RNS Number : 3717U
European Goldfields Ltd
14 May 2008
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE THREE-MONTH PERIOD ENDED 31 MARCH 2008
The following discussion and analysis, prepared as at 14 May 2008, is intended to assist in the understanding and assessment of the
trends and significant changes in the results of operations and financial conditions of European Goldfields Limited (the "Company").
Historical results may not indicate future performance. Forward-looking statements are subject to a variety of factors that could cause
actual results to differ materially from those contemplated by these statements. The following discussion and analysis should be read in
conjunction with the Company's unaudited consolidated financial statements for the three-month periods ended 31 March 2008 and 2007 and
accompanying notes (the "Consolidated Financial Statements").
Additional information relating to the Company, including the Company's Annual Information Form, is available on the Canadian System for
Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com.
Except as otherwise noted, all dollar amounts in the following discussion and analysis and the Consolidated Financial Statements are stated
in United States dollars.
Overview
The Company, a company incorporated under the Yukon Business Corporations Act, is a resource company involved in the acquisition,
exploration and development of mineral properties in Greece, Romania and South-East Europe.
The Company's Common Shares are listed on the AIM Market of London Stock Exchange plc and on the Toronto Stock Exchange (TSX) under the
symbol "EGU".
Greece - The Company holds a 95% interest in Hellas Gold S.A ("Hellas Gold"). Hellas Gold owns three major gold and base metal deposits
in Northern Greece. The deposits are the polymetallic operation at Stratoni, the Olympias project which contains gold, zinc, lead and
silver, and the Skouries copper/gold porphyry project. Hellas Gold commenced production at Stratoni in September 2005 and commenced selling
an existing stockpile of gold concentrates from Olympias in July 2006. Hellas Gold is applying for permits to develop the Skouries and
Olympias projects.
Romania - The Company owns 80% of the Certej gold/silver project in Romania. The Company submitted in March 2007 a technical feasibility
study to the Romanian government in support of a permit application to develop the project. In March 2008, European Goldfields submitted
the Environmental Impact Study to the Romanian environmental authorities to start the assessment of the environmental impact of the Certej
Project.
Results of operations
The Company's results of operations for the year and three-month period ended 31 March 2008 were comprised primarily of activities
related to the results of operations of the Company's 95%-owned subsidiary Hellas Gold in Greece and the Company's exploration and
development program in Romania. Hellas Gold's operational results for the eight most recently completed quarters are summarised in the
following tables:
Stratoni Mine (Greece)
2008 2007 2007 2007 2007 2006 2006 2006
Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
Inventory (start of period)
Ore mined (wet tonnes) - 4,868 4,603 843 2,499 3,617 12,326 1,155
Zinc concentrate (tonnes) 1,689 2,797 2 3,524 37 1,199 1,562 1,034
Lead/silver concentrate 49 2,042 2,150 1,846 214 1,345 674 308
(tonnes)
Production
Ore mined (wet tonnes) 58,208 50,643 56,075 53,088 55,069 47,321 49,652 47,966
Ore milled (tonnes) 55,392 53,813 54,499 48,179 55,258 47,038 56,769 35,810
- Average grade: Zinc (%) 9.37 9.00 8.42 11.57 11.39 10.73 10.54 9.45
Lead (%) 5.35 8.12 7.55 9.14 7.38 6.56 5.78 5.83
Silver (g/t) 134 206 186 232 180 162 142 146
Zinc concentrate (tonnes) 9,427 9,082 8,506 10,485 11,731 9,263 10,768 6,041
- Containing: Zinc (tonnes) 4,644 4,425 4,194 5,170 5,760 4,619 5,468 3,098
Lead concentrate (tonnes) 4,035 6,012 5,586 5,955 5,406 3,993 4,368 2,703
- Containing: Lead (tonnes) 2,653 4,021 3,781 4,109 3,744 2,818 2,997 1,881
Silver (oz) 207,215 316,837 297,059 328,879 288,023 216,586 227,817 141,809
Sales
Zinc concentrate (tonnes) 8,371 10,191 5,710 14,007 8,244 10,425 11,130 5,513
- Containing payable: Zinc 3,454 4,209 2,364 5,855 3,463 4,418 4,702 2,320
(tonnes)*
Lead concentrate (tonnes) 1,872 8,004 5,694 5,651 3,774 5,124 3,696 2,337
- Containing payable: Lead 1,188 5,082 3,759 3,636 2,486 3,329 2,418 1,554
(tonnes)*
Silver (oz)* 95,582 399,272 297,321 285,349 190,292 254,881 189,349 121,350
