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2008 Q3 Results Part 3

11th Nov 2008 07:00

RNS Number : 8685H

European Goldfields Ltd

11 November 2008

MANAGEMENT'S DISCUSSION AND ANALYSIS

FOR THE THREE- AND NINE-MONTH PERIODS ENDED 30 SEPTEMBER 2008

The following discussion and analysis, prepared as at 11 November 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- and nine-month periods ended 30 September 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 - European Goldfields holds a 95% interest in Hellas Gold S.A. 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 - European Goldfields owns 80% of the Certej gold/silver project in Romania. In July 2008, the National Agency of Mineral Resources approved the technical feasibility study in support of its permit application and issued a new mining permit for the Certej project.

Results of operations

The Company's results of operations for the three- and nine-month periods ended 30 September 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 Q3	2008 Q2	2008 Q1	2007 Q4	2007 Q3	2007 Q2	2007 Q1	2006 Q4
Inventory (start of period)
Ore mined (wet tonnes)	1,003	2,816	-	4,868	4,603	843	2,499	3,617
Zinc concentrate (tonnes)	5,660	2,745	1,689	2,797	2	3,524	37	1,199
Lead/silver concentrate (tonnes)	1,238	2,213	49	2,042	2,150	1,846	214	1,345

Production
Ore mined (wet tonnes)	69,847	73,137	58,208	50,643	56,075	53,088	55,069	47,321

Ore milled (tonnes)	63,040	73,280	53,675	53,813	54,499	48,179	55,258	47,038
- Average grade: Zinc (%)	8.82	10.37	9.37	9.00	8.42	11.57	11.39	10.73
Lead (%)	6.40	6.21	5.35	8.12	7.55	9.14	7.38	6.56
Silver (g/t)	160	155	134	206	186	232	180	162

Zinc concentrate (tonnes)	10,451	14,139	9,427	9,082	8,506	10,485	11,731	9,263
- Containing: Zinc (tonnes)	5,132	7,004	4,644	4,425	4,194	5,170	5,760	4,619

Lead concentrate (tonnes)	5,531	6,443	4,035	6,012	5,586	5,955	5,406	3,993
- Containing: Lead (tonnes)	3,726	4,201	2,653	4,021	3,781	4,109	3,744	2,818
Silver (oz)	280,305	316,354	207,215	316,837	297,059	328,879	288,023	216,586

Sales
Zinc concentrate (tonnes)	14,033	11,224	8,371	10,191	5,710	14,007	8,244	10,425
- Containing payable: Zinc (tonnes)*	5,818	4,633	3,454	4,209	2,364	5,855	3,463	4,418

Lead concentrate (tonnes)	5,475	7,418	1,872	8,004	5,694	5,651	3,774	5,124
- Containing payable: Lead (tonnes)*	3,495	4,628	1,188	5,082	3,759	3,636	2,486	3,329
Silver (oz)*	263,464	355,298	95,582	399,272	297,321	285,349	190,292	254,881

Cash operating cost per tonne milled ($)	164	161	164	175	144	135	138	147
Cash operating cost per tonne milled (€)	109	103	110	121	105	100	104	114

Inventory (end of period)
Ore mined (wet tonnes)	6,489	1,003	2,816	-	4,868	4,603	843	2,499
Zinc concentrate (tonnes)	2,078	5,660	2,745	1,689	2,797	2	3,524	37
Lead/silver concentrate (tonnes)	1,294	1,238	2,213	49	2,042	2,150	1,846	214

Financial information (in thousands of US dollars)
Sales ($)	13,250	13,000	10,097	18,483	16,634	22,866	14,215	19,439
Gross profit ($)	171	(198)	3,060	6,147	8,425	13,991	8,294	10,477
Capital expenditure ($)	2,496	2,086	3,111	3,779	12,142	4,673	1,564	4,202
Amortisation and depletion ($)	1,571	1,215	997	2,000	1,256	837	653	1,119

Net of smelter payable deductions

Sale of Gold-Bearing Concentrates from Existing Stockpile at Olympias (Greece)
	2008 Q3	2008 Q2	2008 Q1	2007 Q4	2007 Q3	2007 Q2	2007 Q1	2006 Q4
Sales
Gold concentrate (dmt)	12,710	22,479	9,778	21,385	28,393	12,686	17,090	3,299

