-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EkJE9+8MRMniiH8nSGnTLwHWwQf5RWdyt2vLGiLHq27JRjJL8XGnFIzDseogvY1y 4XiZw8C7LDQcHx1Y7EiupQ== 0001204459-08-000639.txt : 20080401 0001204459-08-000639.hdr.sgml : 20080401 20080401061904 ACCESSION NUMBER: 0001204459-08-000639 CONFORMED SUBMISSION TYPE: 6-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20080331 FILED AS OF DATE: 20080401 DATE AS OF CHANGE: 20080401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Gammon Gold Inc. CENTRAL INDEX KEY: 0001078217 STANDARD INDUSTRIAL CLASSIFICATION: GOLD & SILVER ORES [1040] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 6-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-31739 FILM NUMBER: 08727267 BUSINESS ADDRESS: STREET 1: 1601 LOWER WATER STREET STREET 2: SUITE 402, SUMMIT PLACE, PO BOX 2067 CITY: HALIFAX STATE: A5 ZIP: B3J 2Z1 BUSINESS PHONE: (902) 468-0614 MAIL ADDRESS: STREET 1: 1601 LOWER WATER STREET STREET 2: SUITE 402, SUMMIT PLACE, PO BOX 2067 CITY: HALIFAX STATE: A5 ZIP: B3J 2Z1 FORMER COMPANY: FORMER CONFORMED NAME: Gammon Lake Resources Inc. DATE OF NAME CHANGE: 20060803 FORMER COMPANY: FORMER CONFORMED NAME: GAMMON LAKES RESOURCES INC /FI DATE OF NAME CHANGE: 19990203 6-K 1 gamform6k.htm FORM 6-K Gammon Gold Inc.: Form 6-K - Prepared by TNT Filings Inc.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

 Report of Foreign Issuer

Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934

For the month of March 2008

Commission File Number 001-31739

GAMMON GOLD INC.
(Translation of registrant's name into English)
 
 
1601 Lower Water Street
Suite 402, Summit Place, PO Box 2067

Halifax, Nova Scotia  B3J 2Z1
(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F

 

Form 20-F     

£

Form 40-F     

Q

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):   £

 

Note:  Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders.

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):   £

 

Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a Form 6-K if submitted to furnish a report or other document that the registrant foreign private issuer must furnish and make public under the laws of the jurisdiction in which the registrant is incorporated, domiciled or legally organized (the registrant's ''home country''), or under the rules of the home country exchange on which the registrant's securities are traded, as long as the report or other document is not a press release, is not required to be and has not been distributed to the registrant's security holders, and, if discussing a material event, has already been the subject of a Form 6-K submission or other Commission filing on EDGAR.

Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to rule 12g3-2(b) under the Securities Exchange Act of 1934.

 

Yes    

£

No     

Q

If ''Yes'' is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b) 82 -          


SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

  GAMMON GOLD INC.
   
Date: March 31, 2008 By:   /s/ Fred George                                               
         Fred George
         President

 


EXHIBIT INDEX

Exhibit  

Description

   

 

99.1  

Press Release dated March 31, 2008

   

 

99.2  

Material Change Report dated March 31, 2008


EX-99.1 2 gamexh991.htm NEWS RELEASE DATED MARCH 31, 2008 Gammon Gold Inc.: Exhibit 99.1 - Prepared by TNT Filings Inc.

   

TSX: GAM / AMEX: GRS / BSX: GL7
1601 Lower Water Street
Suite 402, Summit Place
(PO Box 2067)
Halifax, Nova Scotia
B3J 2Z1, CANADA
Tel: +1 (902) 468-0614
Fax: +1 (902) 468-0631
www.gammongold.com
 
PRESS RELEASE
 

Halifax, March 31, 2008

Gammon Gold Announces Fourth Quarter & Year End 2007 Financial Results

Gammon Gold Inc. ("Gammon Gold") (TSX:GAM and AMEX:GRS) announces fourth quarter and year end financial results for the three and twelve months ended December 31, 2007.

For the three-month period ended December 31, 2007 the Company reported sales of $39,699,932 compared to $34,381,498 for the same period in 2006. Net loss for the quarter was $20,728,989 or $0.19 per share compared to $3,291,590 or $0.04 per share for the same period in 2006.

For the twelve-month period ended December 31, 2007 the Company reported sales of $152,058,628 compared to $64,235,896 for the same period in 2006. Net loss for the period was $101,313,968 or $0.90 per share compared to $25,308,401 or $0.29 per share for the same period in 2006.

 

Year ended

Year ended

 

 

 

December 31, 2007

December 31, 2006

Q4 2007

Q4 2006

 

   

 

 

Revenue from mining operations

$152,058,628

$64,235,896

$39,699,932

$34,381,498

Production costs, excluding amortization

 

 

 

 

 

$140,302,718

$37,943,583

$33,511,441

$18,129,116

and depletion

 

 

 

 

Gold ounces sold

121,107

67,477

28,665

33,866

Silver ounces sold

5,027,983

1,888,324

1,183,729

1,138,986

Gold equivalent ounces sold (2)

218,200

105,181

50,041

57,111

Average realized gold price

$698.91

$606.99

$795.00

$608.53

Average realized silver price

$13.42

$12.18

$14.32

$12.54

Gold equivalency rate

52

50

56

49

Net loss

($101,313,968)

($25,308,401)

($20,728,989)

($3,291,590)

Net loss per share, basic and diluted (3)

($0.90)

($0.29)

($0.19)

($0.04)

Cash flows from (used in) operations

($34,191,890)

($20,026,018)

$2,704,381

$5,952,707

Total cash costs (per gold equivalent

 

 

 

 

ounce) (4)

$650

$366

$676

$323

(1) In 2005, the Company changed its year end from July 31st to December 31st.
(2)
Gold equivalent ounces are calculated based on actual sales.
(3)
Net loss per share on a diluted basis is the same as net loss per share on an undiluted basis, as all factors were anti-dilutive.
(4)
See the Non-GAAP Measures section in the attached Management Discussion & Analysis document.

Cash costs per gold equivalent ounce for the fourth quarter improved by $88 per gold equivalent ounce, or 11%, to $676 per gold equivalent ounce over Q3 as a result of improved mine and processing productivities resulting in the Company’s fixed cost base being spread over increased production units the effects of which were partially impacted by $86 per gold equivalent ounce of charges taken as part of the Company’s year-end accounting closing process. Included in the final year-end consolidated total cash cost per gold equivalent ounce result was approximately $57 per gold equivalent ounce to revise the valuation for Ocampo’s gold-in-circuit mill inventory as well as $17 per gold equivalent ounce of pension adjustments relating to future El Cubo employee social benefits payable under Mexican Social Security Legislation. An additional $12 per gold equivalent ounce in non-recurring charges was taken in Q4 to reflect payroll and severance allowances arising from an El Cubo workforce downsizing initiative. Excluding the above adjustments, the consolidated total cash cost per gold equivalent ounce result in Q4 was equal to the $590 per gold equivalent ounce as reported in the Company’s monthly December Key Performance Indicator press release.


The cash costs for the year of $650 per gold equivalent ounce were primarily driven by operational efficiency start-up problems at Ocampo, the effects of which were adversely impacted by the resulting net realizable value adjustments to Ocampo’s ore inventory and severance expense charges associated with the Q4 workforce reduction at Ocampo. During the latter part of the fourth quarter the Company began to gain traction on many of its production and cost cutting initiatives that are expected to continue to positively impact cash costs in future quarters.

The impact of productivity gains achieved in the latter part of Q4 was evident in the improvement to mine site operating and net free cash flow achieved in the quarter. Mine site operating cash flow in Q4 improved to ($240,000) as compared to ($10.6 million) in Q3. Net free cash flow improved to ($14.7 million) as compared to ($36.7 million) in Q3. As the Company completes its investments in expansionary capital projects anticipated to be in mid-2008, the Company expects to achieve positive net free cash flow status.

The Company has targeted opportunities where additional cost reductions can be realized during 2008, which includes the continued focus on workforce optimization, optimization of consumables and reagents, particularly cyanide, as well as gaining access to 20 megawatts of grid power. All of these cost containment initiatives will be supported by the production improvements we anticipate achieving at both Ocampo and El Cubo through the continued implementation of optimal mining methods.

Rene Marion, Chief Executive Officer said: "I am encouraged by the advancements we have made at both our Ocampo and El Cubo mine sites particularly as demonstrated in our January and February key performance indicator press releases. The overall implementation of enhanced mining practices at both mines can be measured by the steady improvement in monthly equivalent gold production which is tremendously exciting given we are in a turnaround phase right now. In fact, we are currently exceeding internal targets on cost reduction. At Ocampo we will continue to focus on advancing our open pit stripping and underground development activities to re-sequence the open-pit and underground operation for steady ore production going forward." Mr. Marion continued, "I am particularly pleased with the advancements made at our El Cubo mine where the progress to date has exceeded our plans. Considering the impact of the continuing improvements in production at both Ocampo and El Cubo, we anticipate that we will continue to report overall improvements in the months ahead."

Commenting on the Company’s performance Scott Perry, Chief Financial Officer said: "The Company’s Ocampo turnaround strategy continues to gain traction and combined with the operational improvements at El Cubo, the Group’s fourth quarter results were highly encouraging given the improvements in company wide productivity as well as the resulting decreases in total cash costs per ounce. Our turnaround strategy is well formulated and together with the progress achieved in 2007 we are continuing to see this positive momentum carry into 2008 where we are continuing to gain momentum with our production profile at both Ocampo and El Cubo and we have continued to post strong cost reductions resulting in solid cash flow performance and cash generation." My Perry continued: "The stronger metal price environment in early 2008 has continued to favourably impact our Company-wide business plan such that our operating cash flow performance has proven more than sufficient to meet our capital investment expenditures allowing us to utilize surplus cash reserves in the month of February to make an accelerated principal pay down of $2.1 million on our financing facility. Our financial foundation is continually improving due to the improved operational performance momentum which together with our undrawn debt financing facility places the Company in good stead to fully fund the Company’s recapitalization initiatives up to the latter part of 2008 when the business anticipates maintaining steady state positive free cash flow status."

Mr. Marion continued, "The potential for additional gains is significant. Equally significant in advancing operations and financial performance, I have recently added considerable strength to senior management by appointing Scott Perry, CFO and Russell Tremayne, COO, where collectively as a senior team we have extensive mining experience in turnaround situations. We are very well positioned to execute our growth strategy and we expect to continue the positive trends seen in January and February."

Highlights


  • 2007 Results:
  • Total production of 121,387 gold ounces and 5,035,704 silver ounces or 218,734 gold equivalent ounces at an annual cash cost per ounce of $650.
     

  • Revenues from mining operations of $152.1 million compared to $64.2 million in 2006 reflecting an average annual gold selling price of $698.91 per ounce and silver selling price of $13.42 per ounce.
     

  • Net loss per share of $(0.90) compared to 2006 net loss per share of $(0.29).


  • Cash used in operations were $34.2 million versus $20.0 million used in 2006. After adjustments for changes in non-cash working capital, funds used in operations were $15.7 million in 2007 versus $4.4 million provided in 2006.
     

  • In late 2007 the Company’s Management Team designed and implemented a Turn-Around Strategy that started to gain traction in early 2008.

  • New Executive Management Team:
  • Mr. Rene Marion was appointed Chief Executive Officer on October 25th. Mr. Marion brings over 22 years of international mining experience to Gammon, having most recently held the position of Chief Operating Officer (seconded from Barrick Gold) with Highland Gold Mining Ltd.
     

  • Subsequent to the 2007 calendar year, Mr. Scott Perry was appointed Chief Financial Officer on January 25th. Mr. Perry brings over 11 years of international mining experience to Gammon having most recently held the position of Chief Financial Officer (seconded from Barrick Gold) with Highland Gold Mining Ltd.
     

  • Subsequent to the 2007 calendar year, Mr. Russell Tremayne was appointed Chief Operating Officer on January 25th. Mr. Tremayne brings over 35 years of international mining experience throughout the world to Gammon, with the majority of that time in senior leadership roles. Most recently, Mr. Tremayne held the position of Director of Operations with Highland Gold Mining Ltd.
     

  • Both Mr. Perry and Mr. Tremayne had previously worked with Gammon’s Chief Executive Officer, Rene Marion at Highland Gold where Mr. Marion and Mr. Perry were seconded from Barrick Gold. Their success as a team in optimizing Highland’s operations, as well as the recapitalization of Highland, will benefit Gammon tremendously. Gammon now has in place a senior management team that possesses the requisite mining experience needed to successfully execute the Company’s growth strategy.

  • Post 2007 Balance Sheet Highlights:
  • The Company’s Turn-Around Strategy is well underway with solid traction achieved on the Company’s targeted cost reduction and productivity initiatives which is most evident in the Company’s February Monthly Results Press Release which illustrated:

  • Increased production over January and average monthly production over Q4;

  • Reduced consolidated cash costs over January and ongoing improvement over Q4’s average cash costs;

  • Increased cash flow performance over January and ongoing improvements in average cash flow performance over Q4; and,

  • Surplus cash generation resulting in an accelerated debt facility principal reduction payment of $2.1M

  • - The Company strengthened its liquidity position when the Company’s lenders, subject to the Company providing a satisfactory mine plan and updated reserve statements, agreed to remove all restrictions that limit access to the final $12.5 million portion of this facility such that the Company will now have access to the full $60 million facility.
     

  • - In March, 2008 Gammon announced encouraging drilling results at its Guadalupe y Calvo exploration project located in Chihuahua State, Mexico which indicated strong resource growth potential from this exciting exploration property. Exploration diamond drilling re-commenced on this highly prospective project during the fourth quarter 2007 as part of a 15-hole (2,400 metre) exploration drilling program. Upon the completion of this drilling program, expected to be in Q2 2008, the Company will complete a scoping study in order to determine the next steps in this advanced exploration property.
     

  • - The Company continues to track positively on its Q1 market deliverables scorecard, most notably remaining on target to produce in the low to mid point of the targeted range of 56,000 to 62,000 gold equivalent ounces during Q1, at total cash costs that are considerably lower than the originally estimated cash costs for Q4 2007, namely $580 to $600 per gold equivalent ounce.
     

  • - The Company will be providing an update on 2007 year end reserves and resources at the end of Q1 2008 and also expects to be releasing 2008 production and total cash cost guidance together with a 3-year outlook at the end of Q1 2008.

Audited Financial Statements for the year ended December 31, 2007 as well as the Notes to the Financial Statements and Management Discussion and Analysis are attached to this release and are posted on SEDAR at www.sedar.com or on the Company’s website at www.gammongold.com.


Conference Call Details

A webcast and conference call will be held on Monday, March 31, 2008 starting at 2:30 pm Eastern Time (3:30 pm Atlantic Time). Senior management will be on hand to discuss the results.

Conference Call Access:

  • Local Toronto Participants: 1-416-644-3419

  • North America Toll Free: 1-800-732-0232

  • Outside North America: 1-416-644-3419

When the Operator answers please ask to be placed into the Gammon Gold Fourth Quarter and Year End Results Conference Call.

Live Webcast:

The event will be broadcast live on the internet via webcast. To access the webcast please follow the link provided below: http://w.on24.com/r.htm?e=106728&s=1&k=7BAED3BAFA9C754ACEC1D49A018F0752.

Archive Call Access:

If you are unable to attend the conference call, a replay will be available until midnight, Friday April 4th by dialing the appropriate number below:

  • Local Toronto Participants: 1-416-640-1917 Passcode: 21266722#

  • North America Toll Free: 1-877-289-8525 Passcode: 21266722#

  • Outside North America: 1-416-640-1917 Passcode: 21266722#

Archive Webcast:

The webcast will be archived for 365-days by following the link provided below: http://w.on24.com/r.htm?e=106728&s=1&k=7BAED3BAFA9C754ACEC1D49A018F0752 or via the Company’s website at www.gammongold.com.

About Gammon Gold

Gammon Gold Inc. is a Nova Scotia based mid tier gold and silver producer with properties in Mexico. The Company’s flagship Ocampo Project in Chihuahua State achieved commercial production in January 2007. Gammon Gold also operates its El Cubo operation in Guanajuato State and has the promising development Guadalupe y Calvo property in Chihuahua State. The company remains 100% unhedged.

For further information please visit the Gammon Gold website at www.gammongold.com or contact:

Scott Perry Anne Day
Chief Financial Officer Director of Investor Relations
Gammon Gold Inc. Gammon Gold Inc.
902-468-0614 902-468-0614

Cautionary Statement

Cautionary Note to US Investors – The United States Securities and Exchange Commission permits US mining companies, in their filings with the SEC, to disclose only those mineral deposits that a company can economically and legally extract or produce. This press release uses certain terms, such as "measured," "indicated," and "inferred" "resources," that the SEC guidelines strictly prohibit US registered companies from including in their filings with the SEC. US Investors are urged to consider closely the disclosure in Gammon Gold’s Annual Report on Form 40-F (File No. 001-31739), which may be secured from Gammon Gold, or from the SEC’s website at http://www.sec.gov/edgar.shtml.


No stock exchange, securities commission or other regulatory authority has approved or disapproved the information contained herein.

Certain information regarding the Company contained herein may constitute forward-looking statements within the meaning of applicable securities laws. Forward-looking statements are subject to a variety of risks and uncertainties which could cause actual events or results to differ from those reflected in the forward-looking statements. Should one or more of these risks and uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in forward looking statements. Specific reference is made to "Risk Factors" in the Company's Annual Information Form and Form 40-F Report. Forward-looking statements may include estimates, plans, expectations, opinions, forecasts, projections, guidance or other statements that are not statements of fact including, without limitation, statements regarding potential mineralization and reserves, including without limitation, statements regarding future cash costs and production at El Cubo and Ocampo and the ability to continue to successfully implement the Company’s Turn-Around Strategy, statements regarding the resource growth potential of Guadeloupe y Calvo, statements regarding the company’s ability to continue its improved cash flow performance, the impact of any future exploration on reserve estimates; expectations regarding the timing and extent of production at the Ocampo project; the implications of the Mexican Single Rate Tax on future income tax payments; estimates regarding the future costs related to exploration at Ocampo; the nature and availability of additional funding sources; and future plans and objectives of Gammon. In some cases, you can identify forward-looking statements by the use of words such as may, will, should, could, expect, plan, intend, anticipate, believe, estimate, predict, potential or continue or the negative or other variations of these words, or other comparable words or phrases. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company’s expectations include, among others, risks related to international operations, including political turmoil and limited local infrastructure to support large scale mining operations; the actual results of current exploration activities; conclusions of economic evaluations and changes in project parameters as plans continue to be refined; and fluctuations in future prices of gold and silver. These factors are set out in the Company’s annual information form. The Company’s forward-looking statements are expressly qualified in their entirety by this cautionary statement.

###



(formerly Gammon Lake Resources Inc.)
Management’s Discussion and Analysis
For the year ended December 31, 2007

March 31, 2008

This Management’s Discussion and Analysis has been prepared as of March 31, 2008, and should be read in conjunction with the consolidated financial statements of Gammon Gold Inc. (“the Company”) for the year ended December 31, 2007. The Company determined that its functional and reporting currency is the United States dollar, and as such, all results are presented in United States dollars, unless otherwise stated. Statements are subject to the risks and uncertainties identified in the Forward-Looking Statements portion of this document. The first, second, third and fourth quarters of the Company’s fiscal year are referred to as “Q1”, “Q2”, “Q3” and “Q4”, respectively.

The Company is a growth-oriented mid-tier gold and silver production and exploration company listed on the Toronto Stock Exchange (TSX:GAM) and the American Stock Exchange (AMEX:GRS). The Company completed construction of its Ocampo mine in Chihuahua State, Mexico, announcing commercial production in January, 2007. In August, 2006, the Company acquired 100% of Mexgold Resources Inc., which added the El Cubo and Las Torres active gold and silver mines in Guanajuato State, Mexico along with the Guadalupe y Calvo advanced exploration development property

Highlights

  • Results:

Total production of 121,387 gold ounces and 5,035,704 silver ounces or 218,734 gold equivalent ounces at an annual cash cost per ounce of $650.

Revenues from mining operations of $152.1 million compared to $64.2 million in 2006 reflecting an average annual gold selling price of $698.91 per ounce and silver selling price of $13.42 per ounce.

Net loss per share of $(0.90) compared to 2006 net loss per share of $(0.29).

Cash used in operations was $34.2 million compared to $20.0 million used in 2006. After adjustments for changes in non-cash working capital, funds used in operations were $15.7 million in 2007 compared to a $4.4 million contribution in 2006.

In late 2007, the Company’s Management Team designed and implemented a Turn-Around Operational Optimization Strategy (see “Post-2007 Balance Sheet Highlights”).

  • New Executive Management Team:

Mr. Rene Marion was appointed Chief Executive Officer on October 25, 2007. Mr. Marion brings over 22 years of international mining experience to the Company, having most recently held the position of Chief Operating Officer (seconded from Barrick Gold) with Highland Gold Mining Ltd.

On January 25, 2008, the Company announced the appointment of Mr. Scott Perry as Chief Financial Officer. Mr. Perry brings over 11 years of international mining experience to the Company having most recently held the position of Chief Financial Officer (seconded from Barrick Gold) with Highland Gold Mining Ltd.

Mr. Russell Tremayne was appointed Chief Operating Officer on January 25, 2008. Mr. Tremayne brings over 35 years of international mining experience throughout the world to the Company, with the majority of that time in senior leadership roles. Most recently, Mr. Tremayne held the position of Director of Operations with Highland Gold Mining Ltd.

  • Post-2007 Balance Sheet Highlights:

The Company’s Turn-Around Strategy is underway with encouraging results achieved on the Company’s targeted cost reduction and productivity initiatives, as disclosed in the Company’s February Key Performance Indicator Press Release:

  • Increased production over January and average monthly production over Q4;

  • Reduced consolidated cash costs over January and ongoing improvement over Q4’s average cash costs;

1


Management’s Discussion & Analysis

Increased cash flow performance over January and ongoing improvements in average cash flow performance over Q4; and, More than sufficient cash generation resulting in an accelerated debt facility principal reduction payment of $2.1M.

