Gammon Gold Announces Fourth Quarter & Year End 2007 Financial Results

HALIFAX, March 31 /PRNewswire/ - 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, December 31,
2007 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
and depletion $140,302,718 $37,943,583 $33,511,441 $18,129,116
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
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(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
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- 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.
Cautionary Statement
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.
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.
Management's Discussion & Analysis

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

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.
-------------------------------------------------------------------------
5 months
Year ended Year ended ended
December 31, December 31, December 31,
2007 2006 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
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(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.
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 turn-around
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.
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
-------------------------------------------------------------------------
Revenue from
mining
operations $39,699,932 $30,443,793 $38,414,989 $43,499,914
Production
costs $33,511,441 $33,957,197 $35,393,662 $37,440,418
Net loss ($20,728,989) ($44,835,395) ($25,487,704) ($10,261,880)
Net loss per
share, basic
and diluted (1) ($0.19) ($0.38) ($0.23) ($0.10)
Cash from
(used in)
operations $2,704,381 ($10,571,784) ($17,064,419) ($9,260,068)
Gold ounces
sold 28,665 25,104 31,006 36,332
Silver ounces
sold 1,183,729 1,068,809 1,306,267 1,469,178
Gold equivalent
ounces sold (2) 49,969 44,863 57,063 66,305
Average realized
gold price
(per oz) $795.00 $678.97 $676.95 $655.67
Average realized
silver price
(per oz) $14.32 $12.54 $13.34 $13.40
Gold equivalency
rate (silver oz
equal to one
gold oz) 56 54 51 49
Total cash costs,
per gold equi-
valent ounce (3) $676 $764 $702 $575
Cash dividends
declared $Nil $Nil $Nil $Nil
-------------------------------------------------------------------------

-------------------------------------------------------------------------
Q4 2006 Q3 2006 Q2 2006 Q1 2006
-------------------------------------------------------------------------
Revenue from
mining
operations $34,381,498 $16,455,599 $11,507,809 $1,890,990
Production
costs $18,129,116 $12,698,143 $3,967,984 $3,148,340
Net loss ($3,291,590) ($15,115,410) ($2,215,076) ($4,686,325)
Net loss per
share, basic
and diluted (1) ($0.04) ($0.16) ($0.03) ($0.05)
Cash from
(used in)
operations $5,952,707 ($16,323,982) ($2,051,352) ($7,603,392)
Gold ounces
sold 33,866 17,112 13,672 2,827
Silver ounces
sold 1,138,986 435,554 251,155 62,629
Gold equivalent
ounces sold (2) 57,111 25,652 18,409 4,009
Average realized
gold price
(per oz) $608.53 $604.42 $615.97 $560.68
Average realized
silver price
(per oz) $12.54 $11.88 $11.45 $10.50
Gold equivalency
rate (silver oz
equal to one
gold oz) 49 51 54 53
Total cash costs,
per gold equi-
valent ounce (3) $323 $500 $219 (4)
Cash dividends
declared $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. 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.
Results of Operations
-------------------------------------------------------------------------

-------------------------------------------------------------------------
2007 2006 2007 2006
Ocampo Ocampo El Cubo El Cubo
-------------------------------------------------------------------------
Revenue from
mining
operations $107,833,028 $47,214,146 $44,225,600 $17,021,750
Gold ounces
produced 87,647 51,748 33,740 15,729
Silver ounces
produced 3,453,388 1,302,807 1,582,316 585,517
Gold equivalent
ounces
produced (1) 154,423 77,804 64,311 27,377
Gold ounces
sold 87,357 51,748 33,740 15,729
Silver ounces
sold 3,445,667 1,302,807 1,582,316 585,517
Gold equivalent
ounces sold (1) 153,961 77,804 64,311 27,377
Production
costs $102,657,728 $26,600,886 $37,644,990 $11,342,697
Refining costs $1,046,259 $342,797 $463,668 $182,807
Net (loss) /
earnings
before other
items ($33,454,524) $8,543,115 ($9,295,937) ($3,630,248)
Total cash
costs (per
gold
equivalent
ounce) (2) $702 $346 $593 $421
Total cash
costs (per
gold
ounce) (2) $703 $214 $511 $279
-------------------------------------------------------------------------

