2008 - Results - Part 2

19th Mar 2009 07:03

European Goldfields Limited

Financial Statements

(Audited)

31 December 2008 and 2007

Management's Responsibility for Consolidated Financial Statements

The accompanying consolidated financial statements of European Goldfields Limited are the responsibility of management and have been approved by the Board of Directors of the Company. The consolidated financial statements include some amounts that are based on management's best estimate using reasonable judgment.

The consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles.

Management maintains an appropriate system of internal controls to provide reasonable assurance that transactions are authorised, assets safeguarded and proper records are maintained.

The Audit Committee of the Board of Directors has met with the Company's external auditors to review the scope and results of the annual audit and to review the consolidated financial statements and related financial reporting matters prior to submitting the consolidated financial statements to the Board of Directors for approval.

The consolidated financial statements have been audited by BDO Dunwoody LLP, Chartered Accountants, and their report follows.

(s) David Reading (s) Timothy Morgan-Wynne

David Reading Timothy Morgan-Wynne

Chief Executive Officer Chief Financial Officer

Auditors' Report o the Shareholders of European Goldfields Limited

We have audited the balance sheets of European Goldfields Limited as at 31 8 and 2007 and the statements of profit and loss, other comprehensive income, equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company as at 31 2008 and 2007 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.

(s) BDO Dunwoody LLP

Chartered Accountants, Licensed Public Accountants

Toronto, Canada

March 18, 2009

European Goldfields Limited Consolidated Balance Sheets As at 31 December 2008 and 2007 (in thousands of US Dollars, except per share amounts)	Note	2008 $	2007 $
Assets
Current assets
Cash and cash equivalents		170,296	218,839
Accounts receivable	6	20,057	20,408
Hedge contract	17	10,282	-
Current taxes receivable		3,820	4,935
Future tax assets		2,004	2,178
Prepaid expenses		1,414	2,834
Inventory	7	3,069	2,110
		210,942	251,304
Non current assets
Plant and equipment	8	74,401	48,776
Deferred exploration and development costs	9
Greek production stage mineral properties		26,652	29,199
Greek exploration stage mineral properties		403,907	402,155
		430,559	431,354
Romanian exploration stage mineral properties		45,187	38,285
Turkish exploration stage mineral properties		456	-
		476,202	469,639
Investment in associates	10	2,075	-
Restricted investment		-	4,900
Other financial assets	17	-	882
Future tax assets	11	2,475	6,630
		766,095	782,131
Liabilities
Current liabilities
Accounts payable and accrued liabilities	12	16,263	9,977
Current taxes payable		-	12,718
Future tax liabilities	11	3,496	-
		19,759	22,695
Non current liabilities
Future tax liabilities	11	90,294	109,943
Asset retirement obligation	13	6,937	6,805
Deferred revenue	14	58,496	65,344
		155,727	182,092
Non-controlling interest		2,874	3,341
Shareholders’ equity
Capital stock	15	538,316	537,275
Contributed surplus	15	7,788	5,997
Accumulated other comprehensive income	15	43,676	38,295
Deficit		(2,045)	(7,564)
		587,735	574,003
		766,095	782,131

The accompanying notes are an integral part of these consolidated financial statements.

Approved by the Board of Directors

(s) Timothy Morgan-Wynne (s) Jeffrey O'Leary

Timothy Morgan-Wynne, Director Dr Jeffrey O'Leary, Director

European Goldfields Limited Consolidated Statements of Profit and Loss For the years ended 31 December 2008 and 2007 (in thousands of US Dollars, except per share amounts)		2008	2007
	Note	$	$
Income
Sales		60,044	86,405
Cost of sales		(48,424)	(37,546)
Depletion of asset retirement obligation		(442)	(526)
Depreciation and depletion		(5,531)	(4,546)
Gross profit		5,647	43,787
Other income
Hedge contract profit		4,918	-
Interest income		5,729	6,588
Foreign exchange (loss)/gain		(6,406)	3,904
Share of loss in equity investment		(105)	-
		4,136	10,492
Expenses
Corporate administrative and overhead expenses		4,859	4,296
Equity-based compensation expense		2,900	1,798
Hellas Gold administrative and overhead expenses		7,620	9,827
Hellas Gold water treatment expenses (non-operating mines)		5,188	4,315
Accretion of asset retirement obligation	13	133	124
Amortisation		682	484
		21,382	20,844
(Loss)/Profit for the year before income taxes		(11,599)	33,435
Income taxes	11
Current taxes		(1,454)	7,712
Future taxes		(15,185)	(2,495)
		(16,639)	5,217
Profit for the year before non-controlling interest		5,040	28,218
Non-controlling interest		479	(5,019)
Profit for the year		5,519	23,199
Earnings per share	24
Basic		0.03	0.16
Diluted		0.03	0.15
Weighted average number of shares (in thousands)
Basic		179,566	148,245
Diluted		181,223	150,100

The accompanying notes are an integral part of these consolidated financial statements.

European Goldfields Limited Consolidated Statements of Equity As at  31 December 2008 and 2007 (in thousands of US Dollars, except per share amounts)	Capital Stock $	Contributed Surplus $	Accumulated Other Comprehensive Income $	Deficit $	Total $
Balance - 31 December 2006	246,890	7,135	4,276	(30,763)	227,538
Equity-based compensation expense	-	2,488	-	-	2,488
Shares issued for equity financing	130,059	-	-	-	130,059
Shares issued as consideration for acquisition	161,425	-	-	-	161,425
Share issue costs	(4,777)	-	-	-	(4,777)
Restricted share units vested	2,646	(2,646)	-	-	-
Share options exercised or exchanged	1,032	(980)	-	-	52
Movement in cumulative translation adjustment	-	-	33,137	-	33,137
Change in fair value of cash flow hedge	-	-	882	-	882
Profit for the year	-	-	-	23,199	23,199
	290,385	(1,138)	34,019	23,199	346,465
Balance - 31 December 2007	537,275	5,997	38,295	(7,564)	574,003
Equity-based compensation expense	-	2,788	-	-	2,788
Share issue costs	(10)	-	-	-	(10)
Restricted share units vested	973	(973)	-	-	-
Share options exercised or exchanged	78	(24)	-	-	54
Change in fair value of cash flow hedge	-	-	5,904	-	5,904
Movement in cumulative translation adjustment	-	-	(523)	-	(523)
Profit for the year	-	-	-	5,519	5,519
	1,041	1,791	5,381	5,519	13,732
Balance - 31 December 2008	538,316	7,788	43,676	(2,045)	587,735

The accompanying notes are an integral part of these consolidated financial statements.