The Company strengthened its liquidity position when the Company’s lenders under its $60 million revolving credit facility agreed, subject to the Company providing a satisfactory mine plan and updated reserve statements, to remove all restrictions that limit access to the final $12.5 million portion of this facility such that the Company will now have access to the full facility.

In March 2008 Gammon announced encouraging drilling results at its Guadalupe y Calvo exploration project located in Chihuahua State, Mexico. Exploration diamond drilling recommenced on this project during Q4 2007 as part of a 15- hole (2,400 metre) exploration drilling program. Upon the completion of this drilling program, expected to be in Q2 2008, the Company will complete a scoping study in order to determine the next steps for this property.

The Company remains on target to produce in the low end of the targeted range of 56,000 to 62,000 gold equivalent ounces during Q1 2008, at total cash costs that are considerably lower than the originally estimated cash costs for Q4 2007, namely $580 to $600 per gold equivalent ounce.

The Company will be providing an update on 2007 year end reserves and resources along with the 2008 production and total cash cost guidance together with a 3-year outlook, at the end of Q1 2008.

Further details on the history of the Company, its mineral properties and the risk factors associated with respect to the Company can be found under the Company’s associated documents including its Annual Information Form at www.sedar.com or on the Company’s website at www.gammongold.com.

Growth Strategy

Gammon Gold Inc. is committed to responsibly operating and organically growing a precious metals company while balancing the needs of all our stakeholders.

Gammon’s growth strategy is to increase its production profile and reserve base through:

  • Expansion opportunities at Ocampo Open Pit mine, Ocampo Underground mine and El Cubo Underground mine;

  • In the latter half of 2008, the Company is aggressively planning to expand the exploration programs at Ocampo and El Cubo; and,

  • Pending the results from the Guadalupe y Calvo exploration program during the first half of 2008, the Company also plans to aggressively advance the exploration program during the second half of 2008. Further, as the exploration program is only focusing on 1 kilometre of the 3 kilometres of identified potential, the Company believes that there is exploration upside yet to be delineated.

 

2


Management’s Discussion & Analysis

Summarized Annual Financial Results

The following selected information has been extracted from the Company’s audited consolidated financial statements for the fiscal years in question.

 

Year ended 

Year ended 

5 months ended 

 

December 31, 2007 

December 31, 2006 

December 31, 2005 (1) 

Revenue from mining operations 

$152,058,628 

$64,235,896 

$Nil 

Production costs, excluding amortization and depletion 

$140,302,718 

$37,943,583 

$Nil 

Gold ounces sold 

121,107 

67,477 

Silver ounces sold 

5,027,983 

1,888,324 

Gold equivalent ounces sold (2) 

218,200 

105,181 

Average realized gold price (per oz) 

$698.91 

$606.99 

Average realized silver price (per oz) 

$13.42 

$12.18 

Gold equivalency rate (silver oz equal to one gold oz) 

52 

50 

Net loss 

($101,313,968) 

($25,308,401) 

($9,614,241) 

Net loss per share, basic and diluted (3) 

($0.90) 

($0.29) 

($0.13) 

Cash flows used in operations 

($34,191,890) 

($20,026,019) 

$3,466,010 

Total cash costs (per gold equivalent ounce) (4) 

$650 

$366 

$Nil 

Total assets 

$753,952,111 

$716,321,415 

$222,183,833 

Total long-term financial liabilities 

$1,333,614 

$63,607,600 

$39,587,505 

Cash dividends declared 

$Nil 

$Nil 

$Nil 

   

(1)     

In 2005, the Company changed its year end from July 31st to December 31st.

(2)     

Gold equivalent ounces are calculated based on actual sales.

(3)     

Net loss per share on a diluted basis is the same as net loss per share on an undiluted basis, as all factors were anti-dilutive.

(4)     

See the Non-GAAP Measures section on page 16.

Review of Annual Financial Results

2007 represented the Company’s first full year of commercial production at our Ocampo operation. Together with a full twelve months of production contributions from the El Cubo operation, which was fully consolidated following the August 8, 2006 acquisition of Mexgold Resources Inc. (“Mexgold”), the Company reported annual production of 121,387 gold ounces and 5,035,704 silver ounces, or 218,734 gold equivalent ounces which compares to 67,477 ounces of gold and 1,888,324 silver ounces or 105,181 gold equivalent ounces in the prior year. The Company’s increased gold and silver production profile was due to the ramped-up production profile at Ocampo, following the establishment of commercial operations in January 2007 and the full twelve months of production contributions from El Cubo.

During 2007, the Company sold 121,107 gold ounces and 5,027,983 silver ounces, or 218,200 gold equivalent ounces, at average gold and silver selling prices of $698.91 per ounce and $13.42 per ounce respectively for total revenues of $152.1 million. This compares to prior year sales of 67,477 gold ounces and 1,888,324 silver ounces, or 105,181 gold equivalent ounces, at average gold and silver selling prices of $606.99 per ounce and $12.18 per ounce respectively for total revenues of $64.2 million. Increased revenues are attributable to the increased gold and silver production and stronger market prices for gold and silver, which the Company fully participated in due to being entirely unhedged on all future production.

Production costs, excluding amortization and depletion, for the year ended December 31, 2007 were $140.3 million (year ended December 31, 2006 - $37.9 million). Ocampo’s cumulative production costs were significantly higher than the prior year due to the commencement of commercial operations in January 2007, resulting in close to a full twelve months of operational accounting, whereas in the prior year a large amount of expenditures were capitalized as pre-commissioning costs. El Cubo’s cost of sales increase was especially high due to the full inclusion of twelve months of accounting compared to 2006 where only five months of operating results were included, reflecting the August 8, 2006 acquisition date for Mexgold. Increased production costs were further negatively impacted by inflationary pressures at all of our operations, attributable to increased energy, material and manpower costs, together with operational start-up problems at the Ocampo operation resulting in operational inefficiency cost pressures.

3


Management’s Discussion & Analysis

The Company’s consolidated total cash cost per gold equivalent ounce increased to $650 per ounce versus $366 in the prior year, which was largely due to higher inflationary input costs across the entire Company and the operational efficiency start-up problems at Ocampo, the effects of which were further impacted by net realizable value and other inventory adjustments to Ocampo’s inventory valuations as well as severance expense charges associated with the Q4 workforce reduction at Ocampo. Included in the year-end total cash cost per ounce result was approximately $20 per ounce of fourth quarter charges taken as part of the Company’s year-end accounting closing process reflecting $13 per ounce of year-end inventory accounting expense to reduce the valuation for Ocampo gold-in-circuit mill inventory, $4 per ounce of pension adjustments required to accurately reflect future El Cubo employee social benefits payable under Mexican Social Security Legislation and $2 per ounce to reflect payroll and severance allowances arising from an El Cubo workforce downsizing initiative.

The net loss of $101.3 million was after a non-cash income tax adjustment of $43.1 million arising from the recently enacted Mexican Single Rate Tax law whereby certain future income tax loss carry forwards will not be utilized as previously anticipated, and employee severance expense charges of $4.4 million associated with reducing the Ocampo workforce by approximately 30% in the month of September 2007 and changes to the Executive Management Team. Excluding these items, the net loss for the year would have been $53.8 million compared to a net loss of $25.3 million in the prior year which would have equated to a net loss per share, basic and diluted, of $0.48 per share compared to $0.29 per share in the prior year. The increase in this adjusted net loss of $28.5 million over the prior year was primarily due to the increased cash costs described above.

After the income tax expense adjustment charge, inventory adjustments and the severance expense, the net after-tax loss for the year was $101.3 million compared to a net loss of $25.3 million in the prior year resulting in a net loss per share, basic and diluted, of $0.90 per share compared to $0.29 per share in the prior year.

Ocampo’s operational efficiency start-up issues together with increased inflationary operating cost pressures more than offset stronger metal prices received for gold and silver, resulting in a significantly reduced cash flow from operations contribution of a negative $34.2 million compared to a negative $20.0 million in the prior year. The non-existence of positive earnings and positive cash flow together with the Company’s turn-around operational status resulted in no dividends being declared in 2007, similar to the prior year.

In the fourth quarter of 2007, Gammon initiated a detailed operational asset review to address the start-up issues at Ocampo. As a result, an operational turn-around strategy was engineered for Ocampo, based on continuous efficiency improvement and cost reduction initiatives, to maximize the value of this cornerstone asset going forward. A similar operational review was also performed at El Cubo, resulting in the formulation of a company-wide turn-around strategy. The Company’s operational turnaround strategy is in place and the targeted improvements have been flowing through to the Company’s bottom line operational results in the latter parts of the fourth quarter and early 2008. The results to date have been disclosed through the monthly disclosures of key performance indicators that the Company committed to make to the market throughout the fourth quarter of 2007 and the first quarter of 2008.

The Company’s total assets of $753.9 million increased by $37.6 million relative to the prior year. This primarily represents capitalized development costs, and fixed asset purchases at our Ocampo and El Cubo operations together with capitalized exploration costs. The Company’s capitalized exploration costs largely represent expenditures at our advanced exploration project, Guadalupe y Calvo, where a diamond drilling program is underway, and at the completion of which the Company will complete a scoping study in order to determine the next steps for this advanced exploration property.

The Company continued to strengthen its liquidity position when during the second quarter of 2007, the Company completed a public offering of 10,000,000 common shares at $17.81 (C$20.00) per common share in Canada and the United States for gross proceeds of $178.1 million. (C$200 million). The Company used a significant portion of the equity issue proceeds to repay its $120 million debt facility. The remainder of the funds were employed to finance the commissioning of operations at Ocampo and development capital funding at El Cubo. In the fourth quarter of 2007, the Company finalized a $60 million revolving credit facility with the Bank of Nova Scotia and Bank of Montreal to replace the existing $20 million revolving facility.

4


Management’s Discussion & Analysis

Quarterly Financial Review

The following selected quarterly information has been extracted from the Company’s consolidated interim financial statements for the periods in question.

 

Q4 2007 

Q3 2007 

Q2 2007 

Q1 2007 

Q4 2006 

Q3 2006 

Q2 2006 

Q1 2006 

Revenue from mining operations 

$39,699,932 

$30,443,793 

$38,414,989 

$43,499,914 

$34,381,498 

$16,455,599 

$11,507,809 

$1,890,990 

Production costs 

$33,511,441 

$33,957,197 

$35,393,662 

$37,440,418 

$18,129,116 

$12,698,143 

$3,967,984 

$3,148,340 

Net loss 

($20,728,989) 

($44,835,395) 

($25,487,704) 

($10,261,880) 

($3,291,590) 

($15,115,410) 

($2,215,076) 

($4,686,325) 

Net loss per share, basic and diluted (1) 

($0.19) 

($0.38) 

($0.23) 

($0.10) 

($0.04) 

($0.16) 

($0.03) 

($0.05) 

Cash from (used in) operations 

$2,704,381 

($10,571,784) 

($17,064,419) 

($9,260,068) 

$5,952,707 

($16,323,982) 

($2,051,352) 

($7,603,392) 

Gold ounces sold 

28,665 

25,104 

31,006 

36,332 

33,866 

17,112 

13,672 

2,827 

Silver ounces sold 

1,183,729 

1,068,809 

1,306,267 

1,469,178 

1,138,986 

435,554 

251,155 

62,629 

Gold equivalent ounces sold (2) 

49,969 

44,863 

57,063 

66,305 

57,111 

25,652 

18,409 

4,009 

Average realized gold price  (per oz) 

$795.00 

$678.97 

$676.95 

$655.67 

$608.53 

$604.42 

$615.97 

$560.68 

Average realized silver price  (per oz) 

$14.32 

$12.54 

$13.34 

$13.40 

$12.54 

$11.88 

$11.45 

$10.50 

Gold equivalency rate  (silver oz equal to one gold oz) 

56 

54 

51 

49 

49 

51 

54 

53 

Total cash costs, per gold  equivalent ounce (3) 

$676 

$764 

$702 

$575 

$323 

$500 

$219 

(4) 

Cash dividends declared 

$Nil 

$Nil 

$Nil 

$Nil 

$Nil 

$Nil 

$Nil 

$Nil 

   

(1)     

Net loss per share on a diluted basis is the same as net loss per share on an undiluted basis, as all factors were anti-dilutive.

(2)     

Gold equivalent ounces are calculated based on actual sales.

(3)     

See the Non-GAAP Measures section on page 16.

(4)     

The Company did not report cash costs per ounce in Q1 2006.

The Company announced the commencement of open pit mining and heap leach operations at the Ocampo location in January of 2006. In February 2006, the first gold-silver pour from the heap leach operations was announced, and in September 2006, the first pour from the mill facility was announced. Commercial production at Ocampo was announced in January 2007. On August 8, 2006, the Company acquired Mexgold Resources Inc., and therefore the results of the El Cubo mine are consolidated as of the third quarter of 2006.

Review of Fourth Quarter Financial Results

The fourth quarter of 2007 reflected improved performance at our cornerstone Ocampo operation attributable to improvements in mine productivity and underground dilution levels following the re-introduction of longhole mining, continued strengthening of key operational indicators such as daily mill tonnage, gold and silver recovery, mining equipment availability and stronger open pit production, all of which contributed to improved production and cost performance. As a result and relative to the third quarter of 2007, the Company reported improvements in production and cash costs in the fourth quarter. This trend is expected to continue in the coming quarters as these initiatives continue to gain traction. Improved productivity was driven by enhanced mining methods, the deployment of mining equipment as well as overall improved mine planning, development and improved equipment availability.

In Q4, 2007, the Company sold 28,665 ounces of gold and 1,183,729 ounces of silver, or 49,969 gold equivalent ounces compared to sales of 25,104 ounces of gold, 1,068,809 ounces of silver, or 44,863 gold equivalent ounces in Q3 2007 and sales of 33,866 ounces of gold, 1,138,986 ounces of silver, or 57,111 gold equivalent ounces in the prior year corresponding period.

5


Management’s Discussion & Analysis

Total revenues of $39.7 million in Q4 2007 were $9.3 million higher than in Q3 2007, reflecting stronger metal prices received for both gold and silver combined with increased gold and silver sales. Increased physical metal sales are largely due to the implementation of optimized mining methods at Ocampo which has positively impacted productivity with the operation reporting a significant increase in tonnes and gold/silver head grades due to lower dilution from the underground as a result of the reintroduction of longhole mining. Relative to the prior year corresponding period, total revenues were $5.3 million higher due to increased metal prices received for both gold and silver partially offset by lower equivalent gold metal production in Q4 2007 which was primarily attributable to lower head grades in Q4 2007 reflecting a lower availability of developed high grade mining areas at the Ocampo operation.

Cash costs per ounce in the fourth quarter were significantly higher than the prior year corresponding period as a result of the lower production but improved by $88 per gold equivalent ounce, or 11%, to $676 per gold equivalent ounce as compared to Q3 2007 as a result of improved mine and processing productivities resulting in the Company’s fixed cost base being spread over increased production units, the effects of which were partially impacted by $86 per ounce of charges taken as part of the Company’s year-end accounting closing process. Included in these year-end adjustments was approximately $57 per ounce to revise the valuation for Ocampo’s gold-in-circuit mill inventory as well as $17 per ounce of pension adjustments required to accurately reflect future El Cubo employee social benefits payable under Mexican Social Security Legislation. An additional $12 per ounce in charges was taken in Q4 to reflect payroll and severance allowances arising from the 2007 El Cubo workforce downsizing initiative. Excluding the above adjustments, the consolidated total cash cost per ounce result in Q4 was equal to the $590 per ounce as reported in the Company’s monthly December Key Performance Indicator press release.

The Company’s operational turn-around strategy targets a number of production and cost optimization initiatives which started to be realized in the fourth quarter of 2007 and are expected to continue to flow through to the Company’s bottom line operational results early 2008. The Company believes its reported production costs in 2007 are significantly higher than those expected in the future as the Company’s turn-around plan continues to deliver targeted improvements and results.

The fourth quarter net loss of $20.7 million improved significantly compared to the third quarter net loss of $44.8 million as the third quarter result included a non-cash income tax adjustment of $21.6 million arising from the recently enacted Mexican Single Rate Tax law, whereby certain future income tax loss carry forwards will not be utilized as previously anticipated. In addition, the Company’s fourth quarter net loss was favourably impacted by the stronger revenues associated with higher metal production and stronger metal prices received for both gold and silver and the lower cash cost per ounce performance.

Notwithstanding the improved net loss position, Ocampo’s below design capacity operational performance was more than offset by stronger production and stronger metal prices, resulting in a positive cash flow from operations of $2.7 million compared to negative operating cash flow of $10.6 million in Q3 2007 and a positive $6.0 million in the prior year. The improvements realised in Q4 2007 were more than offset by the underlying high cash cost operating structure resulting in operating cash flow performance being $3.3 million lower than the prior year corresponding period which is reflective of Ocampo’s productivity & efficiency issues that are now being addressed in the Company’s turnaround plan. The Q4 2007 cash flow from operations result was an improvement on the third quarter result and reflects the increased sales revenue performance and improved cost performance. Operational cash flow performance is expected to improve significantly in 2008 as a result of the detailed operational asset review carried out in the fourth quarter of 2007, which identified a number of continuous efficiency improvement and cost reduction initiatives. Targeted improvements have been flowing through to the Company’s bottom line operational results in the latter parts of the fourth quarter and early 2008 and are expected to result in further improved operational performance results in 2008.

6


Management’s Discussion & Analysis

Results of Operations 

 

2006 

2007 

2006 

2007 

2006 

 

Ocampo 

El Cubo 

El Cubo 

Other 

Other 

 Revenue from mining 

$47,214,146 

$44,225,600 

$17,021,750 

     operations 

 

 

 

 

 

 Gold ounces produced 

51,748 

33,740 

15,729 

 Silver ounces produced 

1,302,807 

1,582,316 

585,517 

 Gold equivalent ounces  produced (1) 

77,804 

64,311 

27,377 

 Gold ounces sold 

51,748 

33,740 

15,729 

 Silver ounces sold 

1,302,807 

1,582,316 

585,517 

 Gold equivalent ounces sold (1) 

77,804 

64,311 

27,377 

 Production costs 

$26,600,886 

$37,644,990 

$11,342,697 

 Refining costs 

$342,797 

$463,668 

$182,807 

 Net (loss) / earnings before  other items 

$8,543,115 

($9,295,937) 

($3,630,248) 

($18,871,971) 

($26,150,386) 

 Total cash costs (per gold equivalent ounce) (2)  

$346 

$593 

$421 

 Total cash costs (per gold ounce) (2) 

$214 

$511 

$279 

     

 

 

 

 

 

(1) 

 

Gold equivalent ounces are calculated based on actual sales. 

(2) 

 

See the Non-GAAP Measures section on page 16. 

Operational Review - Ocampo 

2007 Ocampo Overview 

The Ocampo mine declared commercial production in early 2007 and faced operational challenges typical to start up operations that impacted performance particularly in the first three quarters. During the latter part of the fourth quarter a number of production and cost initiatives were implemented and incremental improvements in most areas of the mine were achieved. To communicate these changes the Company began issuing monthly press releases reporting key performance indicators as well as financial results beginning on December 17, 2008 and subsequently on January 21, 2008, February 19, 2008 and March 11, 2008.

The following table summarises some of the key production and cost initiatives being managed:

Area for Improvement 

Measures Taken in Q4 2007 

Measures to be Taken in 2008 

Equipment Availability 
(Fixed & Mobile) 

  • Additional Mobile Equipment for Underground & Open Pit

  • Improved Preventative Maintenance Practices Implemented     

  • Delivery of Additional Underground Equipment in March & April 

  • Training provided to Operators by equipment supplier to strengthen operation and maintenance practices 

  • Appointment of seasoned Fixed & Mobile 

  • Maintenance Managers 

  • Sufficient Spares Inventory to ensure minimal downtime 

 Insufficient 
Underground 
Development 

  • Continued focus on increasing development 

  • Supplement mill feed with high grade Open Pit ore while underground development is accelerated 

  • New underground equipment in March & April to allow accelerated development 

  • Target of 50 development metres per day 

  • Ramp up of underground production by the end of 2008 

 

7


Management’s Discussion & Analysis

 

Area for Improvement 

Measures Taken in Q4 2007 

Measures to be Taken in 2008 

Underground Mining
Method Selection

  • Improved overall mining methods and process implemented in late Q4

  • Re-introduction of longhole mining in late Q4 enhanced productivity and decreased dilution

  • Continued development of longhole mining stopes to maximize productivity and minimize dilution

  • Training on longhole mining methods & utilization of proper equipment

  • Established Quality Assurance / Quality Control team dedicated to dilution management

Processing Facility Availability

  • Improved preventative maintenance practices

  • Implementation of enhanced practices & processes

  • Appointment of seasoned processing manager

  • Proper Inventory of spares

  • Appointment of seasoned Maintenance manager

Cost Management
Issues

  • Implementation of cost management reporting systems and controls

  • Enhanced mining methods to increase operational efficiencies

  • Strengthening of procurement practices

  • Optimization of workforce

  • Ongoing improvements to reporting systems and cost control measures

  • Continued implementation of optimal mining methods

  • Optimization of consumable and reagents usage

  • Continued focus on optimizing workforce

Labour Relations –
Compensation
Challenges

 

  • Compensation Analysis Study initiated in Q4 to Address Inequities Among workforce

  • Production Bonus Schedule developed for 2008 Implementation

  • Compensation inequities resolved

  • Production Bonus Schedule Implemented

  • Communications with workforce enhanced

  • More experienced mine management team appointed

  • Proactive labour relations program implemented

  • Continual improvement to safety and mine services

Liquidity Constraints

  • New $60 million revolving line of credit established in late Q3 (with restrictions)

  • Cost Containment initiatives and improved reporting systems implemented

  • Restrictions on line of credit removed

  • Improved productivity in late 2007 and early 2008 provided positive cash flow from operations

  • Significantly enhanced cost controls and management reporting systems

Ocampo Underground Mine 

 

Total 

Q4 2007 

 Q3 2007 

Q2 2007 

Q1 2007 

 Tonnes of ore mined 

412,493 

81,210 

     79,750 

154,243 

97,290 

 Average grade of gold (1) 

3.48 

3.09 

         3.21 

3.61 

3.91 

 Average grade of silver (1) 

193.2 

171.9 

       163.1 

209.2 

218.4 

 Average grade of gold equivalent (1) 

7.22 

6.20 

         6.24 

7.73 

8.36 

 Metres developed 

12,766 

2,989 

       3,331 

3,467 

2,979 

 

(1) Grams per tonne. 

