27th Apr 2005 07:01
European Goldfields Ltd27 April 2005 PART 2 Suite 200 Financial Plaza 204 Lambert Street Whitehorse, Yukon Canada Y1A 3T2 European Goldfields Limited Consolidated Financial Statements (Audited) 31 December 2004 and 2003 Management's Responsibility for Consolidated Financial Statements The accompanying consolidated financial statements of European GoldfieldsLimited are the responsibility of management and have been approved by the Boardof Directors of the Company. The financial statements include some amounts thatare based on management's best estimate using reasonable judgment. The financial statements have been prepared by management in accordance withCanadian generally accepted accounting principles. Management maintains an appropriate system of internal controls to providereasonable assurance that transactions are authorised, assets safeguarded andproper records are maintained. The Audit Committee of the Board of Directors has met with the Company'sexternal auditors to review the scope and results of the annual audit and toreview the consolidated financial statements and related financial reportingmatters prior to submitting the consolidated financial statements to the Boardof Directors for approval. The financial statements have been audited by BDO Dunwoody LLP, CharteredAccountants, and their report follows. (s) David Reading (s) David GrannellDavid Reading David GrannellChief Executive Officer Chief Financial Officer Auditors' Report to the Shareholders of European Goldfields Limited We have audited the consolidated balance sheets of European Goldfields Limitedas at 31 December 2004 and 2003 and the consolidated statements of equity, lossand deficit and cash flows for the years then ended. These financial statementsare the responsibility of the Company's management. Our responsibility is toexpress an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditingstandards. Those standards require that we plan and perform an audit to obtainreasonable assurance whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in allmaterial respects, the financial position of the Company as at 31 December 2004and 2003 and the results of its operations and its cash flows for the years thenended in accordance with Canadian generally accepted accounting principles. (s) BDO Dunwoody LLPChartered AccountantsToronto, Canada, 23 March 2005 European Goldfields LimitedConsolidated Balance SheetsAs at 31 December 2004 and 2003(US Dollars) 2004 2003 Note $ $Assets Current assetsCash and cash equivalents 65,252,532 14,997,993Short-term investments - 3,090,800Accounts receivable, prepaid expenses and supplies 11 2,046,945 2,004,190 ---------- ---------- 67,299,477 20,092,983 ---------- ----------Non current assets Plant and equipment 5 13,687,427 486,678 ---------- ----------Mineral properties and deferred exploration anddevelopment costsRomanian mineral properties 6 26,331,967 25,363,348Greek mineral properties 6 195,807,381 - ---------- ---------- 222,139,348 25,363,348 ---------- ----------Future tax asset 14 1,632,078 - ---------- ---------- 304,758,330 45,943,009 ---------- ----------Liabilities Current liabilitiesAccounts payable and accrued liabilities 12 3,820,094 711,688Convertible loan notes 8 - 14,323,410 ---------- ---------- 3,820,094 15,035,098 ---------- ----------Non current liabilitiesAsset retirement obligation 13 5,810,999 -Future tax liability 14 47,472,957 -Non-controlling interest 18,035,927 - ---------- ---------- 71,319,883 - ---------- ----------Shareholders' equityCapital stock 8 238,419,586 27,302,021Contributed surplus 8 5,588,785 2,374,075Cumulative translation adjustment 8,964,420 5,403,615Deficit (23,354,438) (4,171,800) ---------- ---------- 229,618,353 30,907,911 ---------- ---------- 304,758,330 45,943,009 ---------- ---------- The accompanying notes are an integral part of these consolidated financial statements. Approved by the Board of Directors (s) David Grannell (s) Glenn FeatherbyDavid Grannell Glenn FeatherbyDirector Director European Goldfields LimitedConsolidated Statements of Loss and DeficitFor the years ended 31 December 2004 and 2003(US Dollars) 2004 2003 Note $ $ Other incomeInterest income (500,203) (169,650) ExpensesAdministrative and overhead expenses 3,939,829 559,357Audit, accounting, legal and other professional 1,291,362 836,584feesAIM listing expense 559,733 -Business development - New project evaluation 455,236 151,511Foreign exchange gain (510,235) (114,574)Greek operating, general and administrative 1,768,453 -expensesOther expensesAmortisation 93,220 7,603Capital raising costs - Convertible loan notes 1,121,681 177,738Impairment of mineral property 4,806,048 -Accretion of asset retirement obligation 13 23,763 -Milestone share compensation expense 2,527,006 -Share option compensation expense 3,893,179 992,451 ---------- ---------- 19,469,072 2,441,020 Share of