European Goldfields Limited Consolidated Statements of Cash Flows For the years ended 31 December 2008 and 2007 (in thousands of US Dollars, except per share amounts)		2008	2007
	Note	$	$
Cash flows from operating activities
Profit for the year		5,519	23,199
Share of loss in equity investment		105	-
Foreign exchange loss		6,368	6,391
Amortisation		3,336	2,482
Equity-based compensation expense		3,001	1,798
Accretion of asset retirement obligation	13	133	124
Current taxation		(1,454)	7,712
Future taxes		(15,185)	(2,495)
Non-controlling interest		(479)	5,019
Deferred revenue recognised		(6,399)	(3,738)
Depletion of mineral properties		3,398	3,075
		(1,657)	43,567
Net changes in non-cash working capital	19	2,004	(8,247)
Taxation paid		(10,326)	-
		(9,979)	35,320
Cash flows from investing activities
Deferred exploration and development costs – Romania		(6,096)	(5,735)
Plant and equipment – Greece		(26,181)	(21,606)
Deferred development costs – Greece		(2,489)	(2,347)
Deferred development costs – Turkey		(429)	-
Investment in subsidiary		(14)	-
Purchase of land		(2,705)	-
Purchase of equipment		(173)	(127)
Further acquisition in Hellas Gold		-	(9,972)
Restricted investment		4,900	(557)
Investment in associates		(2,694)	-
		(35,881)	(40,344)
Cash flows from financing activities
Proceeds from equity financing		-	130,059
Deferred revenue		3,563	64,389
Proceeds from exercise of share options		54	52
Share issue costs		(10)	(7,153)
		3,607	187,347
Effect of foreign currency translation on cash		(6,290)	1,929
(Decrease)/Increase in cash and cash equivalents		(48,543)	184,252
Cash and cash equivalents – Beginning of year		218,839	34,587
Cash and cash equivalents – End of year		170,296	218,839

The accompanying notes are an integral part of these consolidated financial statements.

	2008 $	2007 $
Profit for the year	5,519	23,199
Other comprehensive income in the year
Currency translation adjustment	(523)	33,137
Change in fair value of cash flow hedge	5,904	882
Comprehensive income	10,900	57,218

European Goldfields Limited

Notes to Consolidated Financial Statements

For the years ended 31 December 2008 and 2007

(in thousands of US Dollars, except per share amounts)

 

1. Nature of operations

European Goldfields Limited (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 the London Stock Exchange 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 - 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. 

The underlying value of the deferred exploration and development costs for mineral properties is dependent upon the existence and economic recovery of reserves in the future, and the ability to raise long-term financing to complete the development of the properties.

For the coming year, the Company believes it has adequate funds available to meet its corporate and administrative obligations and its planned expenditures on its mineral properties.

 

2. Basis of Presentation

These consolidated financial statements have been prepared on a going concern basis in accordance with accounting principles generally accepted in Canada ("Canadian GAAP"), which assumes the Company will be able to realise assets and discharge liabilities in the normal course of business for the foreseeable future. These consolidated financial statements do not include the adjustments that would be necessary should the Company be unable to continue as a going concern.

 

3. Significant accounting policies

These consolidated financial statements reflect the following significant accounting policies.

Basis of consolidation - Business acquisitions are accounted for under the purchase method and the results of operations of these businesses are included in these consolidated financial statements from the acquisition date. Investments in associates over which the Company has significant influence are accounted for using the equity method. 

  These consolidated financial statements include the accounts of the Company and the following subsidiaries:

Company	Country of incorporation	Ownership
Deva Gold (Barbados) Ltd	Barbados	100% owned
European Goldfields (Services) Limited	England	100% owned
European Goldfields Mining (Netherlands) B.V.	Netherlands	100% owned
European Goldfields (Greece) B.V.	Netherlands	100% owned
Hellas Gold B.V.	Netherlands	100% owned
European Goldfields Deva SRL	Romania	100% owned
Hellas Gold S.A.	Greece	95% owned
Deva Gold S.A.	Romania	80% owned
Greater Pontides Exploration B.V.	Netherlands	51% owned
Pontid Madencilik San. ve Ltd	Turkey	60.86% owned
Greek Nurseries SA	Greece	50% owned
Macedonian Copper Mines SA	Greece	100% owned

The 20% minority interest held in the Company's 80% owned subsidiary, Deva Gold S.A. ("Deva Gold"), is accounted for in these consolidated financial statements. The Company is required to fund 100% of all costs related to the exploration and development of the mineral properties held by Deva Gold. 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.

Associates - Associates are those entities in which the Company has a material long term interest and in respect of which the group exercises significant influence over operational and financial policies, normally owning between 20% and 50% of the voting equity, but which it does not control.

Investments in associates are accounted for using the equity method of accounting and are initially recognised at cost. The Company's share of its associates post-acquisition profits or losses is recognised in the statement of profit and loss. Cumulative post-acquisition movements are adjusted against the carrying amount of investment. When the Company's share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Company does not recognise further losses, unless it has unsecured obligations or made payments on behalf of the associate.

Inventory - Inventories of ore mined and metal concentrates are valued at the lower of combined production cost and net realisable value. Production costs include the costs directly related to bringing the inventory to its current condition and location, such as materials, labour, mine site overheads, related depreciation of mining and processing facilities and related depletion of mineral properties and deferred exploration and development costs. Exploration materials and supplies are valued at the lower of cost and net realisable value and on a weighted average basis.

Plant and equipment - Plant and equipment are recorded at cost less accumulated amortisation. Amortisation is calculated on a straight-line basis based on a useful life of 3 years for office equipment, 6 years for vehicles, 10 years for leasehold improvements, at rates varying between 3 and 5 years for exploration equipment and at rates varying between 4 and 20 years for buildings. Amortisation for equipment used for exploration and development are capitalised to mineral properties.

 

Deferred exploration and development costs - Acquisition costs of resource properties, together with direct exploration and development costs incurred thereon, are deferred and capitalised. Upon reaching commercial production, these capitalised costs are transferred from exploration properties to producing properties on the consolidated balance sheets and are amortised into operations using the unit-of-production method over the estimated useful life of the estimated related ore reserves.

Based on annual impairment reviews made by management, in the event that the long-term expectation is that the net carrying amount of these capitalised exploration and development costs will not be recovered such as would be indicated where:

- Producing properties:

the carrying amounts of the capitalised costs exceed the related undiscounted net cash flows of reserves;

- Exploration properties:

exploration activities have ceased;

exploration results are not promising such that exploration will not be planned for the foreseeable future;

lease ownership rights expire; or

insufficient funding is available to complete the exploration program;

then the carrying amount is written down to fair value accordingly and the write-down amount charged to operations.

Impairment of long-lived assets - All long-lived assets and intangibles held and used by the Company are reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If changes in circumstances indicate that the carrying amount of an asset that an entity expects to hold and use may not be recoverable, future cash flows expected to result from the use of the asset and its disposition must be estimated. If the undiscounted value of the future cash flows is less than the carrying amount of the asset, impairment is recognised based on the fair value of the assets. 

Asset retirement obligation - The fair value of the liability of an asset retirement obligation is recorded when it is legally incurred and the corresponding increase to the mineral property is depreciated over the life of the mineral property. The liability is adjusted over time to reflect an accretion element considered in the initial measurement at fair value and revisions to the timing or amount of original estimates and for drawdowns as asset retirement expenditures are incurred.  As at 31 December 2008 and 2007, the Company had an asset retirement obligation relating to its Stratoni property in Greece.

Deferred revenue - The Company receives prepayments for the sale of all of the silver metal to be produced from ore extracted during the mine-life within an area of some 7 km² around its zinc-lead-silver Stratoni mine as well as for sale of gold pyrite concentrate in northern Greece. The prepayment, which is accounted for as deferred revenue, is recognised as sales revenue on the basis of proportion of settlements during the period to expected total settlements.

