
   
Canadian Dollar Foreign Exchange Contracts
 
Year of Settlement
 
Gold Ounces
   
Average
Contract
Price
   
Pay US
Dollars
 (Millions)
   
Exchange
Rate
(Cdn$/USD)
   
Purchase
Canadian Dollars
 (Millions)
 
2009
    53,484     $ 876.06     $ 8.1     $ 1.21     $ 9.8  
2010
    54,261     $ 876.06     $ 13.4     $ 1.21     $ 16.3  
2011
    54,704     $ 876.06     $ 16.1     $ 1.21     $ 19.5  
2012
    73,458     $ 876.06     $ 16.3     $ 1.21     $ 19.7  
2013
    14,523     $ 876.06     $ 4.1     $ 1.21     $ 4.9  
      250,430             $ 58.0             $ 70.2  

The Company did not apply hedge accounting to these transactions.  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 an asset or liability at each balance sheet date (see Note 5).

(c)
Additional Debt Transaction Costs Resulting from the Project Facility
 
Under the terms of a previously existing engagement letter between the Company and a certain financial advisory services firm (the “Firm”) pursuant to which the Firm agreed to provide financial advisory services to the Company, the Project Facility constituted an “alternative transaction” that required the Company to compensate the Firm by issuing to it 2,172,840 common shares and 2,567,901 common share purchase warrants exercisable for a two year period at an exercise price of $0.205 (Cdn$0.256).  In addition, the Company was required to compensate the Firm for related financial advisory services by issuing to it 1,000,000 common shares of the Company.  The Company recorded debt transaction costs of $1.2 million comprised of $0.8 million for the common shares issued to the Firm and $0.4 million for the warrants issued to the Firm.  The warrants were assigned a fair value of $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 80%, an expected life of the warrants of two years, and an annual risk-free rate of 1.2%.
 
14

 
APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Three month period ended March 31, 2009
(Stated in U.S. dollars, unless indicated otherwise; tabular amounts in thousands except share and per share data)
(Unaudited)
 
9.
CONVERTIBLE DEBENTURES
 
On February 19, 2009, the Company reached an agreement with the largest holder (the “Large Holder”) of its Series 2007-A convertible debentures (the “2007 Debentures”) to extend the maturity date of the $4.3 million principal amount of the 2007 Debentures held by the Large Holder from February 23, 2009 to February 23, 2010 (the “Extended Debentures”).

The Large Holder owned $4.3 million principal amount of the 2007 Debentures as of December 31, 2008 and February 23, 2009 (on which $0.8 million of interest was accrued as of February 23, 2009) and 8,580,000 of warrants issued in connection with the 2007 Debentures (the “2007 Debenture Warrants).  The Company and the Large Holder also agreed that the Company shall have the option to repay on February 23, 2009 the $0.8 million of accrued interest on the Large Holder’s 2007 Debentures in either common shares of the Company or cash.  Upon the election by the Company to pay the accrued interest in common shares, the number of common shares is calculated by dividing the accrued interest owed by the US dollar equivalent of the volume weighted average market price of the Company’s common shares as quoted on the Toronto Stock Exchange during the five-day period ending February 23, 2009.  In consideration for the foregoing, the Company agreed to (i) issue 2,000,000 common shares of the Company to the Large Holder on February 23, 2009 (the “Large Holder Shares”), (ii) extend the expiration date of the 8,580,000 2007 Debenture Warrants issued to the Large Holder to March 4, 2010 (the “Large Holder Warrants”) and (iii) reduce the exercise price of the Large Holder Warrants from $0.50 to $0.25.

On February 23, 2009, the Company repaid the $0.8 million of accrued interest on the Large Holder’s 2007 Debentures by issuing 2,444,765 common shares of the Company.

The terms and conditions of the $3.1 million aggregate principal amount of 2007 Debentures and 2007 Debenture Warrants not owned by the Large Holder were not amended and remained unchanged and principal and $0.6 million interest were repaid in cash on February 23, 2009.

The Company recorded a loss on modification of convertible debentures of $2.0 million comprised of $0.6 million for the Large Holder Shares, $1.3 million for the Large Holder Warrants and $0.1 million for administrative costs.  The Large Holder Warrants were assigned a fair value of $1.3 million, using an option pricing model with the following assumptions:  no dividends are paid, a volatility of the Company’s share price of 97%, an expected life of the warrants of one year, and an annual risk-free rate of 1.2%.

The Extended Debentures bear interest at a rate of 18% per annum and are convertible into common shares of the Company at $0.50.  The 2007 Debentures are convertible, at the option of the holder, at any time prior to maturity into common shares of the Company at a price of $0.50 per common share.  The Company has the option to force conversion of the 2007 Debentures under certain circumstances.  The Extended Debentures are classified as a compound financial instrument for accounting purposes.