Cash operating cost per tonne 165 175 144 135 138 147 109 115
milled ($)
Inventory (end of period)
Ore mined (wet tonnes) 2,816 - 4,868 4,603 843 2,499 3,617 12,326
Zinc concentrate (tonnes) 2,745 1,689 2,797 2 3,524 37 1,199 1,562
Lead/silver concentrate 2,213 49 2,042 2,150 1,846 214 1,345 674
(tonnes)
Financial information
(in thousands of US dollars)
Sales ($) 10,097 18,483 16,634 22,866 14,215 19,439 14,226 8,274
Gross profit ($) 3,060 6,147 8,425 13,991 8,294 10,477 6,973 4,330
Capital expenditure ($) 3,111 3,779 12,142 4,673 1,564 4,202 1,487 1,351
Amortisation and depletion ($) 997 2,000 1,256 837 653 1,119 796 942
* Net of smelter payable deductions but before the deduction of smelter and refining charges
Sale of Gold-Bearing Concentrates from Existing Stockpile at Olympias (Greece)
2008 2007 2007 2007 2007 2006 2006 2006
Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
Sales
Gold concentrate (dmt) 9,778 21,385 28,393 12,686 17,090 3,299 6,134 1,905
Financial information
(in thousands of US dollars)
Sales ($) 2,611 4,232 5,029 2,078 2,868 431 985 -
Gross profit ($) 1,789 1,279 2,848 958 1,845 192 985 -
Amortisation and depletion ($) 56 (134) 265 76 120 - - -
Cash operating costs per tonne milled fell in Q1 2008 to $165 (EUR110) per tonne, compared to $175 (EUR121) per tonne in Q4 2007. The
$10 per tonne decrease in costs consisted of a $11/t (EUR8/t) reduction resulting from lower labour and repairs at mill, and a $4 (EUR3) per
tonne fall in G&A costs. However, further strengthening of the Euro against the US dollar in Q1 2008 added $5 per tonne to overall dollar
costs.
Summary of quarterly results
The Company's financial results for the eight most recently completed quarters are summarised in the following table:
2008 2007 2007 2007 2007 2006 2006 2006
(in thousands of US dollars, Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
except per share amounts) $ $ $ $ $ $ $ $
Statement of loss and deficit
Sales 12,708 22,715 21,663 24,944 17,083 19,870 15,211 8,274
Cost of sales 7,859 15,289 10,390 9,995 6,944 9,201 7,253 3,944
Gross profit 4,849 7,426 11,273 14,949 10,139 10,669 7,958 4,330
Interest income 1,757 2,699 2,320 1,116 453 393 485 267
Foreign exchange gain/(loss) 2,674 (2,173) 6,494 (265) (152) (903) (67) 202
Expenses 5,017 6,385 4,819 4,875 4,764 3,543 4,274 4,547
Profit before income tax 4,263 1,567 15,268 10,925 5,676 6,616 4,102 252
Profit/(loss) after income tax 3,642 3,629 12,504 8,129 3,957 4,349 2,984 (311)
Non-controlling interest (233) (29) (348) (2,794) (1,848) (1,973) (1,509) (225)
Profit/(loss) for the period 3,409 3,600 12,156 5,335 2,109 2,376 1,475 (536)
Earnings/(loss) per share 0.02 0.02 0.07 0.04 0.02 0.02 0.01 0.00
Balance sheet (end of period)
Working capital 225,673 226,431 224,289 211,637 45,201 41,854 39,666 36,453
Total assets 794,911 782,131 744,998 729,774 325,501 311,943 294,719 292,236
Non current liabilities 188,210 185,433 175,019 170,970 79,183 74,603 70,080 69,018
Statement of cash flows
Deferred exploration and 1,603 2,133 1,658 1,248
development costs - Romania 696 856 598 992
Plant and equipment - Greece 7,147 3,779 12,142 4,673 1,577 4,144 1,268 1,599
Deferred development costs - 769 915 491 520 421 2,095 462 999
Greece
The breakdown of deferred exploration and development costs per mineral property for the three-month periods ended 31 March 2007 and
2006 is as follows:
Three-month periods ended 31 March
2008 2007
(in thousands of US dollars) $ $
Romanian mineral properties
Certej 1,484 (93%) 661 (95%)
Cainel 24 (1%) - (-%)
Voia 74 (5%) 10 (1%)
Baita-Craciunesti 21 (1%) 25 (4%)
1,603 (100%) 696 (100%)
Greek mineral properties
Stratoni 285 (37%) - (-%)
Skouries 444 (58%) 219 (52%)
Olympias 40 (5%) 202 (48%)
769 (100%) 421 (100%)
Total 2,372 (100%) 1,117 (100%)
The Certej exploitation licence and the Baita-Craciunesti exploration licence are held by the Company's
80%-owned subsidiary, Deva Gold S.A. ("Deva Gold"). Minvest S.A. (a Romanian state owned mining company), together with three private
Romanian companies, hold the remaining 20% interest in Deva Gold. The Company is required to fund 100% of all costs related to the
exploration and development of these properties. As a result, the Company is entitled to the refund of such costs (plus interest) out of
future cash flows generated by Deva Gold, prior to any dividends being distributed to shareholders. The Voia and Cainel exploration licences
are held by the Company's wholly-owned subsidiary, European Goldfields Deva SRL.