loss in equity investment 729,579 - ---------- ----------Loss for the year before income tax 20,198,651 2,441,020 Income taxes 14 (481,318) 15,989 ---------- ----------Loss for the year after income tax 19,717,333 2,457,009 Non-controlling interest (534,695) - ---------- ----------Loss for the year 19,182,638 2,457,009 Deficit - Beginning of year 4,171,800 1,714,791 ---------- ---------- Deficit - End of year 23,354,438 4,171,800 ---------- ----------Loss per share 4 0.39 0.11 Weighted average number of shares 49,245,920 22,021,126 The accompanying notes are an integral part of these consolidated financial statements. European Goldfields LimitedConsolidated Statements of EquityAs at 31 December 2004 and 2003(US Dollars) Capital Contributed Cumulative Deficit Total Stock Surplus Translation Reserve $ $ $ $ $ ---------- ----------- ---------- ---------- ----------Balance - 31 December 2002 27,651,584 304,754 (423,824) (1,714,791) 25,817,723 ---------- ----------- ---------- ---------- ---------- Share options exercised 5,174 - - - 5,174Share option compensation - 1,078,127 - - 1,078,127expenseEquity component of conv. loan - 751,928 - - 751,928notesCapital raising costs - conv. - (70,458) - - (70,458)loan notesBroker warrants expense - 309,724 - - 309,724Movement in cumulative - - 5,827,439 - 5,827,439translation reserveShare issue costs (354,737) - - - (354,737)Loss for the period - - - (2,457,009) (2,457,009) ---------- ----------- ---------- ---------- ---------- (349,563) 2,069,321 5,827,439 (2,457,009) 5,090,188 ---------- ----------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- ----------Balance - 31 December 2003 27,302,021 2,374,075 5,403,615 (4,171,800) 30,907,911 ---------- ----------- ---------- ---------- ---------- Shares issued on conversion of 14,919,593 (673,029) - - 14,246,564conv. loanShares issued from non-brokered 35,846,004 - - - 35,846,004private placementsShares issued from brokered 75,728,892 - - - 75,728,892private placementsShare options exercised 2,588,210 (652,629) - - 1,935,581Shares issued as consideration 77,425,937 - - - 77,425,937for shares in Hellas Gold S.A.Warrants exercised 7,428,171 - - - 7,428,171Milestone shares issued as 1,801,592 725,414 - - 2,527,006compensationShare issue costs (4,620,834) - - - (4,620,834)Transfer of broker warrant - (78,225) - - (78,225)related expense to share issuecostShare option compensation - 3,893,179 - - 3,893,179expenseMovement in cumulative - - 3,560,805 - 3,560,805translation reserveLoss for the period - - - (19,182,638) (19,182,638) ---------- ----------- ---------- ---------- ---------- 211,117,565 3,214,710 3,560,805 (19,182,638) 198,710,442 ---------- ----------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- ----------Balance - 31 December 2004 238,419,586 5,588,785 8,964,420 (23,354,438) 229,618,353 ---------- ----------- ---------- ---------- ---------- The accompanying notes are an integral part of these consolidated financial statements. European Goldfields LimitedConsolidated Statements of Cash FlowsFor the years ended 31 December 2004 and 2003(US Dollars) 2004 2003 Note $ $ Cash flows from operating activitiesLoss for the year after tax (19,717,333) (2,457,009)Amortisation 93,220 7,603Capital raising costs - Convertible loan notes 1,121,681 42,796Share option compensation expense 3,893,179 992,451Milestone share compensation expense 2,527,006 -Impairment of mineral property 4,806,048 -Accretion of asset retirement obligation 13 23,763 -Future tax asset recognized (528,234) -Loss on disposal of equipment 2,291 -Foreign exchange profit (510,235) ---------- ---------- (8,288,614) (1,414,159) Net changes in non-cash working capital 15 2,093,068 (1,379,225) ---------- ---------- (6,195,546) (2,793,384) ---------- ---------- Cash flows from investing activitiesDeferred exploration and development costs - (5,970,571) (4,257,002)RomaniaAcquisition of Hellas Gold assets net of cash (61,075,119) -acquiredShort term investment 3,090,800 (3,090,800)Proceeds from disposal of equipment 21,989 -Purchase of equipment (339,004) (113,819) ---------- ---------- (64,271,905) (7,461,621) ---------- ---------- Cash flows from financing activitiesProceeds from exercise of warrants 7,428,171 -Proceeds from brokered private placements 75,728,892 -Proceeds from non-brokered private placement 35,846,004 -Proceeds from convertible loan notes - 15,089,594Proceeds from exercise of share options 1,935,581 5,174Capital raising costs - Equity portion of convertible - (55,770)loan notesCapital raising costs (4,620,834) - ---------- ---------- 116,317,814 15,038,998 ---------- ---------- Effect of foreign currency translation on cash 4,404,176 1,828,130 ---------- ---------- Increase in cash and cash equivalents 50,254,539 6,612,123 Cash and cash equivalents - Beginning of year 14,997,993 8,385,870 ---------- ---------- Cash and cash equivalents - End