Revenue recognition - Revenues from the sale of concentrates are recognised and are measured at market prices when the rights and obligations of ownership pass to the customer. A number of the Company's concentrate products are sold under pricing arrangements where final prices are determined by quoted market prices in a period subsequent to the date of sale. These concentrates are provisionally priced at the time of sale based on forward prices for the expected date of the final settlement. The terms of the contracts result in non-hedge derivatives that do not qualify for hedge accounting treatment, because of the difference between the provisional price and the final settlement price. These embedded derivatives are adjusted to fair value through revenue each period until the date of final price determination. Subsequent variations in the price are recognised as revenue adjustments as they occur until the price is finalised.

Income taxes - Income taxes are calculated using the asset and liability method of tax accounting. Under this method, current income taxes are recognised for the estimated income taxes payable for the current period. Future income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities, and are measured using the substantially enacted tax rates and laws that will be in effect when the differences are expected to reverse. The benefit of the temporary differences is not recognised to the extent the recoverability of future income tax assets is not considered more likely than not.

Equity-based compensation -  The Company operates a share option plan, a restricted share unit plan and a deferred phantom unit plan. The Company accounts for equity-based compensation granted under such plans using the fair value method of accounting. Under such method, the cost of equity-based compensation is estimated at fair value and is recognised in the profit and loss statement as an expense, or recognised to deferred exploration and development costs when the compensation can be attributed to mineral properties. This cost is recognised over the relevant vesting period for grants to directors, officers and employees, and measured in full at the earlier of performance completed or vesting for grants to non-employees. Any consideration received by the Company on exercise of share options is credited to share capital.

Earnings per share ("EPS") - EPS is calculated based on the weighted average number of common shares issued and outstanding. Diluted per share amounts are calculated using the treasury stock method whereby proceeds deemed to be received on the exercise or exchange of share options and warrants and on the granting of restricted share units in the per share calculation are applied to reacquire common shares at the average market price during the period. 

Foreign currency translation - The Company's functional currency is the United States dollar. Monetary assets and liabilities denominated in foreign currencies are translated at the exchange rate in effect at the balance sheet date. Non-monetary assets and liabilities and revenue and expenses arising from foreign currency transactions are translated at the exchange rate in effect at the date of the transaction. Exchange gains or losses arising from the translation are included in operations.

Integrated foreign subsidiaries and associates are accounted for under the temporal method. Under this method, monetary assets and liabilities are translated at the exchange rate in effect at the balance sheet date. Non-monetary assets and liabilities are translated at historical rates. Revenue and expenses are translated at actual or average rates for the period. Exchange gains or losses arising from the translation are included in operations except for those related to mineral properties which are capitalised. 

Self-sustaining foreign subsidiaries and associates are accounted for under the current rate method. Under this method, all assets and liabilities are translated at the exchange rate in effect at the balance sheet date. Revenue and expenses are translated at actual or average rates for the period. Exchange gains or losses arising from the translation are recorded in equity in the cumulative translation adjustment component of other comprehensive income.

Estimates, risks and uncertainties - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the period. Significant estimates and assumptions include those related to the recoverability of deferred exploration, development costs for mineral properties, asset retirement obligations and equity-based compensation.  While management believes that these estimates and assumptions are reasonable, actual results could vary significantly.

Financial Instruments - The Company's cash and cash equivalents have been classified as held for trading, investments and investments in marketable securities have been classified as available-for-sale and are recorded at fair value on the balance sheet. Fair values are determined directly by reference to published price quotations in an active market. Changes in the fair value of these instruments are reflected in other comprehensive income and included in shareholders' equity on the balance sheet.

All derivatives are to be recorded on the balance sheet at fair value. Mark-to-market adjustments on these instruments will be included in net profit, unless the instruments are designated as part of a cash flow hedge relationship. 

All other financial instruments will be recorded at cost or amortised cost, subject to impairment reviews. Transaction costs incurred to acquire financial instruments are included in the underlying balance. 

Cash and cash equivalents - Cash and cash equivalents include cash and deposits with original maturities of three months or less. 

Hedges - The Company uses derivative and non-derivative financial instruments to manage changes in commodity prices. Hedge accounting is optional and it requires the Company to document the hedging relationship and test the hedging item's effectiveness in offsetting changes in fair values or cash flows of the underlying hedged item on an ongoing basis.

The Company uses cash flow hedges to manage base metal commodity prices. The effective portion of the change in fair value of a cash flow hedging instrument is recorded in other comprehensive income and is reclassified to earnings when the hedge item impacts profit. Any ineffectiveness is recorded in net profit.

If a derivative instrument designated as a cash flow hedge ceases to be effective or is terminated, hedge accounting is discontinued and the gain or loss at that date is deferred in other comprehensive income and recognised concurrently with the settlement of the related transaction. If a hedged anticipated transaction is no longer probable, the gain or loss is recognised immediately in profit. Subsequent gains and losses from ineffective derivative instruments are recognised in profit in the period they occur.

Comprehensive Income - Comprehensive income includes both net profit and other comprehensive income. Other comprehensive income includes holding gains and losses on available-for-sale investments, gains and losses on certain derivative instruments and foreign currency gains and losses relating to self-sustaining foreign operations, all of which are not included in the calculation of net earnings until realised. 

 

4 Significant changes in accounting policies

Capital Disclosure - 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 additional requirement requires management to make an assessment of the Company's ability to continue as a going concern and to disclose any material uncertainties related to events or conditions that may cast significant doubt upon the entity'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 represent a revision and enhancement to Section 3861, Financial instrument - 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. The new disclosures resulting from adoption of these standards are included in note 17.

Change in functional currency - 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 cost. Also taken into consideration along with the net cash flows, were the following factors:

 

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 and applied prospectively.

 

5. Business combination - Acquisition of an additional 30% interest in Hellas Gold

In June 2007, the Company completed the acquisition of additional shares in Hellas Gold, increasing its total interest from 65% to 95%. The total consideration paid by the Company for the purchased shares was satisfied as follows:

(a)  The issue of 35,447,246 common shares of the Company; and

 

(b) $8.42 million paid in cash to the vendor.

Transaction costs of $1.55 million were also accounted for as part of the acquisition.

A summary of the accounting treatment of fair value of net assets acquired and consideration paid is as follows:

		$
	Current assets	31,272
	Property, plant and equipment	12,220
	Other assets	6,536
	Current liabilities	(7,050)
	Other liabilities	(20,470)
	Mineral properties	198,518
	Future tax liabilities	(49,630)
		171,396
Purchase consideration:		$
Cash paid		8,418
Shares issued (35,447,246 common shares)		161,424
Transaction costs		1,554
Purchase price		171,396

For accounting purposes, the Company has used an average share price based upon 5 days prior and post the announcement of the transaction, to value the share element of the purchase consideration.

 

6. Accounts receivable

 

This balance comprises the following:

	2008	2007
	$	$
Value added taxes recoverable	11,780	17,996
Accounts receivable	8,277	2,412
	20,057	20,408

 

7. Inventory

 

This balance comprises the following:

	2008	2007
	$	$
Ore mined	397	-
Metal concentrates	767	865
Material and supplies	1,905	1,245
	3,069	2,110

At as 31 December 2008, the value of total inventory carried at net realisable value amounted to $767 (2007 - Nil), which includes a write-down of $953 (2007 - Nil). 