-------------------------------------------------------------------------
2007 2006
Other Other
-------------------------------------------------------------------------
Revenue from
mining
operations - -
Gold ounces
produced - -
Silver ounces
produced - -
Gold equivalent
ounces
produced (1) - -
Gold ounces
sold - -
Silver ounces
sold - -
Gold equivalent
ounces sold (1) - -
Production
costs - -
Refining costs - -
Net (loss) /
earnings
before other
items ($18,871,971) ($26,150,386)
Total cash
costs (per
gold
equivalent
ounce) (2) - -
Total cash
costs (per
gold
ounce) (2) - -
-------------------------------------------------------------------------
(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
-------------------------------------------------------------------------
Equipment Availability - Additional Mobile Equipment for Underground
(Fixed & Mobile) & Open Pit
- Improved Preventative Maintenance Practices
Implemented

Insufficient Underground - Continued focus on increasing development
Development - Supplement mill feed with high grade Open
Pit ore while underground development is
accelerated
Underground Mining Method - Improved overall mining methods and process
Selection implemented in late Q4
- Re-introduction of longhole mining in late
Q4 enhanced productivity and decreased
dilution
Processing Facility - Improved preventative maintenance practices
Availability - Implementation of enhanced practices
& processes
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

Labour Relations - - Compensation Analysis Study initiated in Q4
Compensation Challenges to Address Inequities Among workforce
- Production Bonus Schedule developed for 2008
Implementation

Liquidity Constraints - New $60 million revolving line of credit
established in late Q3 (with restrictions)
- Cost Containment initiatives and improved
reporting systems implemented

-------------------------------------------------------------------------
Area for Improvement Measures to be Taken in 2008
-------------------------------------------------------------------------
Equipment Availability - Delivery of Additional Underground Equipment
(Fixed & Mobile) 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 - New underground equipment in March & April
Development to allow accelerated development
- Target of 50 development metres per day
- Ramp up of underground production by
the end of 2008

Underground Mining Method - Continued development of longhole mining
Selection 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 - Appointment of seasoned processing manager
Availability - Proper Inventory of spares
- Appointment of seasoned Maintenance manager

Cost Management Issues - 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 inequities resolved
Compensation Challenges - 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 - 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.
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 equi-
valent (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.
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.
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 reserves
(20% of the underground ore), which illustrates the potential to add to
reserves and perhaps increase the production profile in the future.
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
-------------------------------------------------------------------------
Processing Facilities - Advancing key capital projects by early
2008 to drive production throughput and
plant availability
- 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
Development exploration development into areas of
known structures 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 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.

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
-------------------------------------------------------------------------

-------------------------------------------------------------------------
5 months
Year ended Year ended ended
December 31, December 31, December 31,
2007 2006 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 initi
atives 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.
Other Income / (Expense)
-------------------------------------------------------------------------

-------------------------------------------------------------------------
5 months
Year ended Year ended ended
December 31, December 31, December 31,
2007 2006 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 Societe Generale 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.
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.
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:
-------------------------------------------------------------------------
Less than
Total 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.
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:
-------------------------------------------------------------------------
5 months
Year ended Year ended ended
December 31, December 31, December 31,
2007 2006 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.
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
-------------------------------------------------------------------------
SOURCE GAMMON GOLD INC.

Scott Perry, Chief Financial Officer, Gammon Gold Inc., (902) 468-0614; Anne
Day, Director of Investor Relations, Gammon Gold Inc., (902) 468-0614/ /FIRST
ADD TO FOLLOW