 

 

 

 

 

Productivity at the Ocampo underground mine began to decrease in mid-2007 as a result of the lack of underground development accessing stoping areas, the shortage of underground equipment, and the move away from longhole mining. The same factors as well as excessive dilution associated with shrinkage and cut & fill mining methods were responsible for the decrease in grades during 2007. To improve productivity and grades, the Company undertook several initiatives, including the re-commencement and retraining of personnel in longhole mining in the past three months. The Company expects the changes to impact productivity and decrease dilution. The planned accelerated development program for 2008 is expected to allow for more flexibility in sequencing mining areas. A new production bonus schedule for the underground was introduced in February 2008 that has already been well received and is anticipated to favourably improve employee productivity. High grade Ocampo Open Pit ore will continue to be re-directed to the Ocampo Mill to take advantage of the better economics and recoveries through the Mill Circuit, and will thereby improve recovered metal content. The Company is providing additional training to its operators, supported by the recent implementation of a Quality Assurance / Quality Control program. While most of these initiatives arrived too late to affect results for 2007, the Company has seen improvements in grades from underground production to 6.30 grams per tonne gold equivalent in January 2008, and 7.50 grams per tonne gold equivalent in February 2008.

8


Management’s Discussion & Analysis

Additionally, the Company is currently developing the Santa Eduviges decline located under the Plaza de Gallos portion of the Ocampo Open Pit mine that has the potential for a second underground mine and an additional source of high grade ore feed to the mill.

Ocampo Open Pit Mine 

  Total Q4 2007 Q3 2007 Q2 2007 Q1 2007
Total tonnes mined 24,651,769 6,682,603 6,245,055 6,189,740 5,534,371
Tonnes of ore mined 4,082,339 654,605 534,064 1,222,529 1,671,141
Waste to ore ratio (1) 5.04 : 1(1) 9.21 : 1(1) 10.69:1(1) 4.06:1(1) 2.31:1(1)
Average grade of gold (2) 0.60 0.75 0.81 0.60 0.50
Average grade of silver (2) 21.03 33.54 31.42 19.11 13.36
Average grade of gold equivalent (2) 1.01 0.77 0.94 1.39 1.36

(1)     

Marginal low grade ore inventoried in previous quarters is now classified as waste, causing an increase in the waste to ore ratio.

(2)     

Grams per tonne.

The high waste to ore ratio (“strip ratio”) in Q3 and Q4 compared to previous quarters was a result of accelerated stripping required to ensure adequate access to ore throughout 2008. In December 2007 and into Q1 2008 two open pit excavators were unavailable due to a scheduled major maintenance program. In mid-February 2008 the first of the two excavators was re-commissioned with an immediate impact on productivity. The second excavator has been re-commissioned in mid-March and we expect productivity to further increase and normal operations to resume at the Open Pit. We are still targeting above 80,000 tonnes per day and we are confident in attaining this target in the first half of 2008.

The Company completed stripping activities in the Plaza de Gallos and Refugio pits in 2007 that allowed the Company to join the two pits, leading to more efficient mining activities. The Company is currently directing its attention to pre-stripping activities at the Picacho and Conico pits and expects to be extracting ore from the high grade Picacho Pit by mid-2008.

9


Management’s Discussion & Analysis

Ocampo Mill Circuit 

 

Total 

Q4 2007 

Q3 2007 

Q2 2007 

Q1 2007 

 Tonnes from the underground 

353,951 

86,047 

113,634 

79,750 

74,520 

 Tonnes from the open pit 

149,951 

56,201 

71,262 

20,035 

2,453 

 Total tonnes of ore processed 

466,127 

134,032 

112,262 

103,169 

116,664 

 Average grade of gold processed (1) 

2.93 

2.57 

2.73 

3.09 

3.45 

 Average grade of silver processed (1) 

163.05 

137.29 

144.68 

182.00 

193.41 

 Gold equivalent grade processed (1) 

6.06 

5.04 

5.41 

6.66 

7.40 

 Gold ounces produced 

43,591 

10,301 

9,687 

10,299 

13,304 

 Silver ounces produced 

2,153,849 

475,111 

461,630 

547,272 

669,836 

 Gold ounces sold 

43,391 

10,935 

8,763 

10,411 

13,282 

 Silver ounces sold 

2,150,386 

504,233 

425,824 

549,081 

671,248 

 Gold equivalent ounces sold 

84,950 

20,078 

16,678 

21,213 

26,981 

(1) Grams per tonne. 

 

 

 

 

 

Total tonnes processed during the fourth quarter were 134,032, for an average of 1,457 tonnes per day which was 3% below the current name plate capacity of 1,500 tonnes per day but was the highest level achieved in 2007. In early 2008, Mill capacity has consistently averaged above capacity levels and the Company anticipates expanding the capacity of the Mill to approximately 2,600 tonnes per day in the second half of 2008 with further studies being conducted for further expansions.

In 2007, 33% of the mill feed was sourced from the open pit. Based on more recent geological interpretation within the open pit, it is expected further tonnages of high grade ore will become available to send directly to the mill which will provide much higher levels of metallurgical recovery than that achieved on the heap leach pad. The Santa Eduviges advanced exploration project is anticipated to be a third source of ore to the Mill.

Mill downtime experienced throughout 2007 was the result of mechanical issues and lack of a reliable power source. The Company has now implemented a preventative maintenance program. In late January 2008, the Company was connected to an additional 5 megawatts of grid power that has reduced the reliance on the diesel powered generators and is also expected to decrease costs. In early 2009, we anticipate having access to 20 megawatts of grid power that will eliminate reliance on the diesel generators and therefore provide a far more reliable source of power and potential cost reductions of up to $24 per ounce. Mill availability improved to 80% in February 2008 and is expected to continue to improve throughout 2008. During February, tonnes per day improved and the mill was operating near design capacity at 1,435 tonnes per day. Grades improved to 7.16 grams per tonne gold equivalent from 6.34 grams per tonne in January as a result of higher grade ore from both the underground and open pit being delivered to the mill.

During December stockpiles of 12,500 tonnes ahead of the mill were established to minimize the possibility of production interruption due to possible feed variability from the underground or the open pit. The focus going forward will remain on maintaining stockpiles ahead of both processing facilities to ensure ongoing production during any period of downtime. As of February 2008 10,505 tonnes grading 6.23 grams per tonne gold equivalent were stockpiled ahead of the Mill circuit.

10


Management’s Discussion & Analysis

Ocampo Crushing & Heap Leach Circuit 

 

Total 

Q4 2007 

Q3 2007 

Q2 2007 

Q1 2007 

 Open pit ore placed on the heap leach pad 

2,563,660 

616,121 

573,903 

704,614 

669,022 

 Underground mine tonnes placed on heap  leach pad 

95,019 

1,411 

8,168 

45,966 

39,474 

 Total tonnes of ore processed 

2,658,679 

617,532 

582,071 

750,580 

708,496 

 Average grade of gold processed (1) 

0.62 

0.63 

0.60 

0.57 

0.69 

 Average grade of silver processed (1) 

25.52 

26.50 

24.42 

24.45 

26.82 

 Gold equivalent grade processed (1) 

1.57 

1.43 

1.51 

1.28 

1.24 

 Gold ounces produced 

44,056 

9,252 

8,233 

12,673 

13,898 

 Silver ounces produced 

1,299,538 

270,949 

276,955 

378,163 

373,471 

 Gold ounces sold 

43,966 

9,712 

7,817 

11,906 

14,531 

 Silver ounces sold 

1,295,281 

285,344 

266,337 

353,443 

390,157 

 Gold equivalent ounces sold 

69,014 

14,885 

12,777 

18,859 

22,493 

(1) Grams per tonne. 

 

 

 

 

 

Fourth quarter tonnes placed on the heap leach pad of 617,532 averaged 6,861 tonnes per day, an increase over Q3 levels. Ore feed to the heap leach pad continued to improve in early 2008 and tonnes per day to the heap leach pad increased by over 25% in both January and February over Q4 in spite of increased tonnes being re-directed to the Mill.

Construction on expanding the heap leach pad from 5 million to 12 million tonnes is currently underway with completion planned before the onset of the rainy season in late June or early July 2008. During a portion of this construction we were unable to put approximately 120,000 tonnes of ore under leach in January and early February 2008. However construction has since advanced to where all areas are now currently under leach and recoveries will begin to improve in the coming months.

In January 2008, the Company started to haul from the old tailings that are out of reserves, averaging 1.68 grams per tonne gold equivalent to the heap leach pad. The Company believes that taking these high grade tails will significantly reduce costs for the heap leach over the next few months and expect that we will have stacking completed before the start of the wet season.

As at December 31, 2007, the Company had stacked 5.097 million tonnes on the pad at a grade of 0.78 grams per tonne gold and 32.30 grams per tonne silver or approximately 1.40 gold equivalent grams per tonne.

As of the end of February 2008, the Company has 106,498 tonnes of low grade ore grading 0.76 grams per tonne gold equivalent stockpiled ahead of the heap leach that will allow uninterrupted production to continue during unfavourable weather conditions and periods of equipment downtime.

Ocampo Cash Costs

Increased cash costs per ounce were directly attributable to lower production rates achieved during the year. Fixed and mobile equipment issues as well as lack of equipment negatively impacted availability and production in all areas of the mine. However during the fourth quarter, productivity improvements combined with the continued strengthening of key performance indicators such as daily mill tonnage, recovery, equipment availability and strong open pit production all contributed to the improved results. The Company has seen an improvement in cash costs into 2008 and these initiatives are expected to continue delivering further improvements in the coming quarters.

Ocampo Exploration

Approximately 16% of the total 2007 production was mined out of reserve (20% of the underground ore), which illustrates the potential to add to reserves and perhaps increase the production profile in the future.

11


Management’s Discussion & Analysis

The primary focus of the 2008 exploration strategy is a three stage design:

1.     

A development and drilling program at the advanced exploration Santa Eduviges underground target, which is located beneath the open pits and has the potential to become a third long term source of mill feed.

 

2.     

A significant increase to 14,000 metres in exploration development in the Ocampo underground mine aimed at expanding the original 7 veins to the targeted 21 veins.

 

3.     

Greenfield follow up exploration on the 10,000 hectare land position targeting several known anomalies including the Cerro Colorado vein lying parallel to and between the Ocampo vein structures and the Pinos Altos deposit.

 

Operational Review – El Cubo

As with Ocampo, in 2008 the Company is implementing a number of production and cost initiatives at the El Cubo mine.

Areas for Improvement 

Measures to be Taken in 2008 

 High Labour Costs 

  • Optimization of workforce to reduce total site manning of both employees and contractors 

 

  • Advancing key capital projects by early 2008 to drive production throughput and plant availability 

 Processing Facilities 

  • Integration of the El Cubo mine workings with the Las Torres shaft and Mill infrastructure 

 

  • All underground ore will be hauled via train at the 600 level to the Las Torres shaft and plant 

 Equipment Availability 

  • Additional Mobile Equipment for the Underground 

 

  • Improved Preventative Maintenance Practices implemented 

 Lack of Underground 

  • Focus on extending existing underground exploration development into areas of known structures 

 Development 

  • which have been neglected historically due to a lack of capital and priority 

 Underground Mining Method 

  • Improved overall mining methods 

 Selection 

  • Established Quality Assurance / Quality Control team dedicated to dilution management 

Underground and Milling Operations 

 

         Total 2007 

Q4 2007 

Q3 2007 

Q2 2007 

Q1 2007 

 Tonnes of ore mined and processed 

          689,753 

160,278 

200,530 

206,166 

122,779 

 Average grade of gold processed (1) 

                    1.77 

1.74 

1.54 

1.61 

2.44 

 Average grade of silver (1) 

                  83.29 

88.18 

69.94 

73.02 

115.96 

 Gold equivalent grade processed (1) 

                   3.38 

3.33 

2.85 

3.07 

4.82 

 Gold ounces produced 

                33,740 

8,017 

8,524 

9,274 

7,925 

 Silver ounces produced 

           1,582,316 

394,738 

376,648 

432,271 

378,659 

 Gold ounces sold 

                33,740 

8,017 

8,524 

9,274 

7,925 

 Silver ounces sold 

           1,582,316 

394,738 

376,648 

432,271 

378,659 

 Gold equivalent ounces sold 

                64,308 

15,112 

15,409 

18,135 

15,652 

(1) Grams per tonne 

 

 

 

 

 

During the latter part of 2007 the Company began to rationalize the four existing mill facilities. Currently, two of the four mills have been put on care & maintenance with the third mill expected to be placed on care & maintenance in Q2 2008 after which, all ore will be routed to the 2,200 tonne per day Las Torres mill. In early 2008, all administration functions were consolidated at the Las Torres facility.

In early 2008, the Company reported improved productivity and financial results at El Cubo where monthly average production increased over 2007 with a corresponding decrease in costs, primarily as a result of the consolidation of the processing facilities. Further cost reductions are expected to be realized with the closure of our third mill, the commissioning the 600 metre haulage level and as we continue with labour rationalization initiatives in the latter part of 2008. Currently we are already hauling at a reduced level along the 600 metre haulage level with the ramp up to full capacity expected in latter part of 2008.

12


Management’s Discussion & Analysis

El Cubo Exploration

During 2006 and 2007, 40% of the gold and silver production was mined outside of reserves, which illustrates the potential to add to reserves and perhaps increase the production profile in the future.

As with Ocampo there is exploration opportunity at El Cubo with little of the land position being explored to date(the Company is currently only utilizing 700 hectares of El Cubo’s 8,500 hectares of total concessions).

During 2008 we have allocated $2 million to our exploration program and have identified drill priorities at Villalpando, La Loca / Dolores and San Nicolas with secondary targets at San Francisco Poniente, Imaculada, Vein 178, Soledad, Milenio, La Luz, Villalpando del Alto and Tuberos. In addition we have significantly increased the amount of development exploration for 2008.

Guadalupe y Calvo Exploration Project

During 2007 the Company initiated a 15-hole (2,400 metre) exploration drilling program on this highly prospective project. Upon the completion of this drilling program, expected to be in Q2 2008, the Company will complete a scoping study in order to determine the next steps in this advanced exploration property. The recent drilling program was designed to target the high grade core to further test the continuity of the high grade mineralisation along the Rosario and Nankin veins. Prior to being acquired by Gammon, Mexgold had completed 37 holes, comprising approximately 10,000 metres of drilling. As the structure remains open along strike and at depth, the objective of the current exploration program is focused on expanding the property’s resources and better definition of the vein structures.

Our drilling program in the first half of 2008 is designed to allow Gammon to subsequently update the resource estimate, conduct metallurgical test work and to complete a scoping study for a potential open pit and underground operation. Pending the positive results from the drilling program, the Company anticipates aggressively advancing the exploration program at this property starting in the second half of 2008. Further, as our exploration program is only focusing on 1 kilometre of the 3 kilometres of identified potential, there remains exploration upside yet to be delineated.

Expenses 

       

 

Year ended  

Year ended 

5 months ended 

 

December
31, 2007 

December 31, 2006 

December 31, 2005 

 General and administrative 

$24,156,361 

$28,247,412 

$10,683,891 

 Amortization and depletion 

$43,392,399 

$18,756,816 

$180,188 

General and administrative costs decreased by $4.1 million from 2006 due to $15.8 million of stock-based compensation expense being incurred in 2006 compared to $4.0 million in 2007, offset by an increase in wages and severance expenses of $7.4 million. The Company is managing other cost reduction initiatives that are expected to favourably impact general and administrative costs.

Amortization and depletion, which relates to mining activities, increased by $24.6 million to $43.4 million for the year, compared to $18.8 million for the year ended December 31, 2006. The increase is primarily attributable to a full twelve months of amortization and depletion expenses associated with Mexgold assets (including fair value purchase price allocations) being included in the Company’s consolidated results following the full acquisition of Mexgold in August 2006; and increased production activities and assets being commissioned at Ocampo during 2007 resulting in higher amortization and depletion expenses.

13


Management’s Discussion & Analysis

Other Income / (Expense) 

       

 

Year ended 

Year ended 

5 months ended 

 

December 31, 2007 

December 31, 2006 

December 31, 2005 

 Interest on long-term debt 

($3,896,791) 

($5,272,904) 

($205,674) 

 Foreign exchange (loss)/gain 

($8,933,060) 

($1,497,350) 

$569,580 

 Gain/(loss) on equity investment 

$Nil 

$503,711 

$177,855 

 Interest and other income 

$772,218 

$785,203 

$170,582 

Interest on long-term debt decreased by $1.4 million to $3.9 million in 2007 from $5.3 million in 2006. The Company used a significant portion of the proceeds of the $200 million CAD equity offering to repay the $120 million US credit facility with Scotia Capital and Société Générale in late April 2007. At the end of the year, the Company had utilized $30.48 million of its $60 million operating facility.

Non-cash foreign exchange loss increased by $7.5 million from $1.5 million to $8.9 million in 2007 as a result of the translation of the Company’s operations in Canadian dollars and Mexican pesos to US dollars. The Company will continue to experience non-cash foreign currency gains or losses as a result of fluctuations between the US and Canadian dollars and the Mexican peso.

Gains and losses on equity investments was $Nil during 2007 as the investment in Mexgold Resources Inc. was eliminated on August 8, 2006 upon the acquisition of all the issued and outstanding common shares, options and warrants of Mexgold in exchange for common shares, options and warrants of the Company. The Company earned interest on short-term investments and other income of $0.8 million during 2007, compared to $0.8 million in 2006.

Income taxes (recovery)

During the year ended December 31, 2007, the Company’s future income tax expense of $27.6 million was significantly higher than the $1.4 million recovery in 2006, reflecting the significant adjustment recorded in Q3 to reflect the impact of the recently enacted Mexican Single Rate Tax (substantively enacted on September 28, 2007). With the implementation of this Single Rate Tax on January 1, 2008, the Company’s Mexican subsidiaries will pay a 17.5% tax (with lower transitional rates for 2008 and 2009) on the Company’s revenues less certain deductions, all determined on a cash basis. The Company will pay the single rate tax to the extent that it exceeds its income tax otherwise determined pursuant to the pre-existing income tax system in each taxation year. The Company would have recorded a recovery of $15.5 million if this new tax had not been enacted which resulted in an overall impact of $43.1 million to the Company.

The Company has significant income tax loss carry-forwards primarily relating to the accelerated deduction of mining properties costs permitted for income tax purposes. Prior to the implementation of the single rate tax, the full benefit of these loss carry-forwards was reflected as a future income tax asset based on the current Mexican income tax rate of 28%. The future income tax expense recorded in 2007 reflects the value of these loss carry-forwards that the Company projects will not be utilized as intended in future years due to the existence of the new single rate tax. While the 2007 net loss was increased significantly by this future income tax adjustment, the expense is a non-cash item and there was no impact on cash from operating activities.

The Company has sufficient income tax loss carry-forwards in Mexico and Canada which lower the effective current tax rate to zero except for the imposition of the new single rate tax effective January 1, 2008. Future income tax assets and liabilities are determined based on the difference between the financial reporting and tax basis of assets and liabilities and on unclaimed losses carried forward and are measured using the substantively enacted tax rates that will be in effect when the differences are expected to reverse or when unclaimed losses are expected to be utilized.

14


Management’s Discussion & Analysis

Non-GAAP Measure – Total Cash Cost per Ounce Calculation

Total (consolidated) cash costs is a non-GAAP financial measure. Management uses this measure internally to better assess performance trends for the Company as a whole. The Company believes that, in addition to conventional measures prepared in accordance with GAAP, certain investors use such non-GAAP information to evaluate the Company’s performance and ability to generate cash flow. The Company believes that these measures better reflect the Company’s performance for the current period and are a better indication of its expected performance in future periods. Total (consolidated) cash costs is intended to provide additional information, does not have any standardized meaning prescribed by GAAP and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. This measure is not necessarily indicative of operating profit or cash flow from operations as determined under GAAP. Other companies may calculate these measures differently.

Total cash costs per ounce is calculated by dividing all of the costs absorbed into inventory by applicable ounces sold. The following table provides a summary of total cash costs per ounce reconciled to the financial statements:

 

Year ended 

Year ended 

 

December 31, 2007 

December 31, 2006 

Production cost per financial statements 

$140,302,718 

$37,943,583 

Refining cost per financial statements 

$1,509,927 

$525,604 

Total cash costs 

$141,812,645 

$38,469,187 

Divided by gold equivalent ounces sold (1) 

218,200 

105,243 

Total cash cost per gold equivalent ounce 

$650 

$366 

Total cash costs (per above) 

$141,812,645 

$38,469,187 

Less: Silver revenue (see below) 

($67,475,532) 

($22,999,786) 

 

$74,337,113 

$15,469,401 

Divided by gold ounces sold 

121,107 

67,477 

Total cash cost per gold ounce (2) 

$614 

$229 

Silver price 

$13.42 

$12.18 

Multiplied by silver ounces 

5,027,983 

1,888,324 

Silver revenue 

$67,475,532 

$22,999,786 

(1)     

Gold equivalent ounces are calculated based on actual sales.