 

The components of cost of sales were as follows:

	2008	2007
	$	$
Mining cost	28,313	20,219
Direct labour	4,991	4,064
Indirect labour	964	711
Other overhead costs	7,259	6,507
Increase in gross inventories	(1,100)	(314)
Freight charges	7,044	6,359
Write down of inventory to net realisable value	953	-
	48,424	37,546

 

8. Plant and equipment

	Plant and equipment $	Vehicles $	Mine development land and buildings $	Leasehold improvements $	Total $
Cost - 2007
At 31 December 2006	13,220	1,236	15,608	256	30,320
Additions	17,154	599	3,926	55	21,734
Disposals	(34)	(8)	-	-	(42)
Currency translation adjustment	1,361	105	1,678	-	3,144
At 31 December 2007	31,701	1,932	21,212	311	55,156
Accumulated amortisation - 2007
At 31 December 2006	1,681	685	888	58	3,312
Provision for the year	1,261	318	1,000	27	2,606
Disposals	(24)	(8)	-	-	(32)
Currency translation adjustment	233	81	180	-	494
At 31 December 2007	3,151	1,076	2,068	85	6,380
Net book value at 31 December 2007	28,550	856	19,144	226	48,776

Cost - 2008
At 31 December 2007	31,701	1,932	21,212	311	55,156
Additions	14,674	138	14,210	5	29,027
Disposals	(21)	(8)	-	-	(29)
At 31 December 2008	46,354	2,062	35,422	316	84,154
Accumulated amortisation - 2008
At 31 December 2007	3,151	1,076	2,068	85	6,380
Provision for the year	1,527	215	1,616	32	3,390
Disposals	(10)	(7)	-	-	(17)
At 31 December 2008	4,668	1,284	3,684	117	9,753
Net book value at 31 December 2008	41,686	778	31,738	199	74,401

 

During 2008, the net book value amount of plant and equipment not amortised amounted to $43,098 (2007 - $30,984) 

 

9. Deferred exploration and development costs

Greek mineral properties:

	Stratoni $	Olympias $	Skouries $	Other exploration $	Total $
Balance - 31 December 2006	14,677	108,078	74,079	-	196,834
Acquisition of mineral properties	14,239	109,037	75,242	-	198,518
Deferred development costs	769	255	1,373	158	2,555
Depletion of mineral properties	(2,749)	(334)	-	-	(3,083)
Currency translation adjustment	2,263	20,320	13,947	-	36,530
	14,522	129,278	90,562	158	234,520
Balance - 31 December 2007	29,199	237,356	164,641	158	431,354
Acquisition of mineral properties	-	-	78	-	78
Deferred development costs	502	369	1,573	95	2,539
Depletion of mineral properties	(3,049)	(363)	-	-	(3,412)
	(2,547)	6	1,651	95	(795)
Balance - 31 December 2008	26,652	237,362	166,292	253	430,559

The Stratoni, Skouries and Olympias properties are held by the Company's 95% owned subsidiary, Hellas Gold. In September 2005, the Stratoni property commenced production.

 

Romanian mineral properties:

	Certej $	Other  exploration $	Total $
Balance - 31 December 2006	26,862	4,920	31,782
Exploration	3,010	184	3,194
Project management	1,682	42	1,724
Project overhead	1,300	205	1,505
Amortisation	61	19	80
	6,053	450	6,503
Balance - 31 December 2007	32,915	5,370	38,285

Exploration	2,158	420	2,578
Project management	1,894	376	2,270
Project overhead	1,795	170	1,965
Amortisation	70	19	89
	5,917	985	6,902
Balance - 31 December 2008	38,832	6,355	45,187

 

The Certej exploitation licence and the Baita-Craciunesti exploration licence are held by the Company's 80%-owned subsidiary, 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.

 

As at the 31 December 2008, the following cost had been incurred on the remaining Romanian mineral properties:

	2008 $	2007 $
Baita- Craciunesti	3,312	3,166
Voia	1,741	1,167
Magura Tebii	136	-
Cainel	1,166	1,037
	6,355	5,370

Turkish Mineral Properties

	Ardala $	Other  exploration $	Total $
Balance - 31 December 2007	-	-	-

Exploration	30	2	32
Project overhead	402	5	407
Permit acquisition	6	-	6
Amortisation	11	-	11
	449	7	456
Balance - 31 December 2008	449	7	456

 

In April 2008, the Company entered into a Joint Venture ("JV") with Ariana Resources plc ("Ariana") which became effective in May 2008 after the transfer of Ariana's properties was confirmed by the General Directorate of Mining Affairs in Turkey. The JV involves the development of Ariana's current properties in an Area of Intent ("AOI") in the Greater Pontides region of north-eastern Turkey, which include the Ardala copper-gold porphyry and fifteen other licences covering a total area of 229km², and a Strategic Partnership within the AOI to define new opportunities for the JV.

 

The Turkish licences are held by the JV through a Turkish Company Pontid Madencilik. Currently the Company has a 51% interest in all the properties within the JV and the Company will fund 100% of all costs related to the development of these properties. Ownership of these properties may be increased to 80% by funding to completion of a Bankable Feasibility Study. Any new concessions within the JV funded to a Bankable Feasibility Study will be 90% owned by the Company. The owner of the remaining 49% of the properties is Ariana Resources plc.

10. Investment in associates

	2008 $		2007 $
Balance - Beginning of period	-		-
Shares acquired	2,692		-
Share of loss	(105)	-
Cumulative translation adjustment	(517)	-
Equity-based compensation expense	5		-
Balance - End of period	2,075		-

 

In January 2008, Hellas Gold acquired a 50% share of Greek Nurseries SA for a consideration of $834 (€530).

 

In May 2008, the Company subscribed for 20.13% of the issued share capital of Ariana through a $1,858 (£929) private placement of shares. The difference between the cost of the investment of $1,830 and the underlying net book value of Ariana is $132 at the date of acquisition. This excess represents additional fair value assigned to mineral properties of Ariana and will be depleted upon commencement of mining operations of Ariana.

 

11. Income taxes

 

The following table reconciles the expected income tax recovery at the Canadian statutory income tax rate to the amounts recognised in the consolidated statements of profit and loss:

	2008	2007
	$	$
Income tax rate	34.50%	37.12%
Income taxes at statutory rates	4,002	12,411
Tax rate difference from foreign jurisdictions	1,205	(2,573)
Permanent differences	3,149	(3,031)
Change in tax rate	(18,434)	(258)
Change in valuation allowance	1,443	(1,332)
	(16,639)	5,217

The following table reflects future income tax assets:

	2008	2007
	$	$
Loss carry forwards	8,693	7,426
Intangibles	2	10
Retirement obligation	1,323	1,700
Inventory	3	1,265
Personal indemnities	39	37
Accruals	-	1,241
Capital raising costs	1,108	2,376
Valuation allowance	(6,689)	(5,247)
	4,479	8,808
Less: Current portion	(2,004)	(2,178)
Future income tax assets recognised	2,475	6,630

 

The following table reflects future income tax liabilities:

	2008	2007
	$	$
Mineral properties	85,167	104,752
Plant and equipment	882	701
Exploration and development expenditure	2,709	3,003
Accrued expenses & other	-	1,487
Retirement obligation	873	-
Hedge contract	3,496	-
Foreign exchange	663	-
	93,790	109,943
Less: Current portion	(3,496)	-
Future income tax liabilities recognised	90,294	109,943

 

The tax liability arises as a result of the increase in value placed on the mineral properties held by Hellas Gold on acquisition by the Company. This future tax liability will reverse as the corresponding mineral properties are amortised.