On the date of extension of the Extended Debentures, the $4.3 million principal was allocated to the relative fair values of the Debentures ($3.7 million) and the holder’s option to convert the principal balance into common shares ($0.6 million) (the “Conversion Option”).  The $3.7 million fair value of the Extended Debentures is classified as a liability, while the $0.6 million allocated to the Conversion Option is classified as a separate component within shareholders’ equity.

Over their one-year term, the Extended Debentures are accreted to their face value through a periodic charge to accretion expense with a corresponding credit to the liability component.  The accretion expense is based on the effective interest method.  For the three months ended March 31, 2009, the Company recorded accretion expense of $0.1 million related to the Extended Debentures, which is included in interest expense.
 
15

 
APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Three month period ended March 31, 2009
(Stated in U.S. dollars, unless indicated otherwise; tabular amounts in thousands except share and per share data)
(Unaudited)
 
10.
SHARE CAPITAL
 
(a)
Shares issued in 2009
 
(i)           For the three months ended March 31, 2009, there were 2,833,333 shares issued upon exercise of warrants for proceeds of $0.5 million.  Each warrant exercised had an exercise price of $0.176.
 
(ii)           On February 20, 2009, the Company issued to a Firm (see Note 8(c)) 3,172,840 common shares of the Company and 2,567,901 common share purchase warrants exercisable for a two year period at an exercise price of $0.204 (Cdn$0.256) for services rendered.
 
(iii)           On February 23, 2009, the Company issued 2,444,765 common shares of the Company for payment of the $0.8 million of accrued interest on the Large Holder’s 2007 Debentures (see Note 9).  In addition, the Company issued 2,000,000 common shares of the Company in consideration for extending the 2007 Debentures and extended 8,580,000 warrants from February 23, 2009 to March 4, 2010 and reduced the exercise price of these warrants from $0.50 to $0.25.
 
(b)
Warrants
 
The following table summarizes outstanding warrants as at March 31, 2009:
 
Date Issued
 
Number of Warrants and Shares Issuable upon Exercise
   
Exercise Price
 
Expiry Date
         
Exercisable in US$
   
November 8, 2006
    4,666,666       0
.176 
 
November 8, 2009
November 8, 2006
    1,178,944       0
.50 
 
November 8, 2009
February 23, 2009
    8,580,000       0
.25 
 
March 4, 2010
      14,425,610              
           
Exercisable in Cdn$
   
October 31, 2007
    372,727       0
.55 
 
April 30, 2009 (1)
August 21, 2008
    1,020,000       0
.50 
 
February 21, 2010
December 31, 2008
    255,000       0
.30 
 
December 31, 2010
February 20, 2009
    2,567,901       0
.256 
 
February 20, 2011
July 24, 2008
    20,403,250       0
.65 
 
July 24, 2011
December 10, 2008
    42,614,254       0
.221 
 
December 10, 2012
February 20, 2009
    34,836,111       0
.252 
 
February 20, 2013
      102,069,243              
      116,494,853              
 
(1) These warrant expired unexercised on April 30, 2009.
 
In addition, 2,448,390 units issued to placement agents on July 24, 2008 (the Agents’ Units) are outstanding.  Each Agents’ Unit is exercisable at Cdn$0.60 for four years into one common share of the Company and one- half of one warrant (the 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.
 
 
16

 
 
APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Three month period ended March 31, 2009
(Stated in U.S. dollars, unless indicated otherwise; tabular amounts in thousands except share and per share data)
(Unaudited)
 
10. 
SHARE CAPITAL (continued)
 
(c)
Options
 
A summary of information concerning outstanding fixed stock options at March 31, 2009 is as follows:
 
   
Number of
Common
Shares
   
Weighted
Average
Exercise
Price Per Share
 
Balance, December 31, 2008
    8,281,309     $ 0.77  
Options granted
    3,238,567       0.32  
Options forfeited
    (1,350 )     1.36  
Balance, March 31, 2009
    11,518,526     $ 0.64  

The following table summarizes information concerning outstanding and exercisable stock options at March 31, 2009:
 