(2)     

The calculation of total cash cost per gold ounce excludes the by-product silver sales revenue.

Liquidity and Capital Resources

On April 24, 2007, the Company completed a public offering of 10,000,000 common shares at $17.81 (C$20.00) per common share in Canada and the United States for gross proceeds of $178.1 million (C$200 million). The Company used part of the offering proceeds to repay its $120 million debt facility. The Company believes this strengthens the balance sheet, and allows the Company to immediately capitalize on investment and expansion opportunities to enhance its resources and reserves.

The balance of cash and cash equivalents as at December 31, 2007 was $3.7 million (December 31, 2006 - $4.1 million). In the fourth quarter the Company finalized a $60 million revolving credit facility with the Bank of Nova Scotia and Bank of Montreal, expiring on December 31, 2008. The Company will, subject to certain conditions, have an initial availment of $47.5 million increasing to $60 million upon the completion of an updated resources and reserves study, life of mine plan and 2008 budget, all of which are expected to be finalized in the first quarter of 2008. This facility replaces the previous $20 million revolving facility.

15


Management’s Discussion & Analysis

Details of the Company’s operating, financing and investing activities and long-term debt agreement are provided below. Other than as discussed herein, the Company is not aware of any trends, demands, commitments, events or uncertainties that may result in the Company’s liquidity or capital resources either materially increasing or decreasing at present or in the foreseeable future. Material increases or decreases in the Company’s liquidity and capital resources will be substantially determined by the success or failure of the Company’s operations, the Company’s exploration, development and construction programs on its mineral properties and its ability to obtain equity or other sources of financing.

Cash used in operations increased by $14.2 million to $34.2 million from $20.0 million in 2006 as a result of a reduction in the non-cash working capital year over year of $5.9 million, offset by an increased cash operating loss of $20.1 million.

Investing activities for the year ended December 31, 2007 used cash of $73.5 million as a result of expenditures on mining interests and property, plant and equipment, which compared to $87.8 million in 2006 when the Ocampo mine was still under construction. Investing activities for the year ended December 31, 2007 include a full twelve months of investing activities at El Cubo whereas the prior year only included investing expenditures from August 2006 following the full acquisition of Mexgold. In addition, investing activities for the year ended December 31, 2006 are offset by cash provided by the acquisition of Mexgold of $13.6 million. The Company has committed to purchase $2.8 million in equipment that will be financed by either operating cash flow and/or the Company’s existing credit facility. This equipment is expected to be delivered in the first half of 2008. In addition, the Company has budgeted capital expenditures for 2008 of $52.5 million.

Financing activities for the year ended December 31, 2007 contributed cash of $107.3 million and reflects net proceeds of $170.0 million from the equity issuance, $33.4 million in proceeds received related to the exercising of stock options, proceeds of $37.0 million from long term debt less $133.1 million in repayments of long term debt and capital lease obligations, which compares to financing activities in the year ended December 31, 2006 which were also a source of cash of $106.1 million reflecting $14.1 million in proceeds received related to the exercising of stock options, proceeds of $94.8 million from long term debt and related party advances, less $2.8 million in repayments of long term debt, and capital lease obligations. As at December 31, 2007, the Company had options in-the-money that would inject $54.7 million CAD into the Company if exercised.

Gammon will always attempt to target the best sources of funding to supplement operating cash flows for financing the Company’s rapid development while also optimizing the Company’s capital structure through employing the appropriate mix of capital. The operational turnaround that is underway at Ocampo combined with the solid contributions from El Cubo is expected to continue strengthening the Company’s Balance Sheet and liquidity position. In today’s metal price environment, Gammon rates its financial foundation strongly and anticipates that funding from existing cash reserves, operational cash flows and in-place credit facilities will be more than sufficient to fund the Company’s anticipated working capital requirements and growth plans in 2008.

Contractual Obligations 

A summary of the Company’s contractual obligations is summarized as follows: 
       

 

Total 

Less than one year 

1 – 3 years 

 Long-term debt 

$30,800,988 

$30,648,569 

$152,419 

 Interest on long-term debt 

$2,156,000 

$2,156,000 

$Nil 

 Capital leases 

$3,605,265 

$2,424,070 

$1,181,195 

 Future purchase commitments 

$2,797,325 

$2,797,325 

$Nil 

 Total 

$39,359,579 

$38,025,964 

$1,333,615 

The Company does not have any contractual obligations which extend beyond 3 years. 

16


Management’s Discussion & Analysis

Outstanding Share Data

The Company’s share capital was comprised of the following as at December 31, 2007:

 

Year ended Year ended

 

December 31, 2007 December 31, 2006

Authorized:

   

Unlimited number of common shares

   

Unlimited number of non-cumulative, dividends to be determined by the Board of Directors not to exceed 12%, non-participating, non-

voting, Class "A" preferred shares, redeemable at paid-in value

   

Unlimited number of non-cumulative, dividends to be determined by the Board of Directors not to exceed 13%, non-participating, non-

voting, Class "B" preferred shares, redeemable at paid-in value

   

Issued:

   

Common shares

117,432,363 102,146,108

At March 31, 2008, the Company had common shares outstanding of 118,326,068. 

Off-Balance Sheet Arrangements 

The Company does not have any off-balance sheet arrangements. 

Transactions with Related Parties 

The Company paid or has payable the following amounts to directors for services other than in their capacity as directors, and companies controlled by or related to directors:

 

Year ended 

Year ended 

5 months ended 

 

December 31, 2007 

December 31, 2006 

December 31, 2005 

Management fees 

$Nil 

$Nil 

$127,664 

Mining interests – labour (1) 

$2,437,344 

$3,717,149 

$4,092,041 

Production costs – labour (1) 

$31,147,564 

$19,509,027 

$Nil 

Production costs – mine consumables (2) 

$2,032,928 

$3,040,831 

$Nil 

Capital assets (3) 

$24,838 

$916,127 

$Nil 

   

(1)     

The Company pays a third party company related to Mr. Fred George, a director of the Company, for the provision of workers in the Mexican operations at cost plus 13%. Gammon is committed to a fair and transparent procurement process for all goods and services and accordingly, in late 2007, a competitive bid process was conducted. Four organizations submitted bids after which the same related party was selected as the most competitively priced and best resourced organization to provide the requested services. On December 1, 2007, a new two year contract was signed at cost plus 10%.

(2)     

The Company pays a third party company related to Mr. Canek Rangel, a director of the Company, for the provision of mine consumables. The Company believes these costs are at fair market value.

(3)     

The Company pays a third party company related to Mr. Canek Rangel, a director of the Company, for the provision and construction of production and support facilities. The Company believes these costs are at fair market value.

The amounts owing to related parties are recorded as a payable on the balance sheet.

No director, senior officer, principal holder of securities or any associate or affiliate thereof of the Company has any interest, directly or indirectly, in material transactions with the Company or any of its direct or indirect wholly-owned subsidiaries, other than the above-noted transactions, which were in the normal course of operations.

17


Management’s Discussion & Analysis

Directors and officers of the Company are entitled to hold management incentive stock options. The Company has a Stock Option Plan for directors, officers, employees and consultants of the Company and its subsidiaries. The purpose of the Stock Option Plan is to encourage ownership of the Company’s common shares by the persons who are primarily responsible for the management and profitable growth of the Company’s business, as well as to provide an additional incentive for superior performance by such persons and attract and retain valued personnel. The plan provides that eligible persons thereunder include any director, senior officer, consultant or employee of the Company. A consultant is defined as an individual that is engaged by the Company, under a written contract, to provide services on an ongoing basis and spends a significant amount of time on the Company’s business and affairs. The definition of consultant also includes an individual whose services are engaged through a personal holding company.

Risks and Uncertainties

The operations of Gammon are high-risk due to the nature of mining, exploration, and development activities, all of which are conducted in Mexico. The Company’s foreign mining investments are subject to the risks normally associated with the conduct of business in foreign countries, which include but are not limited to, invalidation of governmental orders or permits, corruption, uncertain political and economic environments, terrorist actions, arbitrary changes in laws or policies, the opposition of mining from environmental or other non-governmental organizations and limitations of foreign ownership or the export of gold. These risks may limit or disrupt the Company’s projects, restrict the movement of funds or result in the deprivation of contractual rights or the taking of property by nationalization or expropriation without fair compensation, any or all of which could have a material and adverse effect on the Company’s profitability or the viability of its operations.

The Company’s mineral development and mining activities, and profitability are subject to significant risks due to numerous factors outside its control including, but not limited to, the following risks:

Nature of Mineral Exploration and Mining

Because mines have limited lives based on proven and probable mineral reserves, the Company will be required to continually replace and expand its mineral reserves as its mines produce gold. The Company’s ability to maintain or increase its annual production of gold and silver in the future will be dependent in significant part on its ability to identify and acquire additional commercially viable mineral properties, bring new mines into production and to expand mineral reserves at existing mines.

Mineral resource exploration and development is a highly speculative business, characterized by a number of significant risks including, among other things, unprofitable efforts resulting not only from the failure to discover mineral deposits but also from finding mineral deposits that, though present, are insufficient in quantity and quality to return a profit from production. There can be no assurance that the Company will successfully acquire additional mineral rights. While the discovery of additional ore-bearing structures may result in substantial rewards, few properties which are explored are ultimately developed into producing mines. Major expenses may be required to establish reserves by drilling and to construct mining and processing facilities at a particular site. It is impossible to ensure that the current exploration and development programs of the Company will result in profitable commercial mining operations. The profitability of the Company’s operations will be, in part, directly related to the cost and success of its exploration and development programs which may be affected by a number of factors.

Mining is inherently dangerous and subject to conditions or events beyond the Corporation’s control, which could have a material adverse effect on the Company’s business. Mining involves various types of risks and hazards, including, but not limited to, environmental hazards; industrial accidents; metallurgical and other processing problems; unusual or unexpected rock formations; structural cave-ins or slides; seismic activity; flooding; fires; periodic interruptions due to inclement or hazardous weather conditions; variations in grade, deposit size, density and other geological problems; mechanical equipment performance problems; unavailability of materials and equipment; labour force disruptions; unanticipated or significant changes in the costs of supplies; and unanticipated transportation costs. Where considered practical to do so, the Company maintains insurance against risks in the operation of its business in amounts which it believes to be reasonable. Such insurance, however, contains exclusions and limitations on coverage. The Company may suffer a material adverse effect on its business if it incurs losses related to any significant events that are not covered by its insurance policies.

18


Management’s Discussion & Analysis

 Reserve Estimates

Mineral resource and reserve figures are based upon estimates made by Company personnel and independent geologists. These estimates are imprecise and depend upon geological interpretation and statistical inferences drawn from drilling and sampling analysis, which may prove to be unreliable. There can be no assurance that these estimates will be accurate; that reserves, resources or other mineralization figures will be accurate; or that this mineralization could be mined or processed profitably. Mineralization estimates for the Company’s properties may require adjustments or downward revisions based upon further exploration or development work or actual production experience. In addition, the grade of ore ultimately mined, if any, may differ from that indicated by drilling results. There can be no assurance that minerals recovered in small scale tests will be duplicated in large scale tests under on-site conditions or in-production scale. The reserve and resource estimates have been determined and valued based on assumed future prices, cut-off grades and operating costs that may prove to be inaccurate. Extended declines in market prices for gold, silver and copper may render portions of the Company’s mineralization uneconomic and result in reduced reported mineralization. Any material reductions in estimates of mineralization, or of the Company’s ability to extract this mineralization, could have a material adverse effect on the Company’s results of operations or financial condition.

Foreign Operations

All of the Company’s property interests are located in Mexico, and are subject to Mexican federal and state laws and regulations. As a result, the Company’s mining investments are subject to the risks normally associated with the conduct of business in foreign countries. The Corporation believes the present attitude of the governments of Mexico and of the States of Chihuahua and Guanajuato (where the Corporation’s projects are located) to foreign investment and mining to be favourable; however, any variation from the current regulatory, economic and political climate could have an adverse effect on the affairs of the Company.

The risks of conducting business in a foreign country may include, among others, labour disputes, invalidation of governmental orders and permits, corruption, uncertain political and economic environments, sovereign risk, war (including in neighbouring states), civil disturbances and terrorist actions, arbitrary changes in laws or policies of particular countries, the failure of foreign parties to honour contractual relations, corruption, foreign taxation, delays in obtaining or the inability to obtain necessary governmental permits, opposition to mining from environmental or other non-governmental organizations, limitations on foreign ownership, limitations on the repatriation of earnings, limitations on gold exports, instability due to economic under-development, inadequate infrastructure and increased financing costs. In addition, the enforcement by the Company of its legal rights to exploit its properties may not be recognized by the government of Mexico or by its court system. These risks may limit or disrupt the Company’s operations, restrict the movement of funds or result in the deprivation of contractual rights or the taking of property by nationalization or expropriation without fair compensation.

Environmental Laws and Regulations

The Company’s exploration and production activities in Mexico are subject to regulation by governmental agencies under various environmental laws. These laws address emissions into the air, discharges into water, management of waste, management of hazardous substances, protection of natural resources, antiquities and endangered species and reclamation of lands disturbed by mining operations. Environmental legislation in many countries is evolving and the trend has been towards stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and increasing responsibility for companies and their officers, directors and employees. Compliance with environmental laws and regulations may require significant capital outlays on behalf of the Company and may cause material changes or delays in the Company’s intended activities. There can be no assurance that future changes in environmental regulations will not adversely affect the Company’s business.

19


Management’s Discussion & Analysis

Property Rights, Permits and Licensing

The Company’s current and anticipated future operations, including further exploration, development activities and expansion or commencement of production on the Company’s properties, require certain permits and licenses from various levels of governmental authorities. The Company may also be required to obtain certain property rights to access, or use, certain of its properties in order to proceed to development. There can be no assurance that all licenses, permits or property rights required for the expansion and construction of mining facilities and the conduct of mining operations will be obtainable on reasonable terms or in a timely manner, or at all, that such terms may not be adversely changed, that required extension will be granted, or that the issuance of such licenses, permits or property rights will not be challenged by third parties. Delays in obtaining or a failure to obtain such licenses, permits or property rights or extension thereto; challenges to the issuance of such licenses, permits or property rights, whether successful or unsuccessful; changes to the terms of such licenses, permits or property rights; or a failure to comply with the terms of any such licenses, permits or property rights obtained; could have a material adverse impact on the Corporation.

Uncertainty of Title

The Company cannot guarantee that title to its properties will not be challenged. Title insurance is generally not available for mineral properties and the Company’s ability to ensure that it has obtained secure claim to individual mineral properties or mining concessions may be severely constrained. The Company’s mineral properties may be subject to prior unregistered agreements, transfers or claims, and title may be affected by, among other things, undetected defects. A successful challenge to the precise area and location of these claims could result in the Company being unable to operate on its properties as permitted or being unable to enforce its rights with respect to its properties.

Commodity Price Risk

The profitability of the Company’s gold mining operations will be significantly affected by changes in the market prices for gold and silver. Gold and silver prices fluctuate on a daily basis and are affected by numerous factors beyond the Company’s control. The supply and demand for gold and silver, the level of interest rates, the rate of inflation, investment decisions by large holders of gold and silver, including governmental reserves, and stability of exchange rates can all cause significant fluctuations in gold and silver prices. Such external economic factors are in turn influenced by changes in international investment patterns and monetary systems, and political developments. The price of gold and silver has fluctuated widely and future serious price declines could cause continued commercial production to be impractical. Depending on the price of gold and silver, cash flow from mining operations may not be sufficient to cover costs of production and capital expenditures. If, as a result of a decline in gold and silver prices, revenues from metal sales were to fall below operating costs, production may be discontinued.

The Company presently does not employ any hedging instruments to manage its commodity price risk.

Interest Rate Risk

The Company is exposed to interest rate risk on its variable rate debt. At December 31, 2007 we had $30.48 million of variable rate debt which carries an interest rate of LIBOR plus 1.75% for US dollar advances, and prime rate plus 0.75% for Canadian dollar advances. We have not entered into any agreements to hedge against unfavourable changes in interest rates, but may in the future actively manage our exposure to interest rate risk.

Foreign Currency Exchange Rate Risk

All metal sales revenues for the Company are denominated in US dollars. The Company is primarily exposed to currency fluctuations relative to the US dollar on expenditures that are denominated in Canadian dollars and Mexican Pesos, such as payments for labour, operating supplies and property, plant and equipment. These potential currency fluctuations could have a significant impact on production costs and thereby, the profitability of the Company. The Company is also exposed to the impact of currency fluctuations on its monetary assets and liabilities. The Company does not actively manage this exposure.

20


Management’s Discussion & Analysis

Credit Risk

Credit risk relates to accounts receivable and other contracts, and arises from the possibility that any counterparty to an instrument fails to perform. The Company only transacts with highly-rated counterparties and a limit on contingent exposure has been established for each counterparty based on the counterparty’s credit rating.

Changes in Accounting Policies

The CICA issued the following sections that were adopted by the Company on January 1, 2007: Section 3855, Financial Instruments - Recognition and Measurement; Section 3865, Hedges; Section 1530, Comprehensive Income; Section 3861,

Financial Instruments – Disclosure and Presentation, and Section 3251, Equity. In accordance with the transitional provisions, these standards have been applied retrospectively without restatement of prior periods, except to classify the currency translation adjustment as a component of accumulated other comprehensive income.

(i) Section 3855, Financial Instruments – Recognition and Measurement

Section 3855 prescribes when a financial asset, financial liability or derivative is to be recognized on the balance sheet and at what amount, requiring fair value or cost-based measures under different circumstances. Under Section 3855, financial instruments must be classified into one of five categories: held-for-trading, held-to-maturity, loans and receivables, available-for-sale, or other financial liabilities. All financial instruments, including derivatives, are initially measured on the balance sheet at fair value. Subsequent measurement depends on the classification as follows: held-for-trading – measured at fair value with changes in fair value recognized in net earnings; held-to-maturity, loans and receivables, and other financial liabilities – recorded at amortized cost with gains and losses recognized in net earnings in the period that the asset is derecognized or impaired; and available-for-sale –measured at fair value with changes in fair value recorded in other comprehensive income, until the instrument is derecognized or impaired, when the amounts are then recorded in net earnings.

In accordance with these new standards, the Company has classified its financial instruments as follows:

Asset / Liability 

 

Classification 

 

Measurement 

Cash and cash equivalents 

 

Held-for-trading 

 

Fair value 

Restricted cash 

 

Held-for-trading 

 

Fair value 

Receivables 

 

Loans and receivables 

 

Amortized cost 

Payables and accruals 

 

Other financial liabilities 

 

Amortized cost 

Long-term debt 

 

Other financial liabilities 

 

Amortized cost 


Transaction costs other than those related to financial instruments classified as held-for-trading, which are expensed as incurred, are added to the fair value of the financial asset or financial liability on initial recognition and amortized using the effective interest method.

Fair values are based on quoted market prices where available from active markets, otherwise fair values are estimated using a variety of valuation techniques and models.

All derivative instruments, including embedded derivatives, are recorded on the balance sheet at fair value unless exempted from derivative treatment as a normal purchase and sale. All changes in fair value are recorded in earnings unless cash flow hedge accounting is used, in which case changes in fair value are recorded in other comprehensive income. The Company has elected to apply the accounting treatment for all embedded derivatives in host contracts entered into on or after December 1, 2002. The impact of the change in accounting policy related to financial instruments was not material.

(ii) Section 3865, Hedges

Section 3865, Hedges replaced Accounting Guideline 13, Hedging Relationships. The requirements for the identification, designation, documentation and assessment of effectiveness of hedging relationships remain substantially unchanged from AcG-13. However, Section 3865 addresses the accounting treatment of qualifying hedging relationships and the necessary disclosures, and also requires all derivatives in hedging relationships to be recorded at fair value. The adoption of this standard had no impact on the Company, as there are no hedging relationships in place.

21


Management’s Discussion & Analysis

(iii) Section 1530, Comprehensive Income

Section 1530, Comprehensive Income introduces a statement of comprehensive income, which is comprised of net earnings and other comprehensive income. Other comprehensive income represents the change in shareholders’ equity from transactions and other events from non-owner sources, and includes unrealized gains and losses on financial assets that are classified as available-for-sale and changes in the fair value of the effective portion of cash flow hedging instruments. The Company has included the cumulative changes in other comprehensive income in accumulated other comprehensive income, which is presented as a new category of shareholders’ equity on the consolidated balance sheet.

(iv) Section 3861, Financial Instruments – Disclosure and Presentation

Section 3861, Financial Instruments – Disclosure and Presentation replaces Section 3860 of the same title, and establishes the standards for presentation of financial instruments and non-financial derivatives, and identifies the information that should be disclosed about them.

(v) Section 3251, Equity

Section 3251, Equity, replaces Section 3250, Surplus, and describes the standards for the presentation of equity and changes in equity during the period, with reference to the new comprehensive income standard.

Recent Canadian Accounting Pronouncements

The following is an overview of recent accounting pronouncements that the Company will be required to adopt in future years:

(i) Section 3031, Inventories

In June 2007, the Canadian Institute of Chartered Accountants (“CICA”) issued new Section 3031, Inventories, which replaces Section 3030 of the same title. This new standard provides guidance on the determination of cost and requires inventories to be measured at the lower of cost and net realizable value, with more specific guidance on the costs to include in the cost of inventory. Costs such as storage costs and administrative overhead that do not contribute to bringing inventories to their present location and condition are specifically excluded from the cost of inventories and expensed in the period incurred. This standard is effective for fiscal years beginning on or after January 1, 2008 and will be implemented by the Company in the first quarter of 2008. The Company is currently assessing the implications of this new standard.