 

As at 31 December 2008, the Company has available tax losses for income tax purposes of approximately $29,656 (2007 -$30,461) which may be carried forward to reduce taxable income derived in future years. 

 

The non-capital losses expire as follows:

	2008
	$
2009	2,206
2016	2,742
Non expiring losses	24,708
	29,656

 

In addition, the Company incurred share issue costs and other deductible temporary differences, which have not yet been claimed for income tax purposes, totalling approximately as at 31 December 2008 was $2,828 (2007 - $3,112). Subject to certain restrictions, exploration and development expenditures available to reduce taxable income in Romania as at 31 December 2008 was $45,189 (2007 - $33,629).

 

A valuation allowance has been provided as a portion of the potential income tax benefits of these carry-forward non-capital losses and deductible temporary differences and the realisation thereof is not considered more likely than not.

12. Accounts payable and accrued liabilities

 

The balance principally comprises amounts outstanding for normal operations and ongoing costs. The average credit period taken during the financial year ended 31 December 2008 was 30 days (2007 - 30 days).

13. Asset retirement obligation

Management has estimated the total future asset retirement obligation based on the Company's ownership interest in the Stratoni mines and facilities. This includes all estimated costs to dismantle, remove, reclaim and abandon the facilities at the Stratoni property, and the estimated time period during which these costs will be incurred in the future. The following table reconciles the asset retirement obligation for the financial years ended 31 December 2008 and 2007:

	2008	2007
	$	$
Asset retirement obligation - Beginning of year	6,805	6,031
Currency translation adjustment	-	650
Accretion expense	132	124
Asset retirement obligation - End of year	6,937	6,805

 

As at 31 December 2008, the undiscounted amount of estimated cash flows required to settle the obligation is $7,805 (2007 - $7,421). The estimated cash flow has been discounted using a credit adjusted risk free rate of 5.04% (2007 - 5.04%). The expected period until settlement is six years.

14. Deferred revenue

In April 2007, Hellas Gold agreed to sell to Silver Wheaton (Caymans) Ltd. ("Silver Wheaton") all of the silver metal to be produced from ore extracted during the mine-life within an area of some 7 km² around its zinc-lead-silver Stratoni mine in northern Greece (the "Silver Wheaton Transaction"). The sale was made in consideration of a prepayment to Hellas Gold of $57.5 million in cash, plus a fee per ounce of payable silver to be delivered to Silver Wheaton of the lesser of $3.90 (subject to an inflationary adjustment beginning after year three) and the prevailing market price per ounce. The current Stratoni proven and probable silver reserve contains approximately 12 million ounces of silver. 

In April 2007, Hellas Gold entered in an agreement with MRI Trading AG for the sale of 25,000 wet metric tonnes of gold bearing pyrite concentrate. Hellas Gold received a prepayment of $2.18 million in cash. A further agreement with MRI Trading AG was entered into in March 2008, for the sale of a further 23,372 dry metric tonnes, for which Hellas Gold received a prepayment of $3.56 million in cash.  The remaining balances relating to MRI prepayments were transferred to current liabilities reflecting the repayment of these amounts to MRI in February 2009. In September 2007, Hellas Gold entered into an agreement with a subsidiary of Celtic Resources Holdings Plc for the sale of 50,000 wet metric tonnes of gold bearing pyrite concentrate, for which Hellas Gold received a prepayment of $4.71 million in cash.

The following table reconciles movements on deferred revenue associated with the MRI and Celtic Resources prepayments, and the Silver Wheaton Transaction:

	2008	2007
	$	$
Deferred revenue - Beginning of period	65,344	-
Additions	3,564	64,389
Revenue recognised	(6,399)	(3,738)
Foreign currency translation adjustment	-	4,693
Transferred to current liabilities	(4,013)	-
Deferred revenue - End of period	58,496	65,344

 

During the year ended 31 December 2008, Hellas Gold delivered concentrate containing ounces 1,038,762 (2007 - 952,729 ounces) of silver for credit to Silver Wheaton.

 

15. Capital stock

Authorised:

- Unlimited number of common shares, without par value

- Unlimited number of preferred shares, issuable in series, without par value

Issued and outstanding (common shares - all fully paid):

	Number of Shares	Amount $
Balance - 31 December 2006	114,801,848	246,890
Restricted share units vested	840,000	2,646
Share options exercised or exchanged	473,287	1,032
Shares issued for equity financing	27,600,000	130,059
Shares issued as consideration for acquisition	35,447,246	161,425
Share issue costs, net of tax	-	(4,777)
	64,360,533	290,385
Balance - 31 December 2007	179,162,381	537,275

Restricted share units vested	195,000	973
Share options exercised or exchanged	25,000	77
Share issue costs, net of tax	-	(9)
	220,000	1,041
Balance - 31 December 2008	179,382,381	538,316

Contributed surplus:

	2008	2007
	$	$
Equity-based compensation expense	7,210	5,419
Broker warrants	578	578
	7,788	5,997

Accumulated other comprehensive income 

The components of accumulated other comprehensive income were as follows:

	2008	2007
	$	$
Cumulative translation adjustment	36,890	37,413
Fair value of cash flow hedge (net of tax)	6,786	882
	43,676	38,295

 

16. Share options, restricted share units and deferred phantom units

Share Option Plan

The Company operates a Share Option Plan (together with its predecessor, the "Share Option Plan") authorising the directors to grant options with a maximum term of 5 years, to acquire common shares of the Company to the directors, officers, employees and consultants of the Company and its subsidiaries, on terms that the Board of Directors may determine, within the limitations of the Share Option Plan. The maximum number of common shares of the Company which may be reserved for issuance for all purposes under the Share Option Plan shall not exceed 15% of the common shares issued and outstanding from time to time (26,907,357 shares as at 31 December 2008).

An optionee under the Share Option Plan may elect to dispose of its rights under all or part of its options (the "Exchanged Rights") in exchange for the following number of common shares of the Company (or at the Company's option for cash) in settlement thereof (the "Settlement Common Shares"):

Number of Settlement Common Shares

=

Number of Optioned Shares issuable on exercise of the Exchanged Rights

X

(Current Price - Exercise Price) Current Price

  As at 31 December 2008, the following share options were outstanding:

Expiry date	Number of Options	Exercise price C$
2009	250,000	2.80
2009	360,000	3.07
2009	75,000	3.15
2009	250,000	4.20
2010	359,999	2.00
2011	66,666	3.25
2011	600,000	3.85
2011	150,000	4.10
2012	250,000	5.66
2012	150,000	5.71
2012	270,000	5.87
2013	50,000	1.99
2013	360,000	3.54
2013	135,000	5.07
2013	165,000	6.80
	3,491,665	4.01

During the years ended 31 December 2008 and 2007, share options were granted, exercised, exchanged and forfeited as follows:

	Number of Options	Weighted average exercise price C$
Balance - 31 December 2006	3,213,665	3.06
Options granted	745,000	5.73
Options exercised	(25,000)	2.11
Options exchanged for shares	(802,000)	2.61
Options forfeited	(75,000)	5.47
Options expired	(50,000)	2.50
Balance - 31 December 2007	3,006,665	3.80

Options granted	1,010,000	4.64
Options exercised	(25,000)	2.11
Options exchanged for shares	-	-
Option forfeited	(500,000)	4.14
Options expired	-	-
Balance - 31 December 2008	3,491,665	4.01

Of the 3,491,665 (2007 - 3,006,665) share options outstanding as at 31 December 2008, 2,421,667 (2007 - 2,269,999) were fully vested and had a weighted average exercise price of C$3.53 (2007 - C$3.24) per share. The share options outstanding as at 31 December 2008, had a weighted average remaining contractual life of 3.18 years (2007 - 2.97 years).