of year 65,252,532 14,997,993 ---------- ---------- The accompanying notes are an integral part of these consolidated financial statements. European Goldfields LimitedNotes to Consolidated Financial StatementsFor the years ended 31 December 2004 and 2003(US Dollars) 1. Nature of operations European Goldfields Limited (the "Company"), a company incorporated in the Yukon, Canada, is a resource company involved in the acquisition, exploration and development of mineral properties in Greece, Romania and the Balkans. The Company's common shares are listed on the AIM Market of the London StockExchange and on the Toronto Stock Exchange (TSX) under the symbol "EGU". Greece - As at 31 December 2004, the Company held a 65% interest (on afully-diluted basis) in Hellas Gold S.A ("Hellas Gold"). Hellas Gold owns assetsin Northern Greece which include 70-year mining concessions over a total area of317 km2 and three polymetallic near-production deposits, known as Olympias,Stratoni and Skouries, which contain proven and probable reserves. The Stratoniand Olympias deposits were previously in production and benefit from significantinfrastructure which includes underground mining development, two plants and aship loading facility on the Aegean Sea. Hellas Gold's assets also includepotential revenue generating stockpiles and tailings located on the surface. Romania - In Romania, the Company holds a 80% interest in Deva Gold S.A. ("DevaGold") and a 100% interest in European Goldfields (Romania) SRL ("EG Romania"),which are in the process of exploring their mineral properties in Romania andhave not yet determined whether those properties contain economic reserves. Balkans - The Company is currently entertaining certain investments forexploration and development of mineral properties in the Balkans. The underlying value of the mineral properties and deferred exploration anddevelopment costs is dependent upon the existence and economic recovery ofreserves in the future, and the ability to raise long-term financing to completethe development of the properties. For the coming year, the Company believes it has adequate funds available tomeet its corporate and administrative obligations and its planned expenditureson its mineral properties. These consolidated financial statements have been prepared on a going concernbasis, which assumes the Company will be able to realise assets and dischargeliabilities in the normal course of business for the foreseeable future. Theseconsolidated financial statements do not include the adjustments that would benecessary should the Company be unable to continue as a going concern. 2. Change in functional and reporting currency Effective 1 October 2004, the Company changed its functional currency from theCanadian dollar to the United States dollar. In general, this change resultedfrom a combination of a gradual increase in the operational exposure to theUnited States dollar and predominantly United States dollar based asset andinvestment base of the Company and from a gradual increase in the overallproportion of business activities conducted in United States dollars. Concurrentwith this change in functional currency, the Company adopted the United Statesdollar as its reporting currency. In accordance with accounting principlesgenerally accepted in Canada ("Canadian GAAP"), the change was effected bytranslating all assets and liabilities, at the end of the prior reportingperiods, at the existing United States/Canadian dollar foreign exchange spotrate, while income for those periods were translated at the average rate foreach period. Equity transactions have been translated at the historical rates,with opening equity on 30 June 2000, restated at the rate of exchange on thatdate. The resulting net translation adjustment has been credited to thecumulative translation adjustment account in the equity section of the balancesheet. 3. Business combination - Acquisition of a controlling interest in Hellas Gold In February 2004, the Company acquired an initial 37.97% interest (30% on afully-diluted basis) in Hellas Gold for a total subscription price of €18million ($24.06 million) in cash. In November 2004, the Company completed the acquisition of additional shares inHellas Gold (the "Purchased Shares"), increasing its total interest from 37.97%to 55.70%, and assumed an obligation to subscribe to additional shares in HellasGold for a subscription price of $23.48 million (the "Subscription Obligation"),resulting in an interest of 65% on a fully-diluted basis (the "Acquisition").The total price paid by the Company for the Purchased Shares and for theassumption of the Subscription Obligation was $125.35 million, satisfied asfollows: (a) $77.43 million by the issue in November 2004 of 30,423,280 common shares tothe vendors at a deemed issue price of £1.75 (C$3.98) per share. This wasaccounted for at a price per share of £1.38 (C$3.14), representing the then fairmarket value of such shares; and (b) $47.92 million paid in cash to the vendors in December 2004. Transaction costs of $3.99 million were also accounted for as part of theAcquisition. In January 2005, the Company satisfied the Subscription Obligation for asubscription price of US$23.48 million. To fund the cash requirements relating to the Acquisition and provide additionalworking capital, the Company raised concurrently £40 million ($75.73 million)(before expenses) by the issue of 29,629,630 common shares at a price of £1.35(C$3.07) per share (the "Placing"). The balance of the cash considerationrequired for the Acquisition was funded by a non-brokered private placement withCommerzbank A.G. completed in May 2004, where 5,882,000 common shares at a priceof £1.70 (C$4.18) per share were issued, for total subscription proceeds of £10million ($17.76 million). The Acquisition was accounted for as a purchase and the results of operations ofHellas Gold were included in the consolidated statements of loss and deficitfrom 30 November 2004, the effective date of the Acquisition. From 9 February2004 to 30 November 2004, the Company's initial 37.97% interest (30% on afully-diluted basis) in Hellas Gold was accounted for as an equity investmentand the Company's share of loss in Hellas Gold was included in the consolidatedstatements of loss and deficit. A summary of the fair value of net assets acquired and consideration given is asfollows: $Cash and short term investments 14,269,621Net current assets 935,987Land 4,022,859Mines, farms and forest 3,993,627Other assets 5,102,072Asset retirement obligation (5,787,236)Future tax assets 1,103,844Mineral properties 195,807,381Future tax liabilities (47,472,957)Non-controlling interest (18,570,622) ----------- 153,404,576 -----------Purchase considerationCash paid 71,982,824Shares issued (30,423,280 common shares) 77,425,937Transaction costs 3,995,815 -----------Purchase price 153,404,576 ----------- 4. Significant accounting policies These consolidated financial statements have been prepared on the going concernbasis in accordance with Canadian GAAP and reflect the following significantaccounting policies. Basis of consolidation Business acquisitions are accounted for under the purchase method and theresults of operations of these businesses are included in these consolidatedfinancial statements from the acquisition date. Investments in affiliatedcompanies over which the Company has significant influence are accounted forusing the equity method. Investments in other businesses are recorded at cost. These consolidated financial statements include the accounts of the Company andthe following subsidiaries: Company Country of Ownership incorporation European Goldfields (Services) England 100% ownedLimitedEuropean Goldfields (Romania) SRL Romania 100% ownedDeva Gold (Barbados) Ltd. Barbados 100% ownedCastle Europa Ltd. Barbados 100% ownedDeva Gold S.A. Romania 80% ownedEuropean Goldfields Mining Netherlands 100% owned(Netherlands) B.V.European Goldfields (Greece) B.V. Netherlands 100% ownedGlobal Mineral Resources Limited Barbados 100% ownedGlobal Mineral Resources Holdings Luxembourg 100% ownedS.a.r.l.Global Mineral Resources S.a.r.l. Luxembourg 100% ownedHellas Gold S.A. Greece 65% owned The 20% minority interest held in the Company's 80% owned subsidiary, Deva Gold,is not accounted for in these consolidated financial statements. The basis forthis treatment is that the Company is required to fund 100% of all costs relatedto the exploration and development of these properties. As a result, the Companyis entitled to the refund of such costs (plus interest) out of future cash flowsgenerated by Deva Gold, prior to any dividends being distributed toshareholders. Estimates, risks and uncertainties The preparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptions thataffect the reported amount of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amount of revenues and expenses during the period. Significantestimates and assumptions include those related to the recoverability of mineralproperties and deferred exploration and development costs. While managementbelieves that these estimates and assumptions are reasonable, actual resultscould vary significantly. Income taxes Income taxes are calculated using the asset and liability method of taxaccounting. Under this method, current income taxes are recognised for theestimated income taxes payable for the current period. Future income tax assetsand liabilities are determined based on differences between the financialreporting and tax bases of assets and liabilities, and are measured using thesubstantially enacted tax rates and laws that will be in effect when thedifferences are expected to reverse. The benefit of the temporary differences isnot recognised to the extent the recoverability of future income tax assets isnot considered more likely than not. 