(ii) Section 3862, Financial Instruments – Disclosures and Section 3863, Financial Instruments – Presentation

Effective January 1, 2008, the Company will be required to comply with Section 3862, Financial Instruments – Disclosures, and Section 3863, Financial Instruments – Presentation. These sections will replace existing Section 3861, Financial Instruments –Disclosure and Presentation. The presentation standards are carried forward unchanged. The disclosure standards are enhanced and expanded to complement the changes required by Section 3855, Financial Instruments – Recognition and Measurement.

(iii) Section 1535, Capital Disclosures

Effective January 1, 2008, the Company will be required to comply with Section 1535, Capital Disclosures. This section establishes standards for disclosing information that enables users of financial statements to evaluate the entity’s objectives, policies and processes for managing capital. The new requirements are related to disclosure only and will not impact the financial results of the Company.

22


Management’s Discussion & Analysis

(iv) Section 3064, Goodwill and Intangible Assets

In January 2008, the CICA issued Section 3064, Goodwill and Intangible Assets, which replaces existing Section 3062, Goodwill and Other Intangible Assets. This new section establishes standards for the recognition of internally developed intangible assets. The standards for the recognition and impairment testing of goodwill are carried forward unchanged. This section is applicable to the Company commencing January 1, 2009.

Critical Accounting Estimates

The preparation of financial statements in accordance with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures made in the consolidated financial statements and accompanying notes. Management continually evaluates the estimates and assumptions it uses. Actual results could differ from these estimates.

(i) Mineral reserves used to measure depletion and amortization

We record amortization expense based on the estimated useful economic lives of long-lived assets. Changes in reserve estimates are generally calculated at the end of each year and cause amortization expense to increase or decrease prospectively. The estimate that most significantly affects the measurement of amortization is quantities of proven and probable reserves, because we amortize a large portion of property, plant and equipment using the units-of-production method. The estimation of quantities of reserves is complex, requiring significant subjective assumptions that arise from the evaluation of geological, geophysical, engineering and economic data for a given ore body. This data could change over time as a result of numerous factors, including new information gained from development activities, evolving production history and a reassessment of the viability of production under different economic conditions. Changes in data and/or assumptions could cause reserve estimates to substantially change from period to period. Actual production could differ from expected based on reserves, and an adverse change in gold prices could make a reserve uneconomic to mine. Variations could also occur in actual ore grades and gold and silver recovery rates from estimates. A key trend that could reasonably impact reserve estimates is rising market mineral prices, because the mineral price assumption is closely related to the trailing three-year average market price. As this assumption rises, this could result in an upward revision to reserve estimates as material not previously classified as a reserve becomes economic at higher gold prices.

(ii) Goodwill and long lived assets

Goodwill is not amortized and is assessed for impairment at the reporting unit level. This is done, at a minimum, annually. Any potential goodwill impairment is identified by comparing the fair value of a reporting unit to its carrying value. If the fair value of the reporting unit exceeds its carrying value, goodwill is considered not to be impaired. If the carrying value of the reporting unit exceeds its fair value, potential goodwill impairment has been identified and must be quantified by comparing the estimated fair value of the reporting unit’s goodwill to its carrying value. Any goodwill impairment will result in a reduction in the carrying value of goodwill on the consolidated balance sheet and in the recognition of a non-cash impairment charge in operating income.

The Company periodically assesses the recoverability of long-lived assets when there are indications of potential impairment. In performing these analyses, the Company considers such factors as current results, trends and future prospects, current market value and other economic factors. A substantial change in estimated undiscounted future cash flows for these assets could materially change their estimated fair values, possibly resulting in additional impairment.

(iii) Post-employment and post-retirement benefits

Certain estimates and assumptions are used in actuarially determining the Company’s defined pension and employee future benefit obligations. Significant assumptions used to calculate the pension and employee future benefit obligations are the discount rate and long-term compensation rate. These assumptions depend on various underlying factors such as economic conditions, investment performance, employee demographics and mortality rates. These assumptions may change in the future and may result in material changes in the pension and employee benefit plans expense.

23


Management’s Discussion & Analysis

For fiscal 2007, the discount rate used for calculation of pension and other benefit plan expense was 4.00% (fiscal 2006 –4.00%), and the rate of compensation was 1.50% (2006 – 1.50%). Changes to more than one assumption simultaneously may amplify or reduce impact on the accrued benefit obligations or benefit plan expenses.

(iv) Future income taxes and valuation allowances

We are periodically required to estimate the tax basis of assets and liabilities. Where applicable tax laws and regulations are either unclear or subject to varying interpretations, it is possible that changes in these estimates could occur that materially affect the amounts of future income tax assets and liabilities recorded in our financial statements. Changes in future tax assets and liabilities generally have a direct impact on earnings in the period of changes.

Each period, we evaluate the likelihood of whether some portion or all of each future tax asset will not be realized. This evaluation is based on historic and future expected levels of taxable income, the pattern and timing of reversals of taxable temporary timing differences that give rise to future tax liabilities, and tax planning initiatives. Levels of future taxable income are affected by, among other things, market gold prices, production costs, quantities of proven and probable gold reserves, interest rates and foreign currency exchange rates. If we determine that it is more likely than not (a likelihood of more than 50%) that all or some portion of a future tax asset will not be realized, then we record a valuation allowance against the amount we do not expect to realize. Changes in valuation allowances are recorded as a component of income tax expense or recovery for each period.

(v) Asset retirement obligations

Asset retirement obligations (“AROs”) arise from the acquisition, development, construction and normal operation of mining property, plant and equipment, due to government controls and regulations that protect the environment and public safety on the closure and reclamation of mining properties. We record the fair value of an ARO in our financial statements when it is incurred and capitalize this amount as an increase in the carrying amount of the related asset.

The fair values of AROs are measured by discounting the expected cash flows using a discount factor that reflects the credit-adjusted risk-free rate of interest. We prepare estimates of the timing and amounts of expected cash flows when an ARO is incurred, which are updated to reflect changes in facts and circumstances, or if we are required to submit updated mine closure plans to regulatory authorities. In the future, changes in regulations, laws or enforcement could adversely affect our operations; and any instances of non-compliance with laws or regulations that result in fines or injunctions or delays in projects, or any unforeseen environmental contamination at, or related to, our mining properties could result in us suffering significant costs.

The principal factors that can cause expected cash flows to change are: the construction of new processing facilities; changes in the quantities of material in reserves and a corresponding change in the life of mine plan; changing ore characteristics that ultimately impact the environment; changes in water quality that impact the extent of water treatment required; and changes in laws and regulations governing the protection of the environment. In general, as the end of the mine life nears, the reliability of expected cash flows increases, but earlier in the mine life, the estimation of an ARO is inherently more subjective. Significant judgments and estimates are made when estimating the fair value of AROs. Expected cash flows relating to AROs could occur over periods up to 20 years and the assessment of the extent of environmental remediation work is highly subjective. Considering all of these factors that go into the determination of an ARO, the fair value of AROs can materially change over time.

Financial Instruments

The Company can manage its exposure to fluctuations in commodity prices, interest rates and foreign exchange rates by entering into derivative financial instrument contracts. Gammon’s exposure with respect to commodity prices, interest rates and foreign exchange is described under the section entitled Risks and Uncertainties. As at December 31, 2007, Gammon had not entered into any derivative contracts for the purpose of hedging exposure to commodity prices, interest rates and foreign exchange rates.

24


Management’s Discussion & Analysis

Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in its annual filings, interim filings or other reports filed or submitted by it under provincial and territorial securities legislation or reports that it files or submits under the U.S. Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the applicable time periods, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. As of December 31, 2007 an evaluation was carried out, under the supervision of and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of disclosure controls and procedures as defined in Rule 13a-15(e) under the U.S. Securities Exchange Act of 1934 and in Multilateral Instrument 52-109 under the Canadian Securities Administrators Rules and Policies.

Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as at December 31, 2007.

(b) Management’s Report on Internal Control Over Financial Reporting

Management, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(e) under the U.S. Securities Exchange Act of 1934 and in Multilateral Instrument 52-109 under the Canadian Securities Administrators Rules and Policies. The Company’s internal controls over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian generally accepted accounting principles (GAAP) and reconciled to US GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

As of December 31, 2007, management assessed the effectiveness of the Company’s internal control over financial reporting. In making this assessment, management used the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). As of December 31, 2007, management concluded that a previously reported material weakness no longer exists in the design of the Company’s internal control over financial reporting in the area of accounting for non-routine and complex transactions. The design weakness was first identified in the fourth quarter of 2006 and was caused primarily by the lack of accounting personnel to appropriately review the accounting for stock option expense and inventory valuation. Based on Gammon’s management assessment, management concluded that the Company’s internal control over financial reporting was effective as at December 31, 2007.

Management’s assessment of the effectiveness of the Company’s internal control over financial reporting has been audited by KPMG LLP, the Company’s independent registered public accounting firm, as stated in their report which is included herein.

(c) Change in Internal Control

Management continues to monitor and improve the controls related to non-routine and complex transactions, and implemented the following controls:

  • The Company hired two Corporate Controllers and a Mexican Finance & Accounting leader to provide additional review and oversight to the Company’s routine and non-routine accounting transactions;

  • The Company has engaged third party experts to provide additional support in the identification and accounting for non-routine transactions; and

  • The Company hired additional accounting personnel with strong technical accounting skills to meet the growing needs of the Company’s operations and accounting requirements, with particular emphasis on filling Mexican based support roles.

25


Management’s Discussion & Analysis

Other than the remediation steps discussed above, there were no changes in the Company’s internal controls over financial reporting that occurred during the three months ended December 31, 2007 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Mineral Reserves and Mineral Resources

Mineral reserves and mineral resources have been calculated as at December 31, 2007 in accordance with definitions adopted by the Canadian Institute of Mining, Metallurgy and Petroleum and incorporated into National Instrument 43-101 (see “Definitions” below). Calculations for the Ocampo property have been prepared by employees of Gammon Gold Inc. under the supervision of Abdullah Arik, B.Sc., MS, Mintec, inc., and Glenn R. Clark, P. Eng. of Glenn R. Clark & Associates Limited. Calculations for the El Cubo property have been prepared by employees of Gammon Gold Inc. under the supervision of Jose L. Lee, Ph.D., Director of Exploration, Gammon Gold Inc. and Glenn R. Clark, P. Eng. of Glenn R. Clark & Associates Limited. Reserves for the Ocampo and El Cubo properties have been calculated using an assumed gold price of US$580 per ounce and a silver price of US$12.00 per ounce for a gold equivalent ratio of 48.33:1. Resources at the Ocampo and El Cubo properties have been calculated assuming a gold price of US$850 per ounce and a silver price of US$15.44 and have been summarized at a gold equivalent ratio of 48.33:1 (as per reserves). The Guadalupe y Calvo inferred resources assumed a gold price of US$300 per ounce and a silver price of $4.61 per ounce and have been summarized at a gold equivalent ratio of 48.33:1 (as per reserves). The full technical report on Guadalupe y Calvo Project dated November 25, 2002 was prepared by Clancy J. Wendt and Mark G. Stevens, C.P.G., Pincock, Allen & Holt in accordance with NI 43-101. The information on the exploration work done on the property since the date of the Pincock, Allen & Holt report is summarized in the material change report filed by Mexgold on August 16, 2005. Jim McGlasson, C.P.G. and P.Geo, is the qualified person responsible for all technical data reported in that material change report pursuant to NI 43-101. The full text of both reports is available at www.sedar.com. Reserve calculations incorporate current and/or expected mine plans and cost levels at each property. Varying cut-off grades have been used depending on the mine and type of ore. Gammon Gold’s normal data verification procedures have been employed in connection with the calculations.

Cautionary Note to U.S. Investors

Cautionary Note to U.S. Investors concerning estimates of Measured and Indicated Resources: We advise U.S. investors that while such terms are recognized and permitted under Canadian regulations, the U.S. Securities and Exchange Commission does not recognize them. The term “resources” does not equate to the term “reserves”, and U.S. investors are cautioned not to assume that any part or all of the mineral deposits in these categories will ever be converted into reserves.

Cautionary Note to U.S. Investors concerning estimates of Inferred Resources: We advise U.S. investors that while such term is recognized and permitted under Canadian regulations, the U.S. Securities and Exchange Commission does not recognize it. "Inferred resources" have a great amount of uncertainty as to their existence, and great uncertainty as to their economic and legal feasibility. It cannot be assumed that all or any part of an inferred mineral resource will ever be upgraded to a higher category. Under Canadian rules estimates of inferred mineral resources may not form the basis of feasibility or other economic studies. U.S. investors are cautioned not to assume that any part or all of an inferred resource exists, or is economically or legally mineable.

The consolidated financial statements of the Company have been prepared by management in accordance with Canadian generally accepted accounting principles (“GAAP”) (see Note 2: Summary of Significant Accounting Policies to the financial statements), which differ in certain material respects from accounting principles generally accepted in the United States of America (“U.S. GAAP”). Differences between GAAP and U.S. GAAP that are applicable to the Company are described in the Company’s 40-F form filed with the U.S. Securities and Exchange Commission, which is available at www.edgar.com. The Company’s reporting currency is in United States dollars unless otherwise noted.

26


Management’s Discussion & Analysis

Cautionary Statement regarding Forward-Looking Statements

Certain information regarding the Company contained herein may constitute forward-looking statements within the meaning of applicable securities laws. Forward-looking statements are subject to a variety of risks and uncertainties which could cause actual events or results to differ from those reflected in the forward-looking statements. Should one or more of these risks and uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in forward looking statements. Specific reference is made to "Risk Factors" in the Company’s Annual Information Form and 40F Report. Forward-looking statements may include estimates, plans, expectations, opinions, forecasts, projections, guidance or other statements that are not statements of fact including, without limitation, statements regarding potential mineralization and reserves, including the impact of any future exploration on reserve estimates; expectations regarding the timing and extent of production at the Company’s projects; estimates regarding the future costs related to exploration at the Company’s projects; the nature and availability of additional funding sources; and future plans and objectives of the Company. In some cases, you can identify forward-looking statements by the use of words such as may, will, should, could, expect, plan, intend, anticipate, believe, estimate, predict, potential or continue or the negative or other variations of these words, or other comparable words or phrases. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company’s expectations include, among others, risks related to international operations, including political turmoil and limited local infrastructure to support large scale mining operations; the actual results of current exploration activities; conclusions of economic evaluations and changes in project parameters as plans continue to be refined; and fluctuations in future prices of gold and silver. These factors are set out in the Company’s Annual Information Form. The Company’s forward-looking statements are expressly qualified in their entirety by this cautionary statement.

27


 

 


Consolidated Financial Statements
(formerly Gammon Lake Resources Inc.)

December 31, 2007 and 2006
(in United States Dollars, unless otherwise stated)


AUDITORS’ REPORT

To the Shareholders of Gammon Gold Inc.

We have audited the consolidated balance sheets of Gammon Gold Inc. (formerly Gammon Lake Resources Inc.) (the “Company”) as at December 31, 2007 and 2006 and the consolidated statements of operations and comprehensive loss, cash flows and shareholders’ equity for each of the years in the two year period ended December 31, 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards and in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2007 and 2006 and the results of its operations and its cash flows for each of the years in the two year period ended December 31, 2007 in accordance with Canadian generally accepted accounting principles.

/s/ KPMG LLP

Chartered Accountants

Halifax, Canada

March 29, 2008



Consolidated Balance Sheets
 
At December 31 

 

2007 

 

2006 

 

 

 

 

(Note 4) 
 
ASSETS 

 

 

 

 

Current 

 

 

 

 

     Cash 

3,601,317 

2,940,763 

     Restricted cash 

 

107,427 

 

1,133,337 

     Receivables 

 

 

 

 

     Commodity taxes 

 

10,240,326 

 

12,044,712 

     Trade / other 

 

1,739,195 

 

3,009,053 

     Inventories (Note 6) 

 

51,585,696 

 

46,274,738 

     Prepaids and deposits 

 

2,250,056 

 

775,479 

 

 

69,524,017 

 

66,178,082 

 
Deposits on property, plant and equipment 

 

5,394,975 

 

1,049,588 

Deferred compensation 

 

192,611 

 

856,016 

Long-term ore stockpiles (Note 6) 

 

 

2,043,040 

Mining interests and property, plant and equipment (Note 7) 

 

572,041,140 

 

539,395,321 

Goodwill (Note 5) 

 

106,799,368 

 

106,799,368 

 

753,952,111 

716,321,415 

 
 
LIABILITIES 

 

 

 

 

Current 

 

 

 

 

     Payables and accruals 

17,279,271 

31,799,006 

     Current portion of long-term debt and capital leases (Note 8) 

 

33,072,638 

 

66,038,538 

 

 

50,351,909 

 

97,837,544 

 
Long-term debt and capital leases (Note 8) 

 

1,333,614 

 

63,607,600 

Asset retirement obligations (Note 9) 

 

2,990,484 

 

Employee future benefits (Note 10) 

 

3,746,145 

 

3,224,429 

Future income taxes (Note 11) 

 

108,879,303 

 

70,492,523 

 

 

167,301,455 

 

235,162,096 

SHAREHOLDERS’ EQUITY (Note 12) 

 

 

 

 

Capital stock 

 

699,511,738 

 

463,332,683 

Contributed surplus 

 

42,373,215 

 

71,746,965 

Deficit 

 

(161,668,695) 

 

(60,354,727) 
Accumulated other comprehensive income (Note 4) 

 

6,434,398 

 

6,434,398 

 

 

586,650,656 

 

481,159,319 

 

753,952,111 

716,321,415 

 

 

 

 

 

Nature of operations and going concern assumption (Note 1)
Commitments and contingencies (Note 13)
Subsequent event (Note 19)

     
Signed on behalf of the Board: /s/ Fred George                    /s/ Kent Noseworthy               
  Fred George, Director Kent Noseworthy, Director

   
See accompanying notes to the consolidated financial statements.

1



Consolidated Statements of Operations and Comprehensive Loss
For the years ended December 31 

 

2007 

 

2006 

 

 

 

 

(Note 4) 
 
Revenue from mining operations 

152,058,628 

64,235,896 

 
Expenses 

 

 

 

 

     Production costs, excluding amortization & depletion 

 

140,302,718 

 

37,943,583 

     Write-down of long-term inventory 

 

4,319,654 

 

     Refining costs 

 

1,509,927 

 

525,604 

     General and administrative 

 

24,156,361 

 

28,247,412 

     Amortization and depletion 

 

43,392,399 

 

18,756,816 

 

 

213,681,059 

 

85,473,415 

 
Loss before other items 

 

(61,622,431) 

 

(21,237,519) 
 
Interest on long-term debt 

 

(3,896,791) 

 

(5,272,904) 
Foreign exchange loss 

 

(8,933,060) 

 

(1,497,350) 
Gain on equity investment 

 

 

503,711 

Interest and other income 

 

772,218 

 

785,203 

 

 

(12,057,633) 

 

(5,481,340) 
 
Loss before income taxes 

 

(73,680,064) 

 

(26,718,859) 
 
Future income tax expense / (recovery) (Note 11) 

 

27,633,904 

 

(1,410,458) 
 
Net loss 

 

(101,313,968) 

 

(25,308,401) 
 
Other comprehensive income 

 

 

10,702,416 

 
Comprehensive loss 

(101,313,968) 

(14,605,985) 
 
 
Loss per share (Note 14) 

 

 

 

 

     Basic and diluted 

(0.90) 

(0.29) 
 
Weighted average shares outstanding (Note 14) 

 

 

 

 

     Basic and diluted 

 

113,176,605 

 

88,025,714 

         

   
See accompanying notes to the consolidated financial statements.

2



Consolidated Statements of Cash Flows
 
For the years ended 

 

2007 

 

2006 

 

 

 

 

(Note 4) 
 
OPERATING ACTIVITIES 

 

 

 

 

     Net loss 

(101,313,968) 

(25,308,401) 
     Amortization and depletion 

 

43,392,399 

 

18,756,816 

     Unrealized foreign exchange loss / (gain) 

 

10,062,768 

 

(3,236,581) 
     Stock option expense, net of forfeitures 

 

4,035,401 

 

15,770,871 

     Employee future benefits 

 

521,716 

 

367,952 

     Future income tax expense / (recovery) 

 

27,633,904 

 

(1,410,458) 
     Gain on long-term equity investment 

 

 

(503,711) 
     Change in non-cash operating working capital (Note 15) 

 

(18,524,110) 

 

(24,462,507) 
 
 

 

(34,191,890) 

 

(20,026,019) 
 
INVESTING ACTIVITIES 

 

 

 

 

     Acquisition of investment (Note 5) 

 

 

(6,544,575) 
     Cash acquired on acquisition of Mexgold (Note 5) 

 

 

21,085,809 

     Advances from related companies 

 

 

537,304 

     (Increase) / decrease in deposits on property, plant and equipment 

 

(4,345,387) 

 

462,628 

     Expenditures on mining interests and property, plant & equipment 

 

(69,142,106) 

 

(103,323,105) 
 

 

(73,487,493) 

 

(87,781,939) 
 
FINANCING ACTIVITIES 

 

 

 

 

     Repayment of capital lease obligation 

 

(2,499,458) 

 

(1,876,794) 
     (Repayment of) / proceeds from long-term debt 

 

(93,651,185) 

 

82,660,659 

     Repayment from related company advances 

 

 

11,224,647 

     Net proceeds from issuance of capital stock 

 

170,025,775 

 

     Proceeds from exercise of options and warrants 

 

33,438,895 

 

14,123,622 

 

 

107,314,027 

 

106,132,134 

 
Net decrease in cash and cash equivalents 

 

(365,356) 

 

(1,675,824) 
 
Cash and cash equivalents, beginning of year 

 

4,074,100 

 

5,749,924 

 
Cash and cash equivalents, end of year 

3,708,744 

4,074,100 

 
 
Cash and cash equivalents is comprised of the following: 

 

 

 

 

 
     Cash 

3,601,317 

2,940,763 

     Restricted cash 

 

107,427 

 

1,133,337 

 

3,708,744 

4,074,100 

 

 

 

 

 


   
See accompanying notes to the consolidated financial statements.