The Company recorded a profit (before tax) of $4.26 million for the three-month period ended 31 March 2008, compared to a profit (before
tax) of $5.68 million for the same period of 2007. The Company recorded a net profit (after tax and non-controlling interest) of $3.64
million ($0.02 per share) for the three-month period ended 31 March 2008, compared to a net profit of $2.11 million ($0.02 per share) for
the same period of 2007.
The following factors have contributed to the above:
* In Q1 2008, Hellas Gold's Stratoni mine operated at slightly higher levels than in Q1 2007, producing 58,208 tonnes of ore
compared to 55,069 tonnes in the same period of 2007. However, only 4 shipments of base metal concentrates were sold (Q1 2007 - 5), but
there were significant concentrate stockpiles at quarter end, which will benefit Q2 sales. Pyrite sales were also lower in Q1 2008, as port
disruption at Thessaloniki prevented containers being available for shipments. Hellas Gold sold 9,789 tonnes of pyrite concentrates,
compared to 17,090 tonnes in the prior year. Lower sales shipments and a lower zinc price compared to Q1 2007 impacted sales revenues and
overall profitability.
* As a result, the Company recorded $4.85 million in gross profit on revenues of $12.71 million in Q1 2008 for the sale of
concentrates by Hellas Gold, compared to $10.14 million in gross profit on revenues of $17.08 million for the same period of 2007. Cost of
sales of $7.86 million compared to $6.94 million for the same period of 2007, reflect the higher cost per tonne at the mine, primarily due
to increased labour levels as the mine gears up for higher throughput in the second half of 2008, and a stronger Euro increasing US dollar
based costs. Cost of sales also included $1.05 million in amortisation and depletion expenses (Q1 2007 - $0.78 million) which reflects the
higher depletion rates resulting from the Company's increased ownership interest in Hellas Gold.
* The Company's corporate administrative and overhead expenses have increased from $0.85 million in Q1 2007, to $1.26 million for
the same period of 2007. This reflects higher general levels of corporate activity compared to the prior period.
* The Company recorded a non-cash equity-based compensation expense of $0.47 million in Q1 2008, compared to $0.46 million for the
same period of 2007. In Q1 2008, the Company continued a practice of recharging some of its equity-based compensation expense to its
operating subsidiaries, a portion of which is capitalised by such subsidiaries.
* The Company recorded a foreign exchange profit of $2.67 million in Q1 2008. This profit resulted primarily from profits on
translation of Euro cash balance held by a subsidiary into a US$ functional currency. In contrast, the Company realised a foreign exchange
loss of $0.15 million in Q1 2007.
* In Q1 2008, Hellas Gold's administrative and overhead expenses amounted to $2.06 million, compared to $2.21 million for the same
period of 2007. Hellas Gold's administrative and overhead expenses include the costs of the Athens based office, environmental and water
treatment expenses not directly attributable to the Stratoni operation and the costs of various projects in communities around the mine.
The principal change was a fall in the total amount spent on local community projects.
* In Q1 2008, Hellas Gold incurred an expense of $1.04 million, compared to $1.10 million for the same period of 2007, for ongoing
water pumping and treatment at its non-operating mines of Olympias and Stratoni (Madem Lakkos), in compliance with Hellas Gold's commitment
to the environment under its contract with the Greek State.
* The Company recorded a charge for income taxes of $0.62 million in Q1 2008, compared to a charge of $1.72 million for the same
period of 2007, as a result of a future tax credit being recognized in 2008 compared to a charge in 2007.
* The Company recorded a charge of $0.23 million in Q1 2008 relating to the non-controlling shareholder's interest in Hellas Gold's
profit (after tax) for this period, compared to a charge of $1.85 million for the same period of 2007, relating to the non-controlling
shareholder's interest in Hellas Gold's loss (after tax) for this period. This reflects the non-controlling shareholder's investment falling
from 35% to 5% at the end of June 2007.
Liquidity and capital resources
As at 31 March 2008, the Company had cash and cash equivalents of $210.68 million, compared to
$218.84 million as at 31 December 2007, and working capital of $225.67 million, compared to $226.43 million as at 31 December 2007. After
the quarter end, Hellas Gold received $8.5 million from the Greek authorities as a repayment of accumulated VAT recoverable in Greece.
The decrease in cash and cash equivalents as at 31 March 2008, compared to the balances as at 31 December 2007, resulted primarily from
changes in working capital balances ($6.78 million), capital expenditure in Greece ($7.15 million), deferred exploration and development
costs in Romania ($1.60 million), deferred development costs in Greece ($0.77 million) and the purchase of land ($0.34 million), offset by
the effect of foreign currency translation on cash ($2.02 million), operating cash flow ($2.95 million) and advanced sales proceeds from MRI
($3.56 million).