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       2.4       100,000     $ 0.46  
  676,700  
February 18, 2013
    2.24       3.9       676,700       2.24  
  260,000  
March 10, 2014
    2.05       4.9       260,000       2.05  
  25,000  
May 19, 2014
    1.44       5.1       25,000       1.44  
  20,200  
August 10, 2014
    0.95       5.4       20,200       0.95  
  1,159,750  
March 10, 2015
    0.65       5.9       1,159,750       0.65  
  100,000  
August 4, 2015
    0.27       6.3       100,000       0.27  
  300,000  
December 12, 2015
    0.20       6.7       300,000       0.20  
  125,000  
March 28, 2016
    0.65       7.0       125,000       0.65  
  200,000  
May 23, 2016
    0.53       7.2       200,000       0.53  
  108,000  
August 10, 2016
    0.48       7.4       108,000       0.48  
  40,000  
November 9, 2016
    0.32       7.6       40,000       0.32  
  2,940,246  
February 6, 2017
    0.57       7.9       2,940,246       0.57  
  49,825  
May 23, 2017
    0.46       8.4       24,913       0.46  
  2,098,988  
March 27, 2018
    0.66       9.0       1,049,494       0.66  
  21,250  
August 12, 2018
    0.37       9.4              
  55,000  
November 11, 2018
    0.15       9.6              
  3,238,567  
March 31, 2019
    0.32       10.0              
  11,518,526       $ 0.64       8.1       7,129,303     $ 0.79  

(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:
 
   
March 31, 2009
 
March 31, 2008
 
Risk-free interest rate
 
1.9%
 
2.9%
 
Dividend yield
 
0%
 
0%
 
Volatility
 
78%
 
61%
 
Expected life in years
 
6
 
6
 
Weighted average grant-date fair value of stock options
 
$ 0.22
 
$ 0.39
 
 
17

 
APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Three month period ended March 31, 2009
(Stated in U.S. dollars, unless indicated otherwise; tabular amounts in thousands except share and per share data)
(Unaudited)
 
11.
INTEREST EXPENSE
 
Interest expense consists of:
 
   
March 31,
2009
   
March 31,
2008
 
Accretion on convertible debentures
  $ 970     $ 893  
Capital leases and other
    57       255  
    $ 1,027     $ 1,148  

For the three months ended March 31, 2009, the Company recorded capitalized interest of $0.8 million.

12.
INCOME TAXES
 
The Company recorded a tax benefit of $0.2 million for the three months ended March 31, 2009 due to the issuance of flow-through shares but recorded no other recovery for income taxes as the net loss carry forwards are fully offset by a valuation allowance.  The Company did not record a recovery for income taxes for the period ended March 31, 2008 as the net loss carry forwards are fully offset by a valuation allowance.

13.
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 and of conversion of convertible debentures by applying the treasury stock method.
 
Earnings (loss) used in determining EPS are presented below for the three months ended March 31.
 
   
2009
   
2008
 
Net (loss) income
  $ (24,753 )   $ 3,654  
Weighted average number of shares outstanding, basic
    226,458,505       159,335,903  
Dilutive securities:
               
Options
          559,341  
Warrants
          5,127,349  
Weighted average number of shares outstanding, diluted
    226,458,505       165,022,593  
Basic and diluted earnings (loss) income per share
  $ (0.11 )   $ 0.02  
                 
Options 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
    36,486,837       5,540,249  
Average exercise price of OWNI
  $ 0.55     $ 1.02  
Shares issuable for convertible debentures excluded from calculation of EPS because their effect would have been anti-dilutive
    8,580,000       15,304,200  
Average conversion price of anti-dilutive convertible securities
  $ 0.50     $ 0.50  

Due to a net loss for the three months March 31, 2009, an additional 27.0 million warrants and stock options were excluded from the EPS computation because their effect would have been anti-dilutive.
 
18

 
APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Three month period ended March 31, 2009
(Stated in U.S. dollars, unless indicated otherwise; tabular amounts in thousands except share and per share data)
(Unaudited)

14.
COMMITMENTS AND CONTINGENCIES
 
(a)
Commitments for the Development of Black Fox
 
The Company had entered into a number of contractual commitments related to the development of Black Fox.  As of March 31, 2009, these commitments totaled approximately $14 million and are expected to become due within the next 12 months.
 
(b)
Environmental
 
As of March 31, 2009, the Company had commitments to post $4.1 million (Cdn$5.2) for the benefit of the Ministry of Northern Development and Mines to cover estimated costs of site reclamation at Black Fox.  The amounts are scheduled to be posted as follows: (1) $2.7 million (Cdn$3.4 million) in April 2009 and (2) $1.4 million (Cdn$1.8 million) in May 2009.  The Cdn$3.4 million was posted as scheduled in April 2009.
 
In addition to the Cdn$5.2 million commitments for bonding discussed in the above paragraph, upon acquisition of the mill at Black Fox in July 2008, the Company committed to replace the $1.0 million (Cdn$1.2 million) bond posted by St Andrew Goldfields Ltd. 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 $1.0 million (Cdn$1.2 million) to St Andrew Goldfields Ltd.
 