3



Consolidated Statements of Shareholders’ Equity
 
For the years ended December 31 

 

2007 

 

2006 

 

 

 

 

(Note 4) 
 
Capital stock 

 

 

 

 

     Balance, beginning of year 

463,332,683 

168,759,035 

     For cash pursuant to exercise of stock options 

 

33,438,891 

 

9,622,947 

     Fair value of options exercised 

 

32,714,389 

 

3,466,681 

     For cash pursuant to exercise of warrants 

 

 

4,500,675 

     Fair value of warrants exercised 

 

 

3,157,079 

     Shares issued on acquisition of Mexgold Resources Inc. 

 

 

273,826,266 

     Public offering 

 

178,120,000 

 

     Share issuance costs 

 

(8,094,225) 

 

     Balance, end of year 

699,511,738 

463,332,683 

 
 
Contributed surplus 

 

 

 

 

     Balance, beginning of year 

71,746,965 

16,161,750 

     Options issued on acquisition of Mexgold Resources Inc. 

 

 

50,346,340 

     Fair value of options exercised 

 

(32,714,389) 

 

(6,623,760) 
     Forfeitures 

 

(1,847,927) 

 

     Stock option expense 

 

5,188,566 

 

11,862,635 

     Balance, end of year 

42,373,215 

71,746,965 

 
 
Deficit 

 

 

 

 

     Balance, beginning of year 

(60,354,727) 

(35,046,326) 
     Net loss 

 

(101,313,968) 

 

(25,308,401) 
     Balance, end of year 

(161,668,695) 

(60,354,727) 
 
 
Accumulated other comprehensive income 

 

 

 

 

     Balance, beginning of year 

6,434,398 

17,136,814 

     Unrealized foreign currency translation loss 

 

 

(10,702,416) 
     Balance, end of year 

6,434,398 

6,434,398 

 
 
Total shareholders’ equity 

586,650,656 

481,159,319 

 

 

 

 

 


   
See accompanying notes to the consolidated financial statements.

4


Notes to the Consolidated Financial Statements

1. Nature of operations and going concern assumption

During the year, Gammon Lake Resources Inc. formally changed its corporate name to Gammon Gold Inc. The change in corporate name was approved by shareholders at the Annual and Special Shareholders’ Meeting on June 6, 2007. Gammon Gold Inc. (the “Company”) is a publicly traded company engaged in the mining, development, exploration and acquisition of resource properties in Mexico. The Company’s common shares are listed on the Toronto Stock Exchange (TSX:GAM) and the American Stock Exchange (AMEX:GRS).

These financial statements have been prepared on the basis of accounting principles applicable to a going concern, which assume that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of operations. The future of the Company is dependent on the successful operation of the mine and mill at its Ocampo and El Cubo operations. If the going concern assumption were not appropriate for these financial statements, then adjustments would be necessary in the carrying values of assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used.


2. Summary of significant accounting policies

(a) Basis of presentation

The consolidated financial statements have been prepared by the Company in accordance with Canadian generally accepted accounting principles, using the following significant accounting policies. These financial statements are prepared in United States dollars, unless otherwise stated.

(b) Consolidation

These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Gammon Lake Resources (NS) Incorporated, Gammon Lake de Mexico S.A. de C.V., Gammon Lake Resources (USA) Inc. and Gammon Lake Resources (Barbados) Inc. On August 8, 2006, the Company acquired all of the issued and outstanding shares and options of Mexgold Resources Inc. (see Note 5). As a result, these consolidated financial statements include the accounts of Mexgold Resources Inc. and its subsidiaries, Compania Minera El Cubo S.A. de C.V., and Metales Interamericanos S.A. de C.V., and incorporates the results of operations of these subsidiaries from August 8, 2006. All significant intercompany balances and transactions have been eliminated on consolidation.

(c) Foreign currency translation

The functional currency of the Company’s operations is the United States dollar (“US dollar”). Non-US dollar balances are translated into US dollars as follows: monetary assets and liabilities are translated to US dollars at the period-end exchange rate; non-monetary assets and liabilities are translated at the rate prevailing at the time of the transaction; and revenue and expense transactions are translated using average exchange rates, except for expenses that relate to non-monetary assets and liabilities, which are translated at the same historical exchange rate as the related asset or liability. Translation gains or losses are recognized in earnings in the period in which they occur.

(d) Use of estimates

The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts for assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The significant areas requiring the use of management estimates and assumptions relate to mineral reserves that are the basis for future cash flow estimates utilized in impairment calculations; depletion and amortization calculations; estimates of recoverable gold and other minerals in stockpile and leach pad inventories; estimates of fair value for certain reporting units and asset impairment; write-downs of inventory to net realizable value; post-employment, post-retirement and other employee future benefits; valuation allowances for future income tax assets; reclamation obligations; reserves for contingencies and litigation; and the fair value and accounting treatment of financial instruments. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results could differ from those estimates.

5


Notes to the Consolidated Financial Statements

(e) Revenue recognition

Revenue from the sale of gold, silver, and doré bars is recognized when persuasive evidence of a sale arrangement exists, the risks and rewards of ownership passes to the purchaser including delivery of the product, the selling price is fixed or determinable, and collectibility is reasonably assured. Sales of the doré bars are recorded at estimated values, and are further adjusted based upon final quality assessment and quotations.

(f) Cash and cash equivalents

The Company considers deposits in banks, certificates of deposits, and short-term investments with original maturities of three months or less from the acquisition date as cash and cash equivalents.

(g) Inventories

Supplies inventory

Supplies inventory consists of mining supplies and consumables used in the operation of the mines, and is valued at the lower of average cost and net realizable value.

Ore stockpiles inventory

Stockpiles represent ore that has been mined and is available for further processing. Stockpiles are measured by estimating the number of tonnes added and removed from the stockpile, the number of contained ounces (based on assay data) and the estimated metallurgical recovery rates (based on the expected processing method). Stockpile ore tonnages are verified by periodic surveys. Costs are allocated to stockpiles based on relative values of material stockpiled and processed using current mining costs incurred up to the point of stockpiling the ore, including applicable overhead, depreciation, depletion and amortization relating to mining operations, and removed at the average cost per recoverable unit. Ore stockpiles inventory is measured at the lower of cost and net realizable value.

Ore in process inventory

The recovery of gold and silver is achieved through a milling and heap leaching process. Costs are added to ore on leach pads and in the mill based on current mining costs, including applicable depreciation, depletion and amortization relating to mining operations. Costs are removed from ore on leach pads and in the mill as ounces are recovered, based on the average cost per ounce of gold and silver in ore in process inventory. Ore in process inventory is measured at the lower of cost and net realizable value.

Finished goods

Finished goods inventory consists of gold, silver, and doré bars, and is valued at the lower of cost and net realizable value.

(h) Mineral interests

The carrying value of mineral interests represents the accumulated costs to date related to the acquisition, exploration and development of the Company’s producing mineral properties, located in Ocampo and El Cubo, Mexico. Production stage mining interests are amortized over the life of the mine using the unit-of-production method based on estimated proven and probable reserves to be mined, or on a straight-line basis over the term of the lease.

The expected useful lives used in depreciation and depletion calculations are determined based on the facts and circumstances associated with the mining interest. Any changes in estimates of useful lives are accounted for prospectively from the date of the change.

6


Notes to the Consolidated Financial Statements

(i) Property, plant and equipment and amortization

Property, plant and equipment are recorded at cost. Amortization is calculated on the straight-line basis over the estimated useful lives of the assets, which do not exceed the related estimated life of the mine, as follows:

Equipment under capital lease  lease term  Vehicles  4 years 
Exploration equipment  5-10 years  Buildings  20 years 
Development equipment  8-9 years  Other equipment  3-10 years 
Processing plant  8-9 years     

(j) Impairment of long-lived assets 

The Company assesses the impairment of long-lived assets, which consist primarily of mining interests and property, plant and equipment, whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss will be recognized if the carrying amount of a long-lived asset is not recoverable. The carrying amount of a long-lived asset is not recoverable if the carrying amount exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition. The impairment loss to be recognized is measured as the amount by which the carrying amount of the long-lived asset exceeds its fair value.

Annually, or when events or circumstances indicate that the carrying amount may not be recoverable, the Company reviews the carrying value of its mining interests. The recoverability of the book value of each property is assessed for indicators of impairment such as adverse changes to the estimated recoverable ounces of gold, estimated future commodity prices, and estimated expected future operating costs, capital expenditures and reclamation expenditures. If it is determined that the deferred costs related to a property are not recoverable over its productive life, those costs will be written down to fair value as a charge to operations in the period in which the determination is made. The amounts at which mining interests and the related deferred costs are recorded do not necessarily reflect present or future values.

(k) Goodwill and goodwill impairment

Acquisitions are accounted for using the purchase method whereby assets and liabilities acquired are recorded at their fair values as of the date of acquisition and any excess of the purchase price over such fair value is recorded as goodwill. Goodwill is identified and allocated to reporting units by preparing estimates of the fair value of each reporting unit and comparing this amount to the fair value of assets and liabilities in the reporting unit.

The Company evaluates, on an annual basis, the carrying amount of goodwill to determine whether current events and circumstances indicate that such carrying amount may no longer be recoverable. To accomplish this, the Company compares the fair value of its reporting units to their carrying amounts. If the carrying amount exceeds the fair value, the Company compares the implied fair value of the reporting unit’s goodwill to its carrying amount, and any excess of the carrying amount over the fair value is charged to operations. Assumptions underlying fair value estimates are subject to significant risks and uncertainties.

(l) Asset retirement obligations

The Company’s mining and exploration activities are subject to various governmental laws and regulations relating to the protection of the environment. These environmental regulations are continually changing, and the Company has made, and intends to make in the future, expenditures to comply with such laws and regulations. The Company is required to record a liability and corresponding asset, for the estimated present value of future cash flows associated with site closure and reclamation when the liability is incurred and a reasonable estimate of the fair value can be made. These asset retirement costs are amortized over the life of the related assets using the unit-of-production method. At the end of each period, the liability is increased to reflect the passage of time and changes in the estimated future cash flows underlying any initial fair value measurements.

7


Notes to the Consolidated Financial Statements

(m) Stock based compensation

The Company uses the fair value method of accounting for employee stock-based compensation and other stock-based payments made in exchange for goods and services. Under this method, the Company recognizes a compensation expense for all awards made to employees and non-employees, based on the fair value of the options on the date of grant, which is determined by using an option pricing model. The fair value of the options is expensed over the vesting period of the options. The Company’s stock option plan is described in Note 12.

(n) Income taxes

Income taxes are calculated using the asset and liability method. Under this method, current income taxes are recognized for the estimated income taxes payable for the current period. Future income tax assets and liabilities are determined based on the difference between the financial reporting and tax basis of assets and liabilities and on unclaimed losses carried forward. Future income tax assets and liabilities are measured using the enacted or substantively enacted tax rates that will be in effect when the differences are expected to reverse or when unclaimed losses are expected to be utilized. A valuation allowance is recognized to the extent that the recoverability of future income tax assets is not considered to be more likely than not.

(o) Loss per common share

Loss per common share is calculated based on the weighted average number of common shares outstanding for the period. Diluted loss per common share considers the potential exercise of all outstanding options and warrants using the treasury stock method. This method assumes that proceeds received from the exercise of the in-the-money stock options and warrants are used to repurchase shares at the average market price for the year.

(q) Recent accounting pronouncements

The following is an overview of recent accounting pronouncements that the Company will be required to adopt in future years:

(i) Section 3031, Inventories

In June 2007, the Canadian Institute of Chartered Accountants (“CICA”) issued new Section 3031, Inventories, which replaces Section 3030 of the same title. This new standard provides guidance on the determination of cost and requires inventories to be measured at the lower of cost and net realizable value, with more specific guidance on the costs to include in the cost of inventory. Costs such as storage costs and administrative overhead that do not contribute to bringing inventories to their present location and condition are specifically excluded from the cost of inventories and expensed in the period incurred. This standard is effective for fiscal years beginning on or after January 1, 2008 and will be implemented by the Company in the first quarter of 2008. The Company is currently assessing the implications of this new standard.

(ii) Section 3862, Financial Instruments – Disclosures and Section 3863, Financial Instruments – Presentation

Effective January 1, 2008, the Company will be required to comply with Section 3862, Financial Instruments –Disclosures, and Section 3863, Financial Instruments – Presentation. These sections will replace existing Section 3861, Financial Instruments – Disclosure and Presentation. The presentation standards are carried forward unchanged. The disclosure standards are enhanced and expanded to complement the changes required by Section 3855, Financial Instruments – Recognition and Measurement.

(iii) Section 1535, Capital Disclosures

Effective January 1, 2008, the Company will be required to comply with Section 1535, Capital Disclosures. This section establishes standards for disclosing information that enables users of financial statements to evaluate the entity’s objectives, policies and processes for managing capital. The new requirements are related to disclosure only and will not impact the financial results of the Company.

8


Notes to the Consolidated Financial Statements

(iv) Section 3064, Goodwill and Intangible Assets

In January 2008, the CICA issued Section 3064, Goodwill and Intangible Assets, which replaces existing Section 3062, Goodwill and Other Intangible Assets. This new section establishes standards for the recognition of internally developed intangible assets. The standards for the recognition and impairment testing of goodwill are carried forward unchanged. This section is applicable to the Company commencing January 1, 2009.


3. Changes in accounting policies

The CICA issued the following sections that were adopted by the Company on January 1, 2007: Section 3855, Financial Instruments - Recognition and Measurement; Section 3865, Hedges; Section 1530, Comprehensive Income; Section 3861, Financial Instruments – Disclosure and Presentation, and Section 3251, Equity. In accordance with the transitional provisions, these standards have been applied retrospectively without restatement of prior periods, except to classify the currency translation adjustment as a component of accumulated other comprehensive income.

(i) Section 3855, Financial Instruments – Recognition and Measurement

Section 3855 prescribes when a financial asset, financial liability or derivative is to be recognized on the balance sheet and at what amount, requiring fair value or cost-based measures under different circumstances. Under Section 3855, financial instruments must be classified into one of five categories: held-for-trading, held-to-maturity, loans and receivables, available-for-sale, or other financial liabilities. All financial instruments, including derivatives, are initially measured on the balance sheet at fair value. Subsequent measurement depends on the classification as follows: held-for-trading – measured at fair value with changes in fair value recognized in net earnings; held-to-maturity, loans and receivables, and other financial liabilities – recorded at amortized cost with gains and losses recognized in net earnings in the period that the asset is derecognized or impaired; and available-for-sale – measured at fair value with changes in fair value recorded in other comprehensive income, until the instrument is derecognized or impaired, when the amounts are then recorded in net earnings.

In accordance with these new standards, the Company has classified its financial instruments as follows:

Asset / Liability  Classification  Measurement 
Cash and cash equivalents  Held-for-trading  Fair value 
Restricted cash  Held-for-trading  Fair value 
Receivables  Loans and receivables  Amortized cost 
Payables and accruals  Other financial liabilities  Amortized cost 
Long-term debt  Other financial liabilities  Amortized cost 

Transaction costs other than those related to financial instruments classified as held-for-trading, which are expensed as incurred, are added to the fair value of the financial asset or financial liability on initial recognition and amortized using the effective interest rate method.

Fair values are based on quoted market prices where available from active markets, otherwise fair values are estimated using a variety of valuation techniques and models.

All derivative instruments, including embedded derivatives, are recorded on the balance sheet at fair value unless exempted from derivative treatment as a normal purchase and sale. All changes in fair value are recorded in earnings unless cash flow hedge accounting is used, in which case changes in fair value are recorded in other comprehensive income. The Company has elected to apply the accounting treatment for all embedded derivatives in host contracts entered into on or after January 1, 2003. The impact of the change in accounting policy related to financial instruments was not material.

9


Notes to the Consolidated Financial Statements

(ii) Section 3865, Hedges

Section 3865, Hedges replaced Accounting Guideline 13, Hedging Relationships. The requirements for the identification, designation, documentation and assessment of effectiveness of hedging relationships remain substantially unchanged from AcG-13. However, Section 3865 addresses the accounting treatment of qualifying hedging relationships and the necessary disclosures, and also requires all derivatives in hedging relationships to be recorded at fair value. The adoption of this standard had no impact on the Company, as there are no hedging relationships in place.

(iii) Section 1530, Comprehensive Income

Section 1530, Comprehensive Income introduces a statement of comprehensive income, which is comprised of net earnings and other comprehensive income. Other comprehensive income represents the change in shareholders’ equity from transactions and other events from non-owner sources, and includes unrealized gains and losses on financial assets that are classified as available-for-sale and changes in the fair value of the effective portion of cash flow hedging instruments. The Company has included the cumulative changes in other comprehensive income in accumulated other comprehensive income, which is presented as a new category of shareholders’ equity on the consolidated balance sheet.

(iv) Section 3861, Financial Instruments – Disclosure and Presentation

Section 3861, Financial Instruments – Disclosure and Presentation replaces Section 3860 of the same title, and establishes the standards for presentation of financial instruments and non-financial derivatives, and identifies the information that should be disclosed about them.

(v) Section 3251, Equity

Section 3251, Equity, replaces Section 3250, Surplus, and describes the standards for the presentation of equity and changes in equity during the period, with reference to the new comprehensive income standard.


4. Functional currency and reporting currency

Effective January 1, 2007, as a result of the commencement of commercial production at the Ocampo location, the Company determined that its functional currency is the United States dollar. In accordance with CICA Section 1651, Foreign Currency Translation, this change has been applied prospectively, with no restatement of prior periods.

In addition, at the time of commencement of commercial production, the Company changed its reporting currency to the United States dollar from the Canadian dollar. As a result of the change in reporting currency, the financial information of prior periods has been translated using the current rate method, as if the US dollar had been the reporting currency in prior years. The resulting cumulative exchange difference of $6,434,398 has been reported in accumulated other comprehensive income.



5. Business combinations

Mexgold Resources Inc.

As of June 30, 2006, the Company held approximately a 23% interest in the issued and outstanding common shares of Mexgold Resources Inc. (“Mexgold”). On August 8, 2006, the Company acquired all of the remaining issued and outstanding common shares and options of Mexgold by way of a plan of arrangement under the Business Corporations Act (Ontario). Under the terms of the transaction, each Mexgold shareholder and warrant holder, other than the Company, received 0.47 of a Gammon common share or a Gammon warrant, in exchange for each Mexgold common share and each Mexgold warrant respectively. Holders of Mexgold options received Gammon options to purchase a proportionate number of Gammon common shares. The Company issued 21,838,033 common shares and became obligated to issue up to an aggregate of 5,512,997 common shares to former Mexgold option holders upon exercise, and up to an aggregate of 186,120 Gammon common shares to former Mexgold warrant holders upon exercise.

10


Notes to the Consolidated Financial Statements

The Mexgold acquisition was accounted for as a purchase business combination, with Gammon as the accounting acquirer. The purchase cost was $343 million and was funded through the issuance of Gammon common shares and options to acquire common shares. The measurement price of $12.54 per common share for the purchase consideration represents the average of the Company’s common share closing price 2 days before and 2 days after May 29, 2006. The fair value of the stock options and warrants outstanding under the Mexgold stock option plan were calculated using the Black-Scholes option-pricing model, using the weighted average strike price and expiration.

In accordance with the purchase method of accounting, the purchase cost was allocated to the underlying assets acquired and liabilities assumed based upon their fair values at the date of acquisition. The Company determined the fair values based on independent appraisals, discounted cash flows, quoted market prices, and estimates made by management. The Company recorded the excess of the purchase cost over the net identifiable tangible and intangible assets acquired as goodwill. This process was performed in accordance with CICA Emerging Issues Committee Abstract 152, Mining Assets and Business Combinations. The amount allocated to goodwill is not deductible for tax purposes.