The following table sets forth the Company's contractual obligations including payments due for each of the next five years and
thereafter:
Payments due by period
(in thousands of US dollars)
Contractual obligations Total Less than 1 year 1 - 3 years 4 - 5 years After 5 years
Operating lease (London 1,158 193 386 386 193
office)
Exploration licence spending
commitments (Voia, Romania) 710 - 710 - -
Outotec OT - Processing Plant 42,837 15,427 27,410 - -
Total contractual obligations 44,705 15,620 28,506 386 193
In 2008, the Company now expects to spend a total of $55 million in capital expenditures to fund the development of its project
portfolio. This amount comprises $12 million at its existing operation at Stratoni to complete and expand the internal underground
infrastructure at Mavres Petres and upgrade the mill, $10 million at Olympias in order to start the refurbishment of the mine and process
plant, and $20 million at Skouries as the Company expects to continue to spend on long lead time equipment and engineering studies. At
Certej, the Company expects to spend $13 million as it finalises its bankable feasibility study and increases exploration on potential
satellite orebodies close to Certej. In addition to its capital expenditure programme, the Company expects to spend $2 million in
exploration over the wider licence area in Greece, $13 million on Hellas Gold administrative and overhead and water treatment expenses, and
$4 million on corporate administrative and overhead expenses. The Company expects to fund all such costs from existing cash balances and operating cash flow generated at Stratoni.
Significant changes in accounting policies
Capital Disclosures - Effective 1 January 2008, the Company adopted CICA Handbook, Section 1535, Capital disclosures. The new standard
requires disclosures of qualitative and quantitative information that enables users of financial statements to evaluate the Company's
objectives, policies and processes for managing capital.
Inventories - Effective 1 January 2008, the Company adopted the CICA Handbook Section 3031, Inventories. The new section requires
inventories to be measured at the lower of cost and net realisable value and provides guidance on the cost methodology used to assign costs
to inventory, disallows the use of last-in-first-out inventory costing methodology and requires that, when circumstances which previously
caused inventories to be written down below cost no longer exist, the amount previously written down is to be reversed. Upon adoption, the
impact to the financial statements arising was immaterial.
Standards of Financial Statement Presentation - Effective 1 January 2008, the Company adopted CICA Handbook Section 1400, General
Standards of Financial Statement Presentation. This section provides guidance related to management's assessment of the Company's ability to
continue as a going concern. The adoption of this standard had no impact on the Company's presentation of its financial position.
Financial Instruments Presentation and Disclosures - Effective 1 January 2008, the Company adopted CICA Handbook Sections 3862 -
Financial instruments - disclosures, and 3863 - Financial instruments - Presentation. These new Sections are a replacement of and represent
a revision and enhancement to Section 3861 - Financial instruments - Presentation and disclosure. Under the new standards, the Company is
required to disclose information about the significance of financial instruments for its financial position and performance and qualitative
and quantitative information about its exposure to risks arising from financial instruments, as well as management's objectives, policies
and processes for managing such risks. The adoption of these standards did not have an impact on the classification and valuation of
financial instruments.
Change in functional currency - During the three month period ended 31 March 2008, Hellas Gold completed a long term planning exercise
on its Stratoni mine. As a stand alone business, Stratoni was shown to generate excess of US dollar revenues over Euro expenses for its
life of mine. Hellas Gold also has a series of development projects which will increase the excess of US dollar revenues over Euro
denominated costs. Also taken into consideration along with the net cash flows were the following factors:
* All sales are priced in US dollars;
* Sales markets are international, rather than domestic to Greece;
* Day to day activities are financed by US dollar denominated sales;
* Significant amounts of future financing earmarked for the development projects has already been raised in US dollars by European
Goldfields Limited, and other financing in Hellas Gold, prepaid sales receipts, have all been US dollar denominated;
* Labour and materials are predominantly denominated in Euros.
Overall, it was deemed that the net exposure to the US dollar was greater than the exposure to the Euro, and that the functional
currency of Hellas Gold should change to the US dollar. The change in functional currency is effective 1 January 2008.
Outstanding share data
The following represents all equity shares outstanding and the numbers of common shares into which all securities are convertible,
exercisable or exchangeable:
Common shares: 179,212,381
Common share options: 3,171,665
Restricted share units: 325,000
Common shares (fully-diluted): 182,709,046
Preferred shares: Nil
Risks and uncertainties
The risks and uncertainties affecting the Company, its subsidiaries and their business are discussed in the Company's Annual Information
Form for the year ended 31 December 2007, filed on SEDAR at www.sedar.com.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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