The weighted average grant date fair value cost of the 1,010,000 share options granted during the financial year ended 31 December 2008 (2007 - 745,000) was $1,659 (2007 - $2,088). For outstanding share options, including options granted during the year and those which were not fully vested during the year ended 31 December 2008, the Company incurred a total equity-based compensation cost of $1,384 (2007 - $1,209) of which $1,057 (2007 - $1,057) has been recognised as an expense in the statement of profit and loss and $327 (2007 - $151) has been capitalised to deferred exploration and development costs.

The fair value of the share options granted has been estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions: weighted average risk free interest rate of 2.05% to 3.05% (2007 - 3.23%); volatility factor of the expected market price of the Company's shares of 32.86% to 89.59% (2007 - 58% to 59%); a weighted average expected life of the share options of 5 years (2007 - 5 years), maximum term of 5 years and a dividend yield of Nil (2007 - Nil). 

In 2008, 500,000 options forfeited during the year represent options cancelled and were replaced with DPUs. These have been accounted for as a stock modification.

Restricted Share Unit Plan

The Company operates a Restricted Share Unit Plan (the "RSU Plan") authorising the directors, based on recommendations received from the Compensation Committee, to grant Restricted Share Units ("RSUs") to designated directors, officers, employees and consultants. The RSUs are "phantom" shares that rise and fall in value based on the value of the Company's common shares and are redeemed for actual common shares on the vesting dates determined by the Board of Directors when the RSUs are granted. The RSUs vest on the dates below however upon a change of control of the Company they would typically become 100% vested. The maximum number of common shares of the Company which may be reserved for issuance for all purposes under the RSU Plan shall not exceed 2.5% of the common shares issued and outstanding from time to time (4,484,560 shares as at 31 December 2008).

As at 31 December 2008, the following RSUs were outstanding:

Vesting date	Number of RSUs	Grant date fair value of underlying shares C$
1 January 2009	175,000	3.81
30 June 2009	30,000	5.74
	205,000	4.09

During the years ended 31 December 2008 and 2007, RSUs were granted, vested and forfeited as follows:

	Number of RSUs	Weighted average grant date fair value of underlying shares  C$
Balance - 31 December 2006	1,105,000	3.26
RSUs granted	390,000	5.69
RSUs vested	(840,000)	3.47
RSUs forfeited	(470,000)	4.26
Balance - 31 December 2007	185,000	4.86

RSUs granted	365,000	5.26
RSUs vested	(195,000)	5.08
RSUs forfeited	(150,000)	6.59
Balance - 31 December 2008	205,000	4.09

 

The weighted average grant date fair value cost of underlying shares of the 365,000 RSUs granted during the financial year ended 31 December 2008 (2007 - 390,000) was $1,888 (2007 - $2,065). For outstanding RSUs which were not fully vested, including RSU's granted during the year ended 31 December 2008, the Company incurred a total equity-based compensation cost of $1,399 (2007 - $1,279) of which $889 (2007 - $741) has been recognised as an expense in the statement of profit and loss and $510 (2007 - $538) has been capitalised to deferred exploration and development costs.

Deferred Phantom Unit Plan 

The company operates a Deferred Phantom Unit plan (the "DPU Plan") authorising the directors based on recommendation by the Human Capital Management Committee to grant Deferred Phantom Units ("DPUs") to independent eligible directors. The DPU are units which gives rise to a right to receive a cash payment the value of which, on a particular date should be the market value of the equivalent number of shares at that date. The market value at December 31, 2008 has been included in current liabilities.

As at 31 December 2008, the following DPUs were outstanding:

Grant date	Number of DPUs	Grant date Fair Value of DPUs C$
5 December 2008	406,500	1.86
	406,500	1.86

During the years ended 31 December 2008 and 2007, DPUs were granted and forfeited as follows:

	Number of  DPUs	Fair Value of DPUs  C$
Balance - 31 December 2006	-	-
DPUs granted	-	-
DPUs redeemed	-	-
DPUs forfeited	-	-
Balance - 31 December 2007	-	-
DPUs granted and vested	406,500	3.24
DPUs forfeited	-	-
Balance - 31 December 2008	406,500	3.24

Of the 406,500 (2007 - Nil) DPU's granted during the year, 406,500 (2007 - Nil) were fully vested.

The weighted average grant date fair value cost of the 406,500 DPU's granted during the financial year ended 31 December 2008 (2007 - Nil) was $760 (2007 - Nil). The weighted average fair value cost of the 406,500 DPU's as at the 31 December 2008, based on the year end share price, amounted to $1,054 (2007 - Nil).

 

17. Financial instruments and financial risk management

The Company's financial instruments consist of cash and cash equivalents, accounts receivable, restricted investment, accounts payable, accrued liabilities, embedded derivatives and hedge contracts. 

Short-term financial assets are amounts that are expected to be settled within one year. The carrying amounts in the consolidated balance sheets approximate fair value because of the short term nature of these instruments.

The embedded derivatives are classified as a short term financial asset. 

The carrying amounts for the financial instruments as at 31 December 2008 and 2007, are as follows:

	2008 $	2007 $
Financial Assets:
Held for trading, measured at fair value
Cash and cash equivalents	170,296	218,839
Restricted investment	-	4,900
	170,296	223,739
Loans and receivables, measured at amortised cost
Accounts receivable	20,057	20,408
Financial Liabilities
Other  liabilities, measured at amortised costs
Accounts payable, accrued liabilities and income taxes payable	16,263	22,695
Derivative Financial instruments, measured at fair value
Designated as cash flow hedge
Hedge contract	10,282	882

Credit risk - Credit risk represents the financial loss the Company would suffer if the Company's counterparties to a financial instrument, in owing an amount to the Company, fail to meet or discharge their obligation to the Company.

Financial instruments that potentially subject the Company to concentration of credit risk consist of cash and cash equivalents, accounts receivable and hedging contracts. The cash equivalents consist mainly of short-term investments, such as money market deposits. The Company does not invest in asset-backed commercial papers and has deposited the cash equivalents only with the largest banks within a particular region or with top rated institutions. 

As at 31 December 2008, cash and cash equivalent comprises the following:

	2008  $	2007 $
Interest bearing bank accounts	123,297	216,569
Term deposits	46,999	7,170
	170,296	223,739

The Company has accounts receivable from trading counterparties to whom concentrate products are sold. Where traders are chosen as counterparties, only the larger and most financially secure metal trading groups are dealt with. The company may also transact agreements with trading groups who have direct interests in smelting capacity, or direct to the smelters themselves.