An independent valuation of the significant assets acquired was completed in March 2007, supporting management’s allocation of the purchase consideration. The final allocation of the purchase cost to the assets and liabilities acquired, based on fair valuations, was as follows:

Net assets acquired, at fair value: 

 

 

 

 

  Cash and cash equivalents 

 

 

$

19,997,413 

  Restricted funds 

 

 

 

1,088,396 

  Other working capital, net 

 

 

 

13,838,983 

  Deferred stock-based compensation 

 

 

 

4,817,140 

  Property, plant and equipment 

 

 

 

19,877,760 

  Mining interests 

 

 

 

137,521,035 

  Exploration rights 

 

 

 

110,545,501 

  Goodwill 

 

 

 

110,446,055 

  Long-term debt 

 

 

 

(4,455,800) 
  Employee future benefits 

 

 

 

(2,698,603) 
  Future income taxes 

 

 

 

(67,985,010) 
   

 

 

$

342,992,870 

 
Consideration: 

 

 

 

 

  Common shares, representing the shares of Mexgold not already owned 

 

 

273,826,266 

  Stock options and warrants 

 

 

 

50,346,341 

  Transaction costs 

 

 

 

2,673,133 

  Investment in Mexgold previously owned 

 

 

 

16,147,130 

   

 

 

$

342,992,870 

 
 
6.  Inventories         
      December 31    December 31 
      2007    2006 
Supplies  14,808,304  8,173,726 
Ore stockpiles    3,337,979    6,872,874 
Ore in process    31,869,032    32,134,262 
Finished product    1,570,381    1,136,916 
      51,585,696    48,317,778 
Less: Long-term ore stockpiles    - -    2,043,040 
 
    51,585,696  46,274,738 
           

11


Notes to the Consolidated Financial Statements

7.  Mining interests and property, plant and equipment
 
      December 31, 2007           December 31, 2006   
        Accumulated  Net Book        Accumulated  Net Book 
      Cost  Amortization  Value    Cost    Amortization  Value 
Mining interests:                   
Producing properties    $ 306,023,916  $ 35,876,544 270,147,372    $ 275,896,208    $ 16,416,120 259,480,088 
Exploration properties    110,554,665  - -  110,554,665    109,250,197    - -  109,250,197 
      416,578,581  35,876,544  380,702,037    385,146,405    16,416,120  368,730,285 
Property, plant and equipment:                 
Processing plant    89,277,457  17,519,565  71,757,892    83,439,699    7,536,250  75,903,449 
Exploration equipment    54,103,648  9,878,742  44,224,906    48,016,568    5,046,054  42,970,514 
Development equipment    51,627,155  7,097,362  44,529,793    31,351,127    4,477,211  26,873,916 
Buildings    18,519,049  3,087,691  15,431,358    13,471,478    2,335,617  11,135,861 
Other equipment    5,026,003  1,881,748  3,144,255    3,993,103    1,101,674  2,891,429 
Vehicles    3,238,495  1,397,245  1,841,250    2,606,051    792,253  1,813,798 
Equipment under capital lease  9,082,975  1,631,071  7,451,904    8,408,758    563,353  7,845,405 
Construction in progress    2,957,745  - -  2,957,745    1,230,664    - -  1,230,664 
      233,832,527  42,493,424  191,339,103    192,517,448    21,852,412  170,665,036 
Total      $ 650,411,108 $ 78,369,968 572,041,140    $ 577,663,853    $ 38,268,532 539,395,321 
 
 
8. Long-term debt and capital leases
              December 31  December 31 
                  2007  2006 
(a) 

Revolving credit facility 

        $ 30,480,000 $ 113,793,619 
(b)  Capital leases for equipment          3,605,265  5,461,356 
(c)  Soyopa loan                - -  6,735,223 
(c)  Mining Development Trust Loan            - -  3,499,807 
(d)  Other long-term debt                320,987  156,133 
              34,406,252  129,646,138 
Less: Current portion of long-term debt and capital leases          33,072,638  66,038,538 
                $ 1,333,614 $ 63,607,600 
 
The estimated future minimum debt and lease payments under all facilities are as follows:       
 
2008  33,072,638               
2009  1,234,872               
2010  98,742               

(a)     

In October 2005, May 2006, and December 2006, the Company secured a credit facility with Bank of Nova Scotia and Société Générale. The facility was secured and consisted of a two-year revolving facility of $32,500,000, and a three- year non-revolving facility of $87,500,000. Interest was payable at prime rate plus 1.25% or in the case of US dollar advances, LIBOR + 2.25%. As at December 31, 2006, the Company had drawn $113,800,000 on this facility. On April 24, 2007, the Company repaid the debt facility with proceeds from a public equity offering. The $32,500,000 revolving credit facility remained available to the Company, and was reduced to $20,000,000 at June 30, 2007, pursuant to its terms. In September 2007, Bank of Montreal replaced Société Générale in that credit facility. Bank of Montreal and Bank of Nova Scotia agreed to maintain the $20,000,000 facility at September 30, 2007 when it was otherwise scheduled to reduce to $10,000,000.

 

12


Notes to the Consolidated Financial Statements
   
 

On November 12, 2007, the Company replaced the $20,000,000 revolving facility with a $60,000,000 revolving facility with the Bank of Nova Scotia and Bank of Montreal, expiring on December 31, 2008. The Company will have an initial availment of $47,500,000 increasing to $60,000,000 upon the completion of certain conditions. Interest is payable at prime rate plus 0.75% or in the case of US dollar advances, LIBOR + 1.75%. As at December 31, 2007, the Company had drawn $30,480,000 under this facility.

The credit facility contains various covenants that include an interest coverage ratio of at least 3:1, a leverage ratio of no more than 3.5:1, a tangible net worth of at least $440,000,000 plus 50% of positive net income earned subsequent to June 30, 2007, and certain other operational covenants. The facility is secured by a first-ranking lien on all present and future assets, property and undertaking of the Company.

   
(b)     

The Company is obligated under various capital leases for equipment, all of which expire by 2010. All capital lease agreements provide that the Company can purchase the leased equipment at the end of the lease term for a nominal amount. Interest payable on the various leases range from LIBOR + 2.50% to LIBOR + 2.75%.

 
(c)     

The long-term debt amounts payable to Soyopa and to the Mining Development Trust were fully repaid during the current year.

 
(d)     

The Company is obligated under certain other agreements maturing between 2008 and 2010. These loans are non- interest bearing, with quarterly payments of approximately $40,000.

 

9. Asset retirement obligations

The Company’s asset retirement obligations consist of reclamation costs for the Ocampo and El Cubo mines. The present value of the obligation is currently estimated at $2,990,484 (2006 - $Nil), reflecting payments that will commence in 10 – 20 years. Significant reclamation activities include land rehabilitation, demolition of buildings and mine facilities, ongoing care and maintenance and other costs.

The undiscounted value of the reclamation costs liability is $10,624,853 (2006 - $Nil). The credit adjusted risk-free rate used in estimating the obligation was 8%, and the inflation rate used was 3.5%. Changes to the reclamation and closure cost obligation balance during the year were as follows:

Reclamation cost obligations, beginning of year  - - 
Obligations incurred    2,944,135 
Accretion expense    46,349 
Reclamation cost obligations, end of year  2,990,484 
 
 
10.  Employee future benefits
     
The Company has two defined benefit plans that provide pension benefits to certain of its employees.     

The Company accrues for employee future benefits for contract workers and employees in Mexico paid through an employment services company. These benefits consist of a one-time payment equivalent to 12 days wages for each year of service (at the employee’s most recent salary, but not to exceed twice the legal minimum wage), payable to all employees with 15 or more years of service, as well as to certain employees terminated involuntarily prior to the vesting of their seniority premium benefit. Under Mexican Labour Law, the Company also provides statutorily mandated severance benefits to its employees terminated under certain circumstances. Such benefits consist of a one-time payment of three months wages plus 20 days wages for each year of service payable upon involuntary termination without just cause.

Both plans are unfunded. The most recent actuarial valuation was performed for both plans as at December 31, 2005, and the next required valuation is December 31, 2008.

13


Notes to the Consolidated Financial Statements

Information about the Company’s benefit plans is as follows:

  December 31, 2007   December 31, 2006
 

 

Pension

 

Seniority

 

Total

 

Pension

 

Seniority

 

Total

 

benefit plans

 

premium

 

premiums

 

benefit plans

 

premium

 

premiums

Accrued benefit obligation:

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of year

$

2,461,497

$

904,955

$

3,366,452

$

271,761

$

8,818

$

280,579

Foreign exchange adjustment

 

(26,824)

 

(9,863)

 

(36,687)

 

(4,460)

 

(144)

 

(4,604)

Acquisition of Mexgold

 

-

 

-

 

-

 

1,745,750

 

863,751

 

2,609,501

Service cost

 

271,598

 

126,853

 

398,451

 

176,594

 

91,022

 

267,616

Interest cost

 

82,923

 

28,522

 

111,445

 

65,918

 

27,272

 

93,190

Actuarial loss / (gain)

 

341,361

 

(8,966)

 

332,395

 

205,934

 

(85,764)

 

120,170

 

 

 

 

 

 

 

 

 

 

 

 

 

Deficit

 

3,130,555

 

1,041,501

 

4,172,056

 

2,461,497

 

904,955

 

3,366,452

Unamortized actuarial (loss) / gain

 

(321,299)

 

(104,612)

 

(425,911)

 

(230,944)

 

88,921

 

(142,023)

Accrued benefit liability

$

2,809,256

$

936,889

$

3,746,145

$

2,230,553

$

993,876

$

 3,224,429

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee future benefit costs recognized during the year were as follows:
 

 

 

 

 

 

 

 

 

 

 

 

 

Employee future benefits expense:

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

271,598

$

126,853

$

398,451

$

181,533

$

93,568

$

275,101

Interest cost

 

82,923

 

28,522

 

111,445

 

67,762

 

28,036

 

95,798

Actuarial loss / (gain)

 

253,302

 

(4,346)

 

248,956

 

17,647

 

4,008

 

21,655

Net expense for the year

$

607,823

$

151,029

$

758,852

$

266,942

$

125,612

$

392,554

 

 

 

 

 

 

 

 

 

 

 

 

 

Significant assumptions used:

 

 

 

 

 

 

 

 

 

 

 

 

Discount rate

 

4.00%

 

4.00%

 

4.00%

 

4.00%

 

4.00%

 

4.00%

 

 

 

 

 

 

 

 

 

 

 

 

 

Rate of compensation increase

 

1.50%

 

1.50%

 

1.50%

 

1.50%

 

1.50%

 

1.50%


11. Income taxes

The following table reconciles the expected income tax recovery / (payable) at the statutory income tax rate to the amounts recognized in the consolidated statements of operations for the years ended December 31, 2007 and 2006.

 

 

December 31 

 

December 31 

 

 

2007 

 

2006 

Net loss 

73,680,064 

26,718,859 

Income tax rate 

 

38.12% 

 

38.12% 

 
Expected income tax recovery based on above rates 

 

28,086,840 

 

10,185,229 

Effect of lower tax rates in foreign jurisdictions 

 

(7,457,905) 

 

(1,393,332) 
Non-deductible stock option expense 

 

(1,538,295) 

 

(6,011,856) 
Other 

 

6,726,844 

 

993,409 

Change in Mexican statutory income tax regime 

 

(43,081,397) 

 

Valuation allowance 

 

(10,369,991) 

 

(2,362,992) 
Provision for income taxes 

(27,633,904) 

1,410,458 

14


Notes to the Consolidated Financial Statements
         
The following reflects future income tax liabilities at December 31, 2007 and 2006:         
 
       

 

December 31 

 

December 31 

       

 

2007 

 

2006 

 
Accounting value of mineral properties in excess of tax value     

 $ 

108,666,062 

 $ 

98,344,857 

Accounting value of inventories in excess of tax value     

 

10,297,670 

 

Deductible share issue costs     

 

(3,637,857) 

 

(2,124,484) 
Future employee benefits     

 

(769,197) 

 

(395,566) 
Unrealized foreign exchange gains (losses)     

 

(4,200,597) 

 

330,111 

Non-capital losses carried forward     

 

(66,266,830) 

 

(37,001,059) 
       

 

44,089,251 

 

59,153,859 

Valuation allowance     

 

64,790,052 

 

11,338,664 

Future income tax liabilities recognized     

 $ 

108,879,303 

 $ 

70,492,523 

 
The Company has tax loss carry-forwards expiring in the following years:         
 
      Canada    Mexico    Total 
  2008  807,679  - -  807,679 
  2009    3,015,103    - -    3,015,103 
  2010    - -    1,363,067    1,363,067 
  2011    - -    43,315    43,315 
  2012    - -    4,933,518    4,933,518 
  2013    3,414,516    13,506,112    16,920,628 
  2014    6,712,317    20,502,426    27,214,743 
  2015    5,727,638    50,818,387    56,546,025 
  2016    - -    49,375,219    49,375,219 
  2017    - -    47,838,575    47,838,575 
  2026    8,403,422    - -    8,403,422 
  2027    16,139,920    - -    16,139,920 
    44,220,595  188,380,619  232,601,214 
 
 
12.  Shareholders’ equity 
 
(a)  Capital stock 
 
Authorized:             
Unlimited number of common shares.             

Unlimited number of non-cumulative, dividends to be determined by the Board of Directors not to exceed 12%, non-participating, non-voting, Class “A” preferred shares, redeemable at their paid-in value.

Unlimited number of non-cumulative, dividends to be determined by the Board of Directors not to exceed 13%, non-participating, non-voting, Class “B” preferred shares, redeemable at their paid-in value.

15


Notes to the Consolidated Financial Statements

Issued and outstanding: 

 

 

 

 

Number of 

 

Ascribed 

 

Common Shares 

 

Value 

Balance, December 31, 2005 

76,370,224 

168,759,035 

Issued in connection with acquisition of Mexgold 

21,838,033 

 

273,826,266 

For cash pursuant to exercise of share purchase options 

2,995,555 

 

9,622,947 

Fair value of options exercised 

 

3,466,681 

For cash pursuant to exercise of warrants 

942,296 

 

4,500,675 

Fair value of warrants exercised 

 

3,157,079 

Balance, December 31, 2006 

102,146,108 

463,332,683 

For cash pursuant to exercise of share purchase options 

5,286,255 

 

33,438,891 

Fair value of options exercised 

 

32,714,389 

Public offering 

10,000,000 

 

178,120,000 

Share issuance costs 

 

(8,094,225) 
Balance, December 31, 2007 

117,432,363 

699,511,738 

 
(b)  Stock options (in Canadian dollars) 

The Company has a stock option plan under which options to purchase common shares of the Company may be granted to directors, senior officers, employees and service providers of the Company. The aggregate number of common shares that may be reserved for issuance under the plan is 22,500,000. The maximum number of common shares that may be reserved for issuance to any one person under the plan is 5% of the shares outstanding at the time of grant (on a non-diluted basis), less the aggregate number of shares reserved for issuance to such person under any other option to purchase shares from treasury granted as a compensation or incentive mechanism. Stock options are generally exercisable for a maximum period of five years from the grant date, and have vesting periods as determined by the Company’s Board of Directors.

Under the terms of the Mexgold acquisition described in Note 5, the Company became obligated to issue up to an aggregate of 5,512,997 common shares upon exercise to Mexgold option holders.

The fair value of the options granted was calculated using the Black-Scholes option-pricing model with the following weighted average assumptions:

 

 

 

 

December 31

December 31

 

 

 

 

2007

 

2006

Dividend yield

 

 

 

0%

 

0%

Expected volatility

 

 

 

55.32%

 

43.82%

Risk free interest rate

 

 

 

4.21%

 

3.93%

Expected life

 

 

 

5 years

 

5 years

Weighted average fair value

 

 

 

$ 8.56

 

$ 4.48

 

 

 

 

 

 

 

 

December 31, 2007

December 31, 2006

 

Shares

Average Price

Shares

Average Price

Outstanding, beginning of year

14,040,342

$

4.75

9,032,000

$

4.75

Granted

1,800,000

$

16.41

2,555,000

$

9.05

Issued in connection with acquisition of Mexgold

-

$

-

5,512,997

$

5.40

Expired / forfeited (1,009,167)

$

(18.31) (64,100)

$

(7.90)
Exercised (5,286,255)

$

(7.00) (2,995,555)

$

(3.28)
Outstanding, end of year

9,544,920

$

6.35

14,040,342

$

4.75

Options exercisable, end of year

8,926,656

$

6.13

12,756,677

$

4.56

16


Notes to the Consolidated Financial Statements

During the year ended December 31, 2007, employees, consultants, officers and directors of the Company exercised 5,286,255 (2006 - 2,995,555) options for total proceeds of $38,815,129 (2006 - $10,909,629). Set forth below is a summary of the outstanding options to purchase common shares as at December 31, 2007:

 

 

Options outstanding

Options exercisable

 

 

Number

Weighted average

 

Number

Weighted average

 

Option Price

outstanding

 

exercise price

Average life (yrs)

exercisable

exercise price

$

1.01 - 1.50

893,000

$

1.06

0.04

893,000

$

1.06

$

2.51 - 3.00

1,100,000

$

2.60

0.51

1,100,000

$

2.60

$

5.01 - 5.50

2,577,160

$

5.45

1.30

2,576,063

$

5.45

$

5.51 - 6.00

573,400

$

5.68

1.10

573,400

$

5.68

$

6.01 - 6.50

1,579,500

$

6.12

2.09

1,579,500

$

6.12

$

6.51 - 7.00

293,750

$

6.55

2.65

293,750

$

6.55

$

7.01 - 7.50

235,000

$

7.45

1.19

235,000

$

7.45

$

7.51 - 8.00

50,000

$

7.94

1.36

50,000

$

7.94

$

9.01 - 9.50

903,500

$

9.25

3.04

386,833

$

9.05

$

9.51 - 10.00

70,000

$

10.00

2.11

70,000

$

10.00

$

10.01 - 10.50

135,000

$

10.49

3.45

45,000

$

10.49

$

10.51 - 11.00

801,277

$

10.64

3.06

790,777

$

10.64

$

18.01 - 21.00

333,333

$

20.35

4.26

333,333

$

20.35

 

Total

9,544,920

 

 

 

8,926,656

 

 

(c) Compensation warrants (in Canadian dollars)

A total of 942,296 broker warrants were exercised during 2006 for proceeds of $5,102,459. As a result, $3,579,211, representing the fair value of the broker warrants, was recorded as capital stock with a corresponding credit to share issue costs. As at December 31, 2006, there were no remaining broker warrants outstanding.


13. Commitments and contingencies

Option and joint venture agreements

(a) Minera Fuerte Mayo, S.A. de C.V. ("Fuerte Mayo")/Compania Minera Brenda, S.A de C.V. ("Brenda")

The Company has a joint venture agreement with Fuerte Mayo in respect of the Ocampo property under which the Company has a 60% participating interest in 17 mining claims in Mexico. Under the terms of the joint venture, the Company is the operator and 100% of the sales from production on the property may be applied to the cash payment due to Fuerte Mayo in the joint venture stage. Under the terms of the agreement, a balance of $211,526 was due to Fuerte Mayo upon the sale of the property to a third party. During the year ended July 31, 2005, in consideration for a consulting payment of $250,000 due for services rendered by Fuerte Mayo to the Company, Fuerte Mayo forgave the $211,526 due upon the sale of the property to a third party.

On February 21, 2003, the Company acquired the remaining 40% of the title and interest in a group of claims located in the municipality of Ocampo from Brenda. The Company agreed to pay 8% of net profits attributable to the development of the mining claims and their concessions up to a maximum of $2,000,000. An additional $250,000 is due if, as a result of the exploration of the claims, a minimum mining reserve of two million ounces of equivalent gold are obtained. In the event that the Company were to sell the property, the full $2,000,000 becomes due and payable at that time. During the year ended December 31, 2007, the Company paid Brenda $415,000 (December 31, 2006 – $40,000).

17


Notes to the Consolidated Financial Statements

(b) Compania Minera Global, S.A. de C.V. ("Global")

On July 17, 2000, the Company entered into an agreement with Global for consulting services to assist in the negotiations of an agreement with Minerales de Soyopa, S.A. de C.V. ("Soyopa") to secure the right to acquire the then remaining fifty-one percent (51%) interest in the Ocampo property. As part of the consideration for the successful negotiation and execution of the agreement between the Company and Soyopa, the Company agreed that if it should subsequently sell the lands, claims and concessions described in the agreements, the Company shall be required to pay Global $1,000,000.

A summary of the future commitments based on the above noted option and joint venture agreements at December 31, 2007 are set out in the following table:

Agreement   Consideration Terms
Compania Minera Global, S.A. de C.V. $ 1,000,000 Upon sale of the related property
Compania Minera, Brenda, S.A. de C.V. $ 1,545,000 8% of net profits attributable to related mining
      claims or upon sale of the related property,
      up to a maximum of $2,000,000
Compania Minera, Brenda, S.A. de C.V. $ 250,000 Upon a minimum proven reserve amount

(c) Compania Minera Las Torres S.A. de C.V. ("Las Torres")

In September 2004, a subsidiary of the Company entered into a mining lease agreement with Las Torres. Pursuant to the agreement, the Company acquired the right to explore, develop and mine the Las Torres Gold-Silver property located in Guanajuato State, Mexico, for a five-year period, subject to renewal for a further five-year period. The annual lease payments total $480,000 for the first year and $720,000 for each year thereafter. In addition, the Company is required to pay a 3.5% net smelter return on all gold and silver sales equal to or above $350 per gold ounce and $5.50 per silver ounce, with a minimum monthly royalty of $20,000. The royalty will gradually decrease to a 3.0% net smelter return for sales of gold and silver at or below $300 per gold ounce and $5 per silver ounce.

Pursuant to the mining lease agreement with Las Torres, minimum annual lease and royalty payment commitments for successive years approximate:

    Lease   Royalty
    Payments   Payments
2008 $ 720,000 $ 240,000
2009   720,000   180,000
  $ 1,440,000 $ 420,000

Other contingencies

The Company has been named as a defendant in a claim filed by Midas Fund, Inc. seeking actual damages of $2.4 million and punitive and other damages of $10 million. The complaint arose over Midas’s participation in the Company’s April 2007 common share issuance. In addition, an inactive subsidiary of the Company has been named as a defendant in a $13 million claim filed by Rafael Villagomez, former owner of 50% of the shares of El Cubo, which were acquired by the Company in 2004. Management is of the opinion that both claims are without merit, and that a strong defence exists against each claim. Therefore, no provision for loss has been reflected in the accounts of the Company. The Company is involved in legal proceedings from time to time, arising in the ordinary course of its business. In the opinion of management, the ultimate liability with respect to these actions will not materially affect the Company’s financial position, results of operations or cash flows.

18


Notes to the Consolidated Financial Statements

Other commitments

At December 31, 2007, the Company has purchase commitments in the amount of approximately $2.8 million (2006 - $Nil) related to acquisitions of equipment. The equipment is expected to be delivered during the first half of 2008.


14. Loss per share

Basic loss per share is calculated based on the weighted average number of shares outstanding during the year ended December 31, 2007 of 113,176,605 (December 31, 2006 – 88,025,714). Diluted loss per share is based on the assumption that options under the stock option plan have been exercised on the later of the beginning of the year and the date granted. As of December 31, 2007, 9,544,920 stock options (December 31, 2006 – 14,040,342) were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive.