Financial information (in thousands of US dollars)
Sales ($)	2,851	5,461	2,611	4,232	5,029	2,078	2,868	431
Gross profit ($)	1,222	3,668	1,789	1,279	2,848	958	1,845	192
Amortisation and depletion ($)	72	129	56	(134)	265	76	120	-

Realised base metal prices in Q3 were lower than in Q2, but revenues remained at similar levels since Q2 sales had been depressed by a $2.5 million prior quarter write down. Revenues from the sale of Olympias gold concentrates were lower than in Q2 as industrial action continued at Thessaloniki port.

Operating costs in Q3 rose slightly to €109 per tonne from €103 per tonne in Q2. With the majority of mining costs fixed on a per tonne basis, the change resulted solely from lower mill throughput which increased unit costs for the mill and mine G&A. At the end of the quarter there was 6,489 tonnes of ore inventory, which will be processed in Q4 when unit costs will only benefit accordingly. In dollar terms, the weakening euro offset the increase in euro costs so that Q3 dollar costs only moved up marginally to $164 per tonne from $161 per tonne in Q2.

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 Q3 $	2008 Q2 $	2008 Q1 $	2007 Q4 $	2007 Q3 $	2007 Q2 $	2007 Q1 $	2006 Q4 $
Statement of profit and loss
Sales	16,101	18,461	12,708	22,715	21,663	24,944	17,083	19,870
Cost of sales	14,708	14,991	7,859	15,289	10,390	9,995	6,944	9,201
Gross profit	1,393	3,470	4,849	7,426	11,273	14,949	10,139	10,669
Interest income	1,306	1,502	1,757	2,699	2,320	1,116	453	393
Foreign exchange gain/(loss)	(2,800)	(27)	2,674	(2,173)	6,494	(265)	(152)	(903)
Hedge contract profit	1,362	391	-	-	-	-	-	-
Expenses	6,054	5,058	5,017	6,385	4,819	4,875	4,764	3,543
Share of loss in equity investment	(66)	(36)	-	-	-	-	-	-
Profit/(loss) before income tax	(4,859)	242	4,263	1,567	15,268	10,925	5,676	6,616
Profit/(loss) after income tax	(5,310)	886	3,642	3,629	12,504	8,129	3,957	4,349
Non-controlling interest	267	(74)	(233)	(29)	(348)	(2,794)	(1,848)	(1,973)
Profit/(loss) for the period	(5,043)	812	3,409	3,600	12,156	5,335	2,109	2,376
Earnings/(loss) per share	(0.03)	0.00	0.02	0.02	0.07	0.04	0.02	0.02
Balance sheet (end of period)
Working capital	208,609	216,822	225,673	226,431	224,289	211,637	45,201	41,854
Total assets	775,369	796,537	794,911	782,131	744,998	729,774	325,501	311,943
Non current liabilities	187,275	189,559	188,210	185,433	175,019	170,970	79,183	74,603
Statement of cash flows
Deferred exploration and development costs - Romania	1,420	1,092	1,603	2,133	1,658	1,248	696	856
Plant and equipment - Greece	2,971	3,065	7,147	3,779	12,142	4,673	1,577	4,144
Deferred development costs - Greece	519	656	769	915	491	520	421	2,095

The breakdown of deferred exploration and development costs per mineral property for the three- and nine-month periods ended 30 September 2008 and 2007 is as follows:

	Nine-month periods ended 30 September				Three-month periods ended 30 September
	2008		2007		2008		2007
(in thousands of US dollars)	$	%	$	%	$	%	$	%
Romanian mineral properties
Certej	3,868	94	3,367	94	1,392	98	1,476	89
Cainel	42	1	16	1	-	-	34	2
Voia	123	3	161	4	14	1	131	8
Baita-Craciunesti	82	2	58	1	14	1	17	1
	4,115	100	3,602	100	1,420	100	1,658	100
Greek mineral properties
Stratoni	514	26	240	17	47	9	126	26
Skouries	1,145	59	1,115	78	310	60	605	123
Olympias	285	15	77	5	162	31	(240)	(49)
	1,944	100	1,432	100	519	100	491	100
Total	6,059		5,034		1,939		2,149

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 loss (before tax) of $0.35 million for the nine-month period ended 30 September 2008, compared to a profit (before tax) of $31.87 million for the same period of 2007. The Company recorded a net loss (after tax and non-controlling interest) of $0.82 million ($0.00 per share) for the nine-month period ended 30 September 2008, compared to a net profit of $19.6 million ($0.14 per share) for the same period of 2007.