Of the total trade receivable as at 31 December 2008, 3 (2007 - 4) customers represented 90% (2007 - 95%) of the total. The Company does not anticipate any loss for non-performance.

As at 31 December 2008, the accounts receivable comprises the following:

	2008 $	2007 $
Trade receivables	4,986	1,964
Valued added taxes recoverable	11,780	17,996
Other accounts receivable	3,291	448
	20,057	20,408

As at 31 December 2008, the Company considers its accounts receivable excluding Value Added Taxes recoverable and other accounts receivable to be aged as follows:

Ageing	2008 $	2007 $
Current	1,807	1,793
Past due (1-30 days)	2,632	92
Past due (31-60 days)	417	-
Past due (more than 60 days)	130	79
	4,986	1,964

 

Interest rate risk - The Company is exposed to interest rate risk arising from fluctuations in interest rates on its cash equivalents. The Company seeks to maximise returns on cash equivalents, without risking capital values. The Company's objectives of managing its cash and cash equivalents are to ensure sufficient funds are maintained on hand at all times to meet day to day requirements and to place any amounts which are considered in excess of day to day requirements on short-term deposits with the Company's banks so they earn interest. Upon placing amounts of cash and cash equivalents on short-term deposits, the Company uses top rated institutions and ensures that access to the amounts can be gained at short notice. During the year ended 31 December 2008 the company earned interest income of $5,729 (2007 - $6,588) on cash and cash equivalents, based on rates of returns between 0.50% and 4.40% (2007 - 2.75% and 7.10%)

 

Currency risk - The Company is exposed to currency risk on accounts receivable, accounts payable and cash holdings that are denominated in a currency other than the functional currencies of the individual entities in the group. As at the 31 December 2008, the Company held the equivalent of $30,246 (2007 - $44,676) in net assets denominated foreign currencies. These balances are primarily made up of Euro and to a lesser extent Pound Sterling.

For the year ended 31 December 2008 the Company recorded a foreign exchange loss of $6,406 (and a gain of $3,904 in 2007), mainly due to the translation of its Euro balances in its subsidiaries, with the Euro weakening against the US Dollar the gain in 2007 had arisen due to the Company holding a basket of various currency's with a weakening US Dollar.

The Company publishes its consolidated financial statements in US dollars and as a result, it is also subject to foreign exchange translation risk in respect of assets and liabilities nominated in Euros in its foreign operations.

Liquidity risk - Liquidity risk is the risk that the Company will not be able to meet its financial obligations when they become due.

The Company manages its liquidity risk by ensuring there is sufficient capital to meet short and long term business requirements after taking into account cash flows from operations and holdings of cash and cash equivalents. The Company believes that these sources will be sufficient to cover the likely short to medium term requirements. Senior management is also actively involved in the review and approval of planned expenditures by regularly monitoring cash flows from operations and anticipated investing and financing activities. 

The Company does not have any borrowing or debt facilities and settles its obligations out of cash and cash equivalents. The ability to do this relies on the Company collecting its accounts receivable in a timely manner and maintaining cash on hand. 

Financial liabilities consist of trade payables, accrued liabilities and income taxes payable. As at 31 December 2008, the Company's trade payables and accrued liabilities amounted to $16,263 (2007- $9,977), all which fall due for payment within 12 months of the balance sheet date. The average credit period taken during the year ended 31 December 2008 was 30 days (30 days - 2007).

Commodity Price Risk - The value of the Company's mineral resource properties is related to the prices of gold, copper, zinc, lead and silver and outlook for these commodities.

Gold prices historically have fluctuated widely and are affected by numerous factors outside of the company's control, including, but not limited to, industrial and retail demand, central bank lending, forward sales by producers and speculators, levels of worldwide production, short-term changes in supply and demand because of speculative investing activities, macro-economic and political variables, and certain other factors related specifically to gold. Base metal prices have historically tended to be driven more by the demand and supply fundamentals for each metal. However, levels of speculative activity in the base metals market have increased in recent years.

The long term profitability of the Company's operations is highly correlated to the market price of its commodities and in particular gold. To the extent that these prices increase, asset values increase and cash flows improve; conversely, declines in metal prices directly impact value and cash flows. A protracted period of depressed prices could impair the Company's operations and development opportunities, and significantly erode shareholder value.

The Company has completed a sensitivity analysis to estimate the impact on net profit of a 5% change in foreign exchange rates, a 1% change in interest rates and a 10% change in commodity prices during the years ended 31 December 2008 and 2007. The results of the sensitivity analysis can be seen in the following table:

Impact on Net Profit (+/-)	2008 $	2007 $
Change of - 5 % US$: € foreign exchange rate	(460)	(3,256)
Change of + 5 % US$: € foreign exchange rate	564	2,924
Change of +/- 1% in interest rates	1,321	986
Change of +/- 10% in commodities prices	5,417	5,964

Limitations of sensitivity analysis - The above table demonstrates the effect of either a change in foreign exchange rates or interest rates in isolation. In reality, there is a correlation between the two factors. Additionally, the financial position of the Company may vary at the time that a change in either of these factors occurs, causing the impact on the Company's results to differ from that shown above.

Hedging and specific commitments - The Company enters into financial transactions in the normal course of business and in line with Board guidelines for the purpose of hedging and managing its expected exposure to commodity prices. There are a number of financial institutions which offer metal hedging services. As with cash deposits, the Company deals with highly rated banks and in addition, those institutions who have demonstrated long term commitment to the mining sector. The Company has one counterparty relating to the remaining lead hedge contracts. If this counterparty were unable to honour its obligations under the hedge contracts, the Company would be exposed up to the entire value of the hedge stated in the accounts and would be exposed to the difference between the hedge and the then current market price at the date of the settlement of the hedged item. The hedges below are treated as cash flow hedges in accordance with CICA 3865: Hedges.

Lead hedging contracts - As at 31 December 2008, the Company had entered into forward hedging arrangements over 7,200 tonnes of lead, using options to provide a minimum: maximum price exposure. The hedging contracts are put/call option collar contracts with maturity dates between 2 January 2009 and 5 January 2010 where the fair value amounted to $10,282 (2007 - $882), established by reference to market prices for lead.

	2009 $
Lead Tonnes	7,200
US dollar price ($/tonne) - Put	2,500
US dollar contract amount ($'000) - Put	18,000
US dollar price ($/tonne) - Call	3,500
US dollar contract amount ($'000) - Call	25,200

18. Capital Risk Management

The Company's objectives when managing capital is to maintain its ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to ensure sufficient resources are available to meet day to day operating requirements.

The Company's Board of Directors takes full responsibility for managing the Company's capital and does so through quarterly board meetings, review of financial information, and regular communication with Officers and senior management. 

In order to maximise ongoing development efforts, the company does not pay out dividends.

The Company's investment policy is to invest its cash in high-grade investment securities with varying terms and maturity, selected with regards to the expected timing of expenditures from continuing operations.

The Company expects its current capital resources will be sufficient to carry out its plans and operations through its current operating period.

The Company is not subject to externally imposed capital requirements and there has been no change in the overall capital risk management as at 31 December 2008. 