15.
SUPPLEMENTAL CASH FLOW INFORMATION
 
(a)
Net changes in non-cash operating working capital items for the three months ended March 31 are:
 
   
2009
   
2008
 
-(Increase) decrease in:
           
Accounts receivable and other
  $ (344 )   $ (2,018 )
Prepaids
    8       244  
Inventories
    2,425       (1,918 )
Increase (decrease) in:
               
Accounts payable
    226       (692 )
Accrued liabilities
    275       (16 )
Property and mining taxes payable
    (58 )     153  
    $ 2,532     $ (4,247 )

(b)
Components of cash and cash equivalents are:
 
   
March 31,
2009
   
March 31,
2008
 
Cash
  $ 5,192     $ 1,142  
Short-term investments
          1,726  
    $ 5,192     $ 2,868  
 
19

 
APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Three month period ended March 31, 2009
(Stated in U.S. dollars, unless indicated otherwise; tabular amounts in thousands except share and per share data)
(Unaudited)

15. 
SUPPLEMENTAL CASH FLOW INFORMATION (continued)
 
(c)
Non-cash transactions for the three months ended March 31 are:
 
   
2009
   
2008
 
Increase in prepaid assets due to financing a portion of the Company’s insurance program via the issuance of notes payable
    582        
Increase in property, plant and equipment due to assets acquired via issuance of notes payable
    633        
Increase in contributed surplus for the issuance of warrants to the Banks in connection with the Project Facility (Note 8(a)) and a corresponding decrease in debt for the debt discount
    7,395        
Increase in share capital and reduction in convertible debentures due to the conversion of Series 2007-A convertible debentures into common shares of the Company
          481  
Increase in share capital and a decrease in future income tax assets upon renouncement of expenditures in connection with a flow-through share offering completed in October 2007
          1,165  

16.
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 market risk, 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 2008.

The capital structure of the Company consists of debt, convertible debentures and equity attributable to common shareholders, comprising issued share capital, equity component of convertible debentures, 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 cash, restricted certificates of deposit, derivative instruments and auction rate securities in the ordinary course of business.  Cash and cash equivalents, restricted cash, restricted certificates of deposit, derivative 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 2008.
 
20

 
APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Three month period ended March 31, 2009
(Stated in U.S. dollars, unless indicated otherwise; tabular amounts in thousands except share and per share data)
(Unaudited)
 
16. 
FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
 
The Company assesses quarterly whether there has been an impairment of the financial assets of the Company.  Other than disclosed in Note 7 related to ARS, the Company has not recorded an impairment on any of the financial assets of the Company during the year ended December 31, 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 permitted 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.  The current rating by Standard and Poor on Apollo’s ARS is A.  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 of cash and cash equivalents, trade receivables, restricted cash, restricted certificates of deposit, derivative instruments and auction rate securities.  There are no material financial assets that the Company considers to be past due.
 
(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.  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 March 31, 2009, the Company is in compliance with its debt covenants.  The Company’s overall liquidity risk has not changed significantly from the prior year.

(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, restricted certificates of deposit and accounts payable.  For the three months ended March 31, 2009, 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 million, respectively, for a 10% increase or decrease in the Canadian dollar.

On February 20, 2009, in order to meet certain loan criteria of the Project Facility (Note 8(a)), the Company entered into certain option contracts.  See Note 8(b) for details.

(e)
Interest Rate Risk
 
The Company is exposed to interest rate risk on its outstanding borrowings and short-term investments.  As of March 31, 2009, the Company’s significant outstanding borrowings consist of $41.5 million of the Project Facility (Note 8(a)) and the Extended Debentures which have an aggregate $4.3 million face value (Note 9).  Amounts outstanding under the Project Facility accrue interest at a floating rate based on LIBOR plus 7.0% and the Extended Debentures have a stated rate of 18%.  The average monthly LIBOR rate charged to the Company on the Project Facility during the three months ended March 31, 2009 was 0.5%.  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 first quarter of 2009 on its outstanding borrowings was 9.4%.
 
21

 
APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Three month period ended March 31, 2009
(Stated in U.S. dollars, unless indicated otherwise; tabular amounts in thousands except share and per share data)
(Unaudited)
 
16. 
FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
 
For the three months ended March 31, 2009, a 100 basis point increase or decrease in interest rates would not have had a significant impact on the amount of interest expense recorded during the quarter.