15. Supplemental cash flow information

 

 

December 31

 

December 31

 

 

2007

 

2006

Change in non-cash working capital:

 

 

 

 

Receivables

$

3,074,244

$

(298,924)

Prepaids

 

(1,474,577)

 

(433,197)

Inventory

 

(5,604,041)

 

(35,843,586)

Payables and accruals

 

(14,519,736)

 

12,113,200

 

$

(18,524,110)

$

(24,462,507)
Supplemental information

 

 

 

 

Interest paid

$

4,567,318

$

4,464,571

Non-cash transactions

 

 

 

 

Acquisition of assets under capital lease

$

635,200

$

4,910,680

Loan to shareholder pursuant to exercise of share options

$

-

$

12,415

         

16. Related party transactions

The Company had the following related party transactions, which were in the normal course of operations and measured at the exchange amount:

      December 31   December 31
      2007   2006
(a) Production costs – labour $ 31,147,564 $ 19,509,027
(a) Mining interests – labour   2,437,344   3,717,149
(b) Production costs – consumables   2,032,928   3,040,831
(c) Capital assets   24,838   916,127
    $ 35,642,674 $ 27,183,134

(a)

The Company pays a third party company related to a director for the provision of workers in the Mexican operations at cost plus 13%. On December 1, 2007, a new two year contract was signed at cost plus 10%.

(b)

The Company pays a third party company related to a director for the provision of mine consumables.

(c)

The Company pays a third party company related to a director for the provision and construction of production and support facilities.

19


Notes to the Consolidated Financial Statements

As at December 31, 2007, the Company had included $1,775,351 (2006 - $1,730,561) in payables and accruals, representing amounts owing to these related parties.


17. Financial instruments

The Company’s financial instruments consisted of cash and cash equivalents, restricted cash, receivables, payables and accruals, long-term debt and capital leases. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest or credit risks arising from these financial instruments. Some of the Company’s receivables and payables are denominated in Mexican Pesos or Canadian dollars. Balances are translated at the period end based on the Company’s accounting policy as set out in Note 2(c) to the consolidated financial statements.

The Company estimates that the fair value of its cash and cash equivalents, restricted cash, receivables, payables and accruals, and long-term debt approximate the carrying value of the assets and liabilities.

Commodity price risk

The profitability of the Company’s gold mining operations will be significantly affected by changes in the market prices for gold and silver. Gold and silver prices fluctuate on a daily basis and are affected by numerous factors beyond the Company’s control. The supply and demand for gold and silver, the level of interest rates, the rate of inflation, investment decisions by large holders of gold and silver, including governmental reserves, and stability of exchange rates can all cause significant fluctuations in gold and silver prices. Such external economic factors are in turn influenced by changes in international investment patterns and monetary systems, and political developments. The Company does not actively hedge this exposure.

Interest rate risk

The Company is exposed to interest rate risk on its variable rate debt. The Company has not entered into any agreements to hedge against unfavourable changes in interest rates.

Foreign currency exchange rate risk

All metal sales revenues for the Company are denominated in US dollars. The Company is primarily exposed to currency fluctuations relative to the US dollar on expenditures that are denominated in Canadian dollars and Mexican Pesos. These potential currency fluctuations could have a significant impact on production costs and thereby, the profitability of the Company. The Company is also exposed to the impact of currency fluctuations on its monetary assets and liabilities. The Company does not actively manage this exposure.

Credit risk

Credit risk relates to accounts receivable and other contracts, and arises from the possibility that any counterparty to an instrument fails to perform. The Company only transacts with highly-rated counterparties and a limit on contingent exposure has been established for each counterparty based on the counterparty’s credit rating.


18. Segmented information

Information is reported on a mine by mine basis, and therefore the Company’s operating segments are represented by the individual mines and the corporate operations. Revenue in both mining segments is derived from the sale of gold and silver.

20


Notes to the Consolidated Financial Statements
 

 

 

 

 

 

 

December 31, 2007

 

Ocampo

El Cubo

Other

Total

Revenue from mining operations

$ 107,833,028

$ 44,225,600

$ -

152,058,628

Production costs

102,657,728

37,644,990

-

140,302,718

Write-down of long-term inventory

4,319,654

-

-

4,319,654

Refining costs

1,046,259

463,668

-

1,509,927

General and administrative

4,681,913

682,167

18,792,281

24,156,361

Amortization and depletion

28,581,998

14,730,712

79,689

43,392,399

 

141,287,552

53,521,537

18,871,970

213,681,059

Total $ (33,454,524) $ (9,295,937) $ (18,871,970) (61,622,431)
Expenditures related to mining interests

 

 

 

 

and property, plant and equipment

$ 53,805,959

$ 15,254,724

$ 81,423

69,142,106

Total assets

$ 379,284,869

$ 373,044,164

$ 1,623,078

753,952,111

 

 

 

 

 

 

 

 

December 31, 2006

 

Ocampo

El Cubo

Other

Total

Revenue from mining operations

$ 47,214,146

$ 17,021,750

$ -

64,235,896

Production costs

26,600,886

11,342,697

-

37,943,583

Refining costs

342,797

182,807

-

525,604

General and administrative

1,970,035

407,685

25,869,692

28,247,412

Amortization and depletion

9,757,313

8,718,809

280,694

18,756,816

 

38,671,031

20,651,998

26,150,386

85,473,415

Total

$ 8,543,115

$ (3,630,248) $ (26,150,386) (21,237,519)
Expenditures related to mining interests

 

 

 

 

and property, plant and equipment

$ 95,681,070

$ 7,469,306

$ 172,729

103,323,105

Total assets

$ 341,251,075

$ 370,965,750

$ 4,104,590

716,321,415

All goodwill included on the balance sheet relates to the El Cubo operating segment.


19. Subsequent event

Subsequent to year-end, the Company has been named as a defendant in a claim filed by Ed J. McKenna. The plaintiff is seeking, among other things, an order certifying the action as a class proceeding and $75 million in special and general damages and $5 million in punitive damages on behalf of the class. Management considers the allegations in the statement of claim to be without merit and therefore no amount has been accrued in the accounts of the Company.


20. Comparative figures

Certain of the comparative figures for December 31, 2006 have been reclassified to conform with the financial statement presentation adopted for December 31, 2007.

21


EX-99.2 3 gamexh992.htm MATERIAL CHANGE REPORT DATED MARCH 31, 2008 Gammon Gold Inc.: Exhibit 99.2 - Prepared by TNT Filings Inc.

FORM 51-102F3
MATERIAL CHANGE REPORT

Item 1     Name and Address of Company

Gammon Gold Inc.
1601 Lower Water Street, Summit Place
Suite 402
Halifax, Nova Scotia, B3J 3P6

Item 2     Date of Material Change

March 31, 2008

Item 3     News Release

The press release attached as Schedule A was released over Canada NewsWire on March 31, 2008.

Item 4     Summary of Material Change

Gammon Gold Inc. ("Gammon Gold") (TSX:GAM and AMEX:GRS) announces fourth quarter and year end financial results for the three and twelve months ended December 31, 2007. The financial statements will be available on the Company’s website at www.gammongold.com or www.sedar.com.

Item 5     Full Description of Material Change

Gammon Gold Announces Fourth Quarter & Year End 2007 Financial Results

Gammon Gold Inc. ("Gammon Gold") (TSX:GAM and AMEX:GRS) announces fourth quarter and year end financial results for the three and twelve months ended December 31, 2007.

For the three-month period ended December 31, 2007 the Company reported sales of $39,699,932 compared to $34,381,498 for the same period in 2006. Net loss for the quarter was $20,728,989 or $0.19 per share compared to $3,291,590 or $0.04 per share for the same period in 2006.

For the twelve-month period ended December 31, 2007 the Company reported sales of $152,058,628 compared to $64,235,896 for the same period in 2006. Net loss for the period was $101,313,968 or $0.90 per share compared to $25,308,401 or $0.29 per share for the same period in 2006.

 

Year ended

Year ended

 

 

 

December 31, 2007

December 31, 2006

Q4 2007

Q4 2006

 

   

 

 

Revenue from mining operations

$152,058,628

$64,235,896

$39,699,932

$34,381,498

Production costs, excluding amortization

 

 

 

 

 

$140,302,718

$37,943,583

$33,511,441

$18,129,116

and depletion

 

 

 

 

Gold ounces sold

121,107

67,477

28,665

33,866

Silver ounces sold

5,027,983

1,888,324

1,183,729

1,138,986

Gold equivalent ounces sold (2)

218,200

105,181

50,041

57,111

Average realized gold price

$698.91

$606.99

$795.00

$608.53

Average realized silver price

$13.42

$12.18

$14.32

$12.54

Gold equivalency rate

52

50

56

49

Net loss

($101,313,968)

($25,308,401)

($20,728,989)

($3,291,590)

Net loss per share, basic and diluted (3)

($0.90)

($0.29)

($0.19)

($0.04)

Cash flows from (used in) operations

($34,191,890)

($20,026,018)

$2,704,381

$5,952,707

Total cash costs (per gold equivalent

 

 

 

 

ounce) (4)

$650

$366

$676

$323

(1) In 2005, the Company changed its year end from July 31st to December 31st.
(2)
Gold equivalent ounces are calculated based on actual sales.
(3)
Net loss per share on a diluted basis is the same as net loss per share on an undiluted basis, as all factors were anti-dilutive.
(4)
See the Non-GAAP Measures section in the attached Management Discussion & Analysis document.

Cash costs per gold equivalent ounce for the fourth quarter improved by $88 per gold equivalent ounce, or 11%, to $676 per gold equivalent ounce over Q3 as a result of improved mine and processing productivities resulting in the Company’s fixed cost base being spread over increased production units the effects of which were partially impacted by $86 per gold equivalent ounce of charges taken as part of the Company’s year-end accounting closing process. Included in the final year-end consolidated total cash cost per gold equivalent ounce result was approximately $57 per gold equivalent ounce to revise the valuation for Ocampo’s gold-in-circuit mill inventory as well as $17 per gold equivalent ounce of pension adjustments relating to future El Cubo employee social benefits payable under Mexican Social Security Legislation. An additional $12 per gold equivalent ounce in non-recurring charges was taken in Q4 to reflect payroll and severance allowances arising from an El Cubo workforce downsizing initiative. Excluding the above adjustments, the consolidated total cash cost per gold equivalent ounce result in Q4 was equal to the $590 per gold equivalent ounce as reported in the Company’s monthly December Key Performance Indicator press release.


The cash costs for the year of $650 per gold equivalent ounce were primarily driven by operational efficiency start-up problems at Ocampo, the effects of which were adversely impacted by the resulting net realizable value adjustments to Ocampo’s ore inventory and severance expense charges associated with the Q4 workforce reduction at Ocampo. During the latter part of the fourth quarter the Company began to gain traction on many of its production and cost cutting initiatives that are expected to continue to positively impact cash costs in future quarters.

The impact of productivity gains achieved in the latter part of Q4 was evident in the improvement to mine site operating and net free cash flow achieved in the quarter. Mine site operating cash flow in Q4 improved to ($240,000) as compared to ($10.6 million) in Q3. Net free cash flow improved to ($14.7 million) as compared to ($36.7 million) in Q3. As the Company completes its investments in expansionary capital projects anticipated to be in mid-2008, the Company expects to achieve positive net free cash flow status.

The Company has targeted opportunities where additional cost reductions can be realized during 2008, which includes the continued focus on workforce optimization, optimization of consumables and reagents, particularly cyanide, as well as gaining access to 20 megawatts of grid power. All of these cost containment initiatives will be supported by the production improvements we anticipate achieving at both Ocampo and El Cubo through the continued implementation of optimal mining methods.

Rene Marion, Chief Executive Officer said: "I am encouraged by the advancements we have made at both our Ocampo and El Cubo mine sites particularly as demonstrated in our January and February key performance indicator press releases. The overall implementation of enhanced mining practices at both mines can be measured by the steady improvement in monthly equivalent gold production which is tremendously exciting given we are in a turnaround phase right now. In fact, we are currently exceeding internal targets on cost reduction. At Ocampo we will continue to focus on advancing our open pit stripping and underground development activities to re-sequence the open-pit and underground operation for steady ore production going forward." Mr. Marion continued, "I am particularly pleased with the advancements made at our El Cubo mine where the progress to date has exceeded our plans. Considering the impact of the continuing improvements in production at both Ocampo and El Cubo, we anticipate that we will continue to report overall improvements in the months ahead."

Commenting on the Company’s performance Scott Perry, Chief Financial Officer said: "The Company’s Ocampo turnaround strategy continues to gain traction and combined with the operational improvements at El Cubo, the Group’s fourth quarter results were highly encouraging given the improvements in company wide productivity as well as the resulting decreases in total cash costs per ounce. Our turnaround strategy is well formulated and together with the progress achieved in 2007 we are continuing to see this positive momentum carry into 2008 where we are continuing to gain momentum with our production profile at both Ocampo and El Cubo and we have continued to post strong cost reductions resulting in solid cash flow performance and cash generation." My Perry continued: "The stronger metal price environment in early 2008 has continued to favourably impact our Company-wide business plan such that our operating cash flow performance has proven more than sufficient to meet our capital investment expenditures allowing us to utilize surplus cash reserves in the month of February to make an accelerated principal pay down of $2.1 million on our financing facility. Our financial foundation is continually improving due to the improved operational performance momentum which together with our undrawn debt financing facility places the Company in good stead to fully fund the Company’s recapitalization initiatives up to the latter part of 2008 when the business anticipates maintaining steady state positive free cash flow status."

Mr. Marion continued, "The potential for additional gains is significant. Equally significant in advancing operations and financial performance, I have recently added considerable strength to senior management by appointing Scott Perry, CFO and Russell Tremayne, COO, where collectively as a senior team we have extensive mining experience in turnaround situations. We are very well positioned to execute our growth strategy and we expect to continue the positive trends seen in January and February."

Highlights


  • 2007 Results:
  • Total production of 121,387 gold ounces and 5,035,704 silver ounces or 218,734 gold equivalent ounces at an annual cash cost per ounce of $650.
     

  • Revenues from mining operations of $152.1 million compared to $64.2 million in 2006 reflecting an average annual gold selling price of $698.91 per ounce and silver selling price of $13.42 per ounce.
     

  • Net loss per share of $(0.90) compared to 2006 net loss per share of $(0.29).


  • Cash used in operations were $34.2 million versus $20.0 million used in 2006. After adjustments for changes in non-cash working capital, funds used in operations were $15.7 million in 2007 versus $4.4 million provided in 2006.
     

  • In late 2007 the Company’s Management Team designed and implemented a Turn-Around Strategy that started to gain traction in early 2008.

  • New Executive Management Team:
  • Mr. Rene Marion was appointed Chief Executive Officer on October 25th. Mr. Marion brings over 22 years of international mining experience to Gammon, having most recently held the position of Chief Operating Officer (seconded from Barrick Gold) with Highland Gold Mining Ltd.
     

  • Subsequent to the 2007 calendar year, Mr. Scott Perry was appointed Chief Financial Officer on January 25th. Mr. Perry brings over 11 years of international mining experience to Gammon having most recently held the position of Chief Financial Officer (seconded from Barrick Gold) with Highland Gold Mining Ltd.
     

  • Subsequent to the 2007 calendar year, Mr. Russell Tremayne was appointed Chief Operating Officer on January 25th. Mr. Tremayne brings over 35 years of international mining experience throughout the world to Gammon, with the majority of that time in senior leadership roles. Most recently, Mr. Tremayne held the position of Director of Operations with Highland Gold Mining Ltd.
     

  • Both Mr. Perry and Mr. Tremayne had previously worked with Gammon’s Chief Executive Officer, Rene Marion at Highland Gold where Mr. Marion and Mr. Perry were seconded from Barrick Gold. Their success as a team in optimizing Highland’s operations, as well as the recapitalization of Highland, will benefit Gammon tremendously. Gammon now has in place a senior management team that possesses the requisite mining experience needed to successfully execute the Company’s growth strategy.

  • Post 2007 Balance Sheet Highlights:
  • The Company’s Turn-Around Strategy is well underway with solid traction achieved on the Company’s targeted cost reduction and productivity initiatives which is most evident in the Company’s February Monthly Results Press Release which illustrated:

  • Increased production over January and average monthly production over Q4;

  • Reduced consolidated cash costs over January and ongoing improvement over Q4’s average cash costs;

  • Increased cash flow performance over January and ongoing improvements in average cash flow performance over Q4; and,

  • Surplus cash generation resulting in an accelerated debt facility principal reduction payment of $2.1M

  • - The Company strengthened its liquidity position when the Company’s lenders, subject to the Company providing a satisfactory mine plan and updated reserve statements, agreed to remove all restrictions that limit access to the final $12.5 million portion of this facility such that the Company will now have access to the full $60 million facility.
     

  • - In March, 2008 Gammon announced encouraging drilling results at its Guadalupe y Calvo exploration project located in Chihuahua State, Mexico which indicated strong resource growth potential from this exciting exploration property. Exploration diamond drilling re-commenced on this highly prospective project during the fourth quarter 2007 as part of a 15-hole (2,400 metre) exploration drilling program. Upon the completion of this drilling program, expected to be in Q2 2008, the Company will complete a scoping study in order to determine the next steps in this advanced exploration property.
     

  • - The Company continues to track positively on its Q1 market deliverables scorecard, most notably remaining on target to produce in the low to mid point of the targeted range of 56,000 to 62,000 gold equivalent ounces during Q1, at total cash costs that are considerably lower than the originally estimated cash costs for Q4 2007, namely $580 to $600 per gold equivalent ounce.
     

  • - The Company will be providing an update on 2007 year end reserves and resources at the end of Q1 2008 and also expects to be releasing 2008 production and total cash cost guidance together with a 3-year outlook at the end of Q1 2008.

Audited Financial Statements for the year ended December 31, 2007 as well as the Notes to the Financial Statements and Management Discussion and Analysis are attached to this release and are posted on SEDAR at www.sedar.com or on the Company’s website at www.gammongold.com.


Conference Call Details

A webcast and conference call will be held on Monday, March 31, 2008 starting at 2:30 pm Eastern Time (3:30 pm Atlantic Time). Senior management will be on hand to discuss the results.

Conference Call Access:

  • Local Toronto Participants: 1-416-644-3419

  • North America Toll Free: 1-800-732-0232

  • Outside North America: 1-416-644-3419

When the Operator answers please ask to be placed into the Gammon Gold Fourth Quarter and Year End Results Conference Call.

Live Webcast:

The event will be broadcast live on the internet via webcast. To access the webcast please follow the link provided below: http://w.on24.com/r.htm?e=106728&s=1&k=7BAED3BAFA9C754ACEC1D49A018F0752.

Archive Call Access:

If you are unable to attend the conference call, a replay will be available until midnight, Friday April 4th by dialing the appropriate number below:

  • Local Toronto Participants: 1-416-640-1917 Passcode: 21266722#

  • North America Toll Free: 1-877-289-8525 Passcode: 21266722#

  • Outside North America: 1-416-640-1917 Passcode: 21266722#

Archive Webcast:

The webcast will be archived for 365-days by following the link provided below: http://w.on24.com/r.htm?e=106728&s=1&k=7BAED3BAFA9C754ACEC1D49A018F0752 or via the Company’s website at www.gammongold.com.

About Gammon Gold

Gammon Gold Inc. is a Nova Scotia based mid tier gold and silver producer with properties in Mexico. The Company’s flagship Ocampo Project in Chihuahua State achieved commercial production in January 2007. Gammon Gold also operates its El Cubo operation in Guanajuato State and has the promising development Guadalupe y Calvo property in Chihuahua State. The company remains 100% unhedged.

For further information please visit the Gammon Gold website at www.gammongold.com or contact:

Scott Perry Anne Day
Chief Financial Officer Director of Investor Relations
Gammon Gold Inc. Gammon Gold Inc.
902-468-0614 902-468-0614

Cautionary Statement

Cautionary Note to US Investors – The United States Securities and Exchange Commission permits US mining companies, in their filings with the SEC, to disclose only those mineral deposits that a company can economically and legally extract or produce. This press release uses certain terms, such as "measured," "indicated," and "inferred" "resources," that the SEC guidelines strictly prohibit US registered companies from including in their filings with the SEC. US Investors are urged to consider closely the disclosure in Gammon Gold’s Annual Report on Form 40-F (File No. 001-31739), which may be secured from Gammon Gold, or from the SEC’s website at http://www.sec.gov/edgar.shtml.


No stock exchange, securities commission or other regulatory authority has approved or disapproved the information contained herein.

Certain information regarding the Company contained herein may constitute forward-looking statements within the meaning of applicable securities laws. Forward-looking statements are subject to a variety of risks and uncertainties which could cause actual events or results to differ from those reflected in the forward-looking statements. Should one or more of these risks and uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in forward looking statements. Specific reference is made to "Risk Factors" in the Company's Annual Information Form and Form 40-F Report. Forward-looking statements may include estimates, plans, expectations, opinions, forecasts, projections, guidance or other statements that are not statements of fact including, without limitation, statements regarding potential mineralization and reserves, including without limitation, statements regarding future cash costs and production at El Cubo and Ocampo and the ability to continue to successfully implement the Company’s Turn-Around Strategy, statements regarding the resource growth potential of Guadeloupe y Calvo, statements regarding the company’s ability to continue its improved cash flow performance, the impact of any future exploration on reserve estimates; expectations regarding the timing and extent of production at the Ocampo project; the implications of the Mexican Single Rate Tax on future income tax payments; estimates regarding the future costs related to exploration at Ocampo; the nature and availability of additional funding sources; and future plans and objectives of Gammon. In some cases, you can identify forward-looking statements by the use of words such as may, will, should, could, expect, plan, intend, anticipate, believe, estimate, predict, potential or continue or the negative or other variations of these words, or other comparable words or phrases. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company’s expectations include, among others, risks related to international operations, including political turmoil and limited local infrastructure to support large scale mining operations; the actual results of current exploration activities; conclusions of economic evaluations and changes in project parameters as plans continue to be refined; and fluctuations in future prices of gold and silver. These factors are set out in the Company’s annual information form. The Company’s forward-looking statements are expressly qualified in their entirety by this cautionary statement.

###

Item 6     Reliance of subsection 7.1(2) or (3) of National Instrument 51-102

Not applicable.

Item 7     Omitted Information

Not applicable.

Item 8     Executive Officer

Rene Marion
Chief Executive Officer
Gammon Gold Inc.
Tel: 902-468-0614

Item 9     Date of Report

March 31, 2008


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