The Company recorded a loss (before tax) of $4.86 million for the three-month period ended 30 September 2008, compared to a profit (before tax) of $15.27 million for the same period of 2007. The Company recorded a net loss (after tax and non-controlling interest) of $5.04 million ($0.03 per share) for the three-month period ended 30 September 2008, compared to a net profit of $12.16 million ($0.07 per share) for the same period of 2007.

The following factors have contributed to the above:

·; The key revenue drivers have been commodity prices in particular zinc, lead grades and sale of gold concentrate: in the first nine months of 2008, the price of zinc which is the primary sales product from the Stratoni mine, averaged approximately $2,130 per tonne. This was substantially lower than the corresponding period in 2007 which averaged almost $3,450 per tonne. Hellas Gold’s Stratoni mine was operating at substantially higher levels in the first nine months of 2008 than in the same period of 2007, with mine ore production increasing 23% and mill throughput increasing 20%. However, lower grades for lead in 2008 meant that lead concentrate production and sales were at similar levels to the same period in 2007, but with lower levels of profitability. In the first nine months of 2008, Hellas Gold sold 44,967 tonnes of gold bearing pyrite concentrates from Olympias, a reduction of 23% compared to the same period of 2007 but higher gold prices more than offset this fall in volumes and resulted in higher gold revenues. In Q3 2008, sales of gold concentrate were down 55% compared to the same period in 2007. Despite higher gold prices revenues fell 43%. Overall, lower base metal prices and grades and lower gold concentrates shipments outweighed any benefits from the higher gold prices, with the result that revenues and profitability declined for the first nine months of 2008 and in Q3 2008 compared to the same periods of 2007.

·; As a result, the Company recorded a gross profit of $9.71 million in the first nine months of 2008 and $1.39 million in Q3 2008, on revenues of $47.27 million and $16.10 million, respectively, compared to a gross profit of $36.36 million in the first nine months of 2007 and $11.27 million in Q3 2007, on revenues of $63.69 million and $21.66 million, respectively. Cost of sales of $37.56 million in the first nine months of 2008 and $14.71 million in Q3 2008, compared to $27.33 million and $10.39 million, respectively, for the same periods of 2007, reflect the higher tonnages mined and processed, and the effect of a weak US dollar increasing the Euro based costs, and included $4.04 million in amortisation and depletion expenses in the first nine months of 2008, compared to $3.21 million for the same period of 2007.

·; The Company’s corporate administrative and overhead expenses have increased from $2.60 million in the first nine months of 2007 and $0.87 million in Q3 2007, to $3.92 million and $1.35 million, respectively, for the same periods of 2008. This reflects higher general levels of corporate activity and higher wage costs compared to the prior period.

·; The Company recorded a non-cash equity-based compensation expense of $1.55 million in the first nine months of 2008 and $0.54 million in Q3 2008, compared to $1.51 million and $0.60 million, respectively, for the same periods of 2007. In the first nine months of 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 loss of $0.15 million in the first nine months of 2008 and a foreign exchange loss of $2.80 million in Q3 2008. The Q3 loss resulted from the translation of Euro working capital balances held by Hellas Gold into a US dollar functional currency, and occurred at the end of Q3 2008 during a period of rapid Euro weakness against the US dollar. In contrast, the Company realised a foreign exchange gain of $6.1 million in the first nine months of 2007, and a gain of $6.5 million in Q3 2007 as the Company gained from holding a basket of Sterling, Canadian dollars and Euros during a period of US dollar weakness.