(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 February 20, 2009, in order to meet certain loan criteria of the Project Facility (Note 8(a)), the Company entered into certain gold forward sales contracts.  See Note 8(b) 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, with the exception of auction rate securities.  The Company’s ARS investments (see Note 5) are valued using a probability-weighted discounted cash flow valuation.  The Company’s valuation of the ARS investments considers possible cash flows and probabilities forecasted under certain potential scenarios. Each scenario’s cash flow is multiplied by the probability of that scenario occurring.  The major inputs included in the valuation are: (i) maximum contractual ARS interest rate, (ii) probability of passing auction/early redemption at each auction, (iii) probability of failing auction at each auction, (iv) probability of default at each auction, (v) severity of default, and (vi) discount rate.  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 cash, 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.

17.
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.
 
22

 
APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Three month period ended March 31, 2009
(Stated in U.S. dollars, unless indicated otherwise; tabular amounts in thousands except share and per share data)
(Unaudited)
 
17. 
SEGMENTED INFORMATION (continued)
 
Amounts as at March 31, 2009 are as follows:

   
Montana
Tunnels
   
Black
Fox
   
Corporate
and Other
   
Total
 
Cash and cash equivalents
  $ 547     $ 1,662     $ 2,983     $ 5,192  
Other non-cash current assets
    3,081       1,877       2,846       7,804  
      3,628       3,539       5,829       12,996  
Long-term investments
                1,036       1,036  
Property, plant and equipment
    7,333       107,610       3,032       117,975  
Deferred stripping costs
    184                   184  
Restricted certificates of deposit
    8,216       7,249       8       15,473  
Other long-term assets
          103             103  
Total assets
  $ 19,361     $ 118,501     $ 9,905     $ 147,767  
                                 
Current liabilities
  $ 3,297     $ 31,929     $ 11,931     $ 47,157  
Derivative instruments
                14,266       14,266  
Debt and other long-term liabilities
    18       12,483       323       12,824  
Accrued site closure costs
    9,346       2,223             11,569  
Future income tax liability
          362             362  
Deferred gain
    97                   97  
Total liabilities
  $ 12,758     $ 46,997     $ 26,520     $ 86,275  

Amounts at December 31, 2008 are as follows:

   
Montana
Tunnels
   
Black
Fox
   
Corporate
and Other
   
Total
 
Cash and cash equivalents
  $ 12     $ 214     $ 2,871     $ 3,097  
Other non-cash current assets
    5,425       9,805       3,156       18,386  
      5,437       10,019       6,027       21,483  
Long-term investments
                1,081       1,081  
Property, plant and equipment
    7,655       85,183       3,043       95,881  
Deferred stripping costs
    1,052                   1,052  
Restricted certificates of deposit
    8,209       3,813       8       12,030  
Other long-term assets
          103             103  
Total assets
  $ 22,353     $ 99,118     $ 10,159     $ 131,630  
                                 
Current liabilities
  $ 4,376     $ 26,925     $ 9,113     $ 40,414  
Debt and other long-term liabilities
    44       967       4,888       5,899  
Accrued site closure costs
    9,165       1,398             10,563  
Future income tax liability
          447             447  
Deferred gain
    552                   552  
Total liabilities
  $ 14,137     $ 29,737     $ 14,001     $ 57,875  
 
23

 
APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Three month period ended March 31, 2009
(Stated in U.S. dollars, unless indicated otherwise; tabular amounts in thousands except share and per share data)
(Unaudited)
 
17. 
SEGMENTED INFORMATION (continued)
 
Amounts for the three months ended March 31, 2009 and 2008 are as follows:
 
   
Three months ended March 31, 2009
 
   
Montana
Tunnels
   
Black
Fox
   
Corporate
and Other
   
Total
 
Revenue from sale of minerals
  $ 7,370     $     $     $ 7,370  
Direct operating costs
    8,403                   8,403  
Depreciation and amortization
    301             10       311  
General and administrative expenses
                932       932  
Accretion expense – accrued site closure costs
    181                   181  
Amortization of deferred gain
    (455 )                 (455 )
Exploration and business development
          64       163       227  
      8,430       64       1,105       9,599  
Operating income (loss)
    (1,060 )     (64 )     (1,105 )     (2,229 )
Interest income
    7             40       47  
Interest expense
    (29 )           (998 )     (1,027 )
Debt transaction costs
          (572 )     (1,239 )     (1,811 )
Loss on modification of convertible debentures
                (1,969 )     (1,969 )
Realized gains on derivative contracts
                368       368  
Unrealized losses on derivative contracts
                (18,418 )     (18,418 )
Foreign exchange loss and other
                97       97  
Loss before income taxes
  $ (1,082 )   $ (636 )   $ (23,224 )   $ (24,942 )