Capital under management was as follows:

	2008	2007
	$	$
Capital stock	538,316	537,275
Contributed surplus	7,788	5,997
Accumulated other comprehensive income	43,676	38,295
Deficit	(2,045)	(7,564)
	587,735	574,003

19. Supplementary cash flow information

	2008	2007
	$	$
Changes in non-cash working capital:
Accounts receivable and prepaid expenses	(2,242)	(11,962)
Inventory	(943)	(1,164)
Accounts payable and accrued liabilities	5,189	4,879
	2,004	(8,247)
Supplemental disclosure of non-cash transactions:
Share capital issued for business combination	-	161,424
Share options and restricted share units issued for non-cash consideration	2,788	2,488
Exercise or exchange of share options - Transfer from contributed surplus  to share capital	(24)	(980)
Vesting of restricted share units	(973)	(2,646)

20. Commitments 

The Company has spending commitments of $180 per year (plus service charges and value added tax) for a term of ten years under the lease for its office in London, England, which commenced in April 2004. The rent will be reviewed on the fifth anniversary of the commencement of the term to reflect any increase in rents in the market.

Hellas Gold has spending commitments of $145 (€104) per year for a term of 9 years under the lease for its office in Athens, Greece, which commenced in December 2007. The rent will be reviewed on the second anniversary of the commencement of the term to reflect any increase in rents in the market.

As at 31 December 2008, Hellas Gold had entered into off-take agreements pursuant to which Hellas Gold agreed to sell 44,838 dmt of zinc concentrates, 22,321 dmt of lead/silver concentrates and 60,273 dmt of gold concentrates until the financial year's ending 2012.

During 2007, Hellas Gold entered into purchase agreements with Outotec Minerals OY for long-lead time equipment for the Skouries project with a cost of $50,181 (€36,057) which is to be paid by the end of 2009. As at 31 December 2008, $17,459 (€12,515) of the commitment had been paid. Hellas Gold has pledged $24,056 (€17,285) in support of a letter of credit issued on behalf of Outotec Minerals OY through Nordea Bank of Finland.

21. Transactions with related parties

During the year ended 31 December 2008, Hellas Gold incurred costs of $41,852 (2007 - $27,885) for management, technical and engineering services received from a related party, Aktor S.A., a 5% shareholder in Hellas Gold. As at 31 December 2008, Hellas Gold had accounts payable of $3,637 (2007 - $2,125) to Aktor S.A. These expenditures were contracted in the normal course of operations and are recorded at the exchange amount agreed by the parties.

 

22. Segmented information

The Company has one operating segment: the acquisition, exploration and development of precious and base metal mineral resources properties located in Greece, Romania and Turkey.

Geographic segmentation of plant and equipment and deferred exploration and development costs and operating liabilities is as follows:

	2008	2007
	$	$
Sales
Canada	-	-
Greece	60,044	86,405
Romania	-	-
Turkey	-	-
United Kingdom	-	-
	60,044	86,405
Plant and equipment and deferred exploration and development costs
Canada	-	-
Greece	501,852	479,656
Romania	47,946	38,418
Turkey	496	-
United Kingdom	309	341
	550,603	518,415
Operating liabilities
Canada	1,503	832
Greece	14,084	20,037
Romania	252	659
Turkey	80	-
United Kingdom	344	1,167
	16,263	22,695

23. Pension plans and other post-retirement benefits

The Company's subsidiary, European Goldfields (Services) Limited, maintains a defined contribution pension plan for its employees. The defined contribution pension plan provides pension benefits based on accumulated employee and Company contributions. Company contributions to these plans are a set percentage of employees' annual income and may be subject to certain vesting requirements. The cost of defined contribution benefits is expensed as earned by employees.

As at 31 December 2008 and 2007, the Company recognised the following costs:

	2008	2007
	$	$
Defined contribution plans	261	227

 

24. Earnings per share

The calculation of the basic and diluted earnings per share attributable to holders of the Company's common shares is based as follows:

	2008	2007
	$	$
Profit for the year	5,519	23,199
Effect of dilutive potential common shares	-	-
Diluted earnings	5,519	23,199
Weighted average number of common shares for the purpose of basic earnings per share	179,566	148,245
Incremental shares - Share options	1,657	1,855
Weighted average number of common shares for the purpose of diluted earnings per share	181,223	150,100

In 2008, the weighted average number of options excluded from the computation of diluted earnings per share because their effect was not dilutive, was 1,220 (2007 - 670).

25. Comparative figures

The prior year amounts have been reclassified from statements previously presented to conform to the presentation of 2008 Consolidated Financial Statements.

26. Legal proceedings

In June 2005, certain residents of Stratoniki village submitted a request for the annulment of the Greek government's joint ministerial decision approving the environmental impact study for the Stratoni mine (the "JMD Approval"). In November 2005, the same petitioners submitted a request for the annulment of the decision of the Minister of Development approving the Technical Study for the exploitation of the Mavres Petres mine that forms part of the Stratoni complex (the "MOD Approval"). The JMD Approval and the MOD Approval are necessary for the continued operation of the Stratoni mine. In both cases the petitioners alleged a lack of legal basis for the approvals and potential harm to the environment and their properties. The Greek government, supported by the Company, the Association of Extractive Companies, and two workers' unions, has taken a position that the approvals are valid. In December 2005 the petitioners requested an injunction to stop work on the Stratoni project pending the hearing of the requests for annulment, but the court rejected the request. A hearing on both requests for annulment will be held shortly. The management of the Company believes that both requests for annulment are unfounded and unlikely to succeed. 

27. Post balance sheet event

Since 31 December 2008, the Company granted 584,779 restricted share units under the Company's Restricted Share Unit Plan. 

In February 2009, the Company subscribed for an additional 9,700,000 ordinary shares in Ariana Resources plc for a total consideration of $140 (£97).

 

28. Recently issued accounting standards

Goodwill and intangible assets - In February 2008, the Canadian Institute of Chartered Accountants ("CICA") issued Section 3064 Goodwill and intangible assets, replacing Section 3062, Goodwill and other intangible assets. The new Section will be applicable to financial statements relating to fiscal years beginning on or after October 1, 2008. Accordingly, the Company will adopt the new standards for its fiscal year beginning 1 January 2009. It establishes standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit-oriented enterprises. Standards concerning goodwill are unchanged from the standards included in the previous Section 3062. The Company is currently evaluating the impact of the adoption of this new Section on its consolidated financial statements.

Business Combination, Consolidated Financial Statements and non controlling interest - In January 2009, the CICA issued Handbook Sections 1582 - Business Combinations, 1601 - Consolidated Financial Statements and 1602 - Non-controlling Interests which replace CICA Handbook Sections 1581 - Business Combinations and 1600 - Consolidated Financial Statements. Section 1582 establishes standards for the accounting for business combinations that is equivalent to the business combination accounting standard under International Financial Reporting Standards. Section 1582 is applicable for the Company's business combinations with acquisition dates on or after January 1, 2011. Early adoption of this Section is permitted. Section 1601 together with Section 1602 establishes standards for the preparation of consolidated financial statements. Section 1601 is applicable for the Company's interim and annual consolidated financial statements for its fiscal year beginning January 1, 2011. Early adoption of this Section is permitted. If the Company chooses to early adopt any one of these Sections, the other two sections must also be adopted at the same time.

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 it's 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.

ENDFR CKCKDABKKDND

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