·; Hellas Gold’s administrative and overhead expenses amounted to $6.20 million in the first nine months of 2008 and $2.19 million in Q3 2008, compared to $6.66 million and $2.13 million, respectively, for the same periods 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.

·; Hellas Gold incurred an expense of $3.86 million in the first nine months of 2008 and $1.76 million in Q3 2008, compared to $3.25 million and $1.07 million, respectively, for the same periods 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 increase in Q3 2008 relates to higher costs incurred accessing old voids at Madem Lakkos to allow backfilling activities to continue.

·; The Company recorded a charge for income taxes of $0.43 million in the first nine months of 2008 and $0.45 million in Q3 2008, compared to charges of $7.28 million and $2.76 million, respectively, for the same periods of 2007. Lower profitability in 2008 meant that Hellas Gold recorded a much lower charge for income tax in the first nine months of 2008 and Q3 2008. Higher metal prices and profitability in the prior periods led to higher charges for taxation.

·; The Company recorded a charge of $0.04 million in the first nine months of 2008 and a credit of $0.27 million in Q3 2008 relating to the non-controlling shareholder’s interest in Hellas Gold’s profit (after tax) for this period, compared to charges of $4.99 million and $0.35 million, respectively, for the same periods of 2007 relating to the non-controlling shareholder’s interest in Hellas Gold’s loss (after tax) for this period.

Liquidity and capital resources

As at 30 September 2008, the Company had cash and cash equivalents of $187.56 million, compared to $218.84 million as at 31 December 2007, and working capital of $208.61 million, compared to $226.43 million as at 31 December 2007.

The decrease in cash and cash equivalents as at 30 September 2008, compared to the balances as at 31 December 2007, resulted primarily from capital expenditure in Greece ($13.18 million), changes in working capital balances ($13.44 million), deferred exploration and development costs in Romania ($4.12 million), the purchase of land ($2.71 million), investment in an associate ($1.86 million) and deferred development costs in Greece ($1.94 million), offset by advanced sales proceeds from offtakers ($3.56 million) and operating cash flow ($2.58 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)	1,043	190	379	379	95
Exploration licence spending commitments (Voia, Romania)	634	-	634	-	-
Outotec OT - Processing Plant	38,750	36,278	2,472	-	-
Total contractual obligations	40,427	36,468	3,485	379	95

In 2008, the Company now expects to spend a total of $32 million in capital expenditures to fund the development of its project portfolio. This amount comprises $10 million at its existing operation at Stratoni to complete and expand the internal underground infrastructure at Mavres Petres and upgrade the mill, $3 million at Olympias in preparation for the refurbishment of the mine and process plant, and $10 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 $9 million as it finalises its bankable feasibility study, progresses through the final stages of permitting and continues exploration around Certej to increase the life of mine. In addition to its capital expenditure programme, the Company expects to spend $1 million in exploration over the wider licence area in Greece, $13 million on Hellas Gold administrative and overhead and water treatment expenses, and $5 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 nine-month period ended 30 September 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 was effective 1 January 2008.

International Financial Reporting Standards ("IFRS") - In 2006, the Canadian Accounting Standards Board ("AcSB") published a new strategic plan that will significantly affect financial reporting requirements for Canadian companies. The AcSB strategic plan outlines the convergence of Canadian GAAP with IFRS over an expected five year transitional period. In February 2008, the AcSB confirmed that publicly listed companies will be required to adopt IFRS for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011, and in April 2008, the AcSB issued for comment its Omnibus Exposure Draft, Adopting IFRS in Canada. Early adoption may be permitted, however it will require exemptive relief on a case by case basis from the Canadian Securities Administrators.

The Company has begun assessing the adoption of IFRS and is in the process of completing its overall conversion plan. The plan assesses the possible benefits of early adoption, the key differences between IFRS and Canadian GAAP including disclosures as well as a timeline for implementation.

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:	179,382,381
Common share options:	3,941,666
Restricted share units:	355,000
Common shares (fully-diluted):	183,679,047
Preferred shares:	Nil

Outlook

Reference is made to the Company's news release dated 11 November 2008 which accompanies this Management's Discussion and Analysis.

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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