2008 Q1 Results Part 3

14th May 2008 07:00



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 Q1	2007 Q4	2007 Q3	2007 Q2	2007 Q1	2006 Q4	2006 Q3	2006 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 (tonnes)	49	2,042	2,150	1,846	214	1,345	674	308
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 (tonnes)*	3,454	4,209	2,364	5,855	3,463	4,418	4,702	2,320
Lead concentrate (tonnes)	1,872	8,004	5,694	5,651	3,774	5,124	3,696	2,337
- Containing payable: Lead (tonnes)*	1,188	5,082	3,759	3,636	2,486	3,329	2,418	1,554
Silver (oz)*	95,582	399,272	297,321	285,349	190,292	254,881	189,349	121,350
Cash operating cost per tonne milled ($)	165	175	144	135	138	147	109	115
Inventory (end of period)
Ore mined (wet tonnes)	2,816	-	4,868	4,603	843	2,499	3,617	12,326
Zinc concentrate (tonnes)	2,745	1,689	2,797	2	3,524	37	1,199	1,562
Lead/silver concentrate (tonnes)	2,213	49	2,042	2,150	1,846	214	1,345	674
Financial information (in thousands of US dollars)
Sales ($)	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 Q1	2007 Q4	2007 Q3	2007 Q2	2007 Q1	2006 Q4	2006 Q3	2006 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 (€110) per tonne, compared to $175 (€121) per tonne in Q4 2007. The $10 per tonne decrease in costs consisted of a $11/t (€8/t) reduction resulting from lower labour and repairs at mill, and a $4 (€3) 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:

(in thousands of US dollars, except per share amounts)	2008 Q1 $	2007 Q4 $	2007 Q3 $	2007 Q2 $	2007 Q1 $	2006 Q4 $	2006 Q3 $	2006 Q2 $
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 development costs - Romania	1,603	2,133	1,658	1,248	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 - Greece	769	915	491	520	421	2,095	462	999

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
(in thousands of US dollars)	2008 $		2007 $
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 office)	1,158	193	386	386	193
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.

ENDQRFUOOKRWRRVAAR

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Related Shares:

EGU.L