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 ofthree years for office equipment, six years for vehicles, ten years forleasehold improvements, at rates varying between three and five years forexploration equipment and at rates varying between four and 20 years forbuildings. Amortisation for equipment used for exploration and development arecapitalised to mineral properties. Mineral properties and deferred exploration and development costs Acquisition costs of resource properties, together with direct exploration anddevelopment costs incurred thereon, are deferred and capitalised. Upon reachingcommercial production, these capitalised costs are transferred from explorationproperties to producing properties on the consolidated balance sheets and areamortised into operations using the unit-of-production method over the estimateduseful life of the estimated related ore reserves. Based on annual impairment reviews made by management, in the event that thelong-term expectation is that the net carrying amount of these capitalisedexploration and development costs will not be recovered such as would beindicated 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 accordingly and the write-down amountcharged to operations. Foreign currency translation The Company's functional currency is the United States dollar. Monetary assetsand liabilities denominated in foreign currencies are translated at the exchangerate in effect at the balance sheet date. Non-monetary assets and liabilitiesand revenue and expenses arising from foreign currency transactions aretranslated at the exchange rate in effect at the date of the transaction.Exchange gains or losses arising from the translation are included inoperations. Integrated foreign subsidiaries are accounted for under the temporal method.Under this method, monetary assets and liabilities are translated at theexchange rate in effect at the balance sheet date. Non-monetary assets andliabilities are translated at historical rates. Revenue and expenses aretranslated at average rates for the period. Exchange gains or losses arisingfrom the translation are included in operations except for those related tomineral properties which are capitalised. Loss per share ("LPS") LPS is calculated based on the weighted average number of common shares issuedand outstanding during 2004 being 49,245,920 (2003 - 22,021,126). Diluted pershare amounts are calculated using the treasury stock method whereby proceedsdeemed to be received on the exercise of options and warrants in the per sharecalculation are applied to reacquire common shares. The effect of potentialissuances of shares under options and warrants would be anti-dilutive, andaccordingly basic and diluted loss per share are the same. Financial instruments The Company's financial instruments consist of cash and cash equivalents,accounts receivable and accounts payable and accrued liabilities. Unlessotherwise noted, it is management's opinion that the Company is not exposed tosignificant interest or credit risks arising from these financial instruments.The fair values of these financial instruments approximate their carrying valuesunless otherwise noted. The Company's operations expose it to significant fluctuations in foreignexchange rates. The Company has monetary assets and liabilities denominated inBritish pounds sterling, Romanian lei, euros and Canadian dollars, which are,therefore, subject to exchange variations against the reporting currency, theUnited States dollar. Included in cash and cash equivalents is approximately $38million denominated in euros. The Company does not currently have any hedging policies or practices in place. Share options The Company operates a share option plan, which is described in Note 9.Effective 1 January 2003, the Company chose to adopt the accounting standard ofthe Canadian Institute of Chartered Accountants with respect to the accountingfor stock-based compensation and adopted the fair value method of accounting forshare options granted to directors, officers and employees on a prospectivebasis whereby the weighted average fair value of options granted is recorded asa compensation expense in the financial statements. Compensation expense onshare options granted to non-employees is recorded as an expense at the earlierof the date the options are vested or the performance is complete, using thefair value method. Any consideration paid by directors, officers, employees andconsultants on exercise of share options or purchases of shares is credited toshare capital. Cash and cash equivalents Cash and cash equivalents include cash and deposits with three months or less tomaturity. Asset retirement obligation Effective 1 January 2004, the Company adopted the CICA Handbook Section 3110"Asset Retirement Obligations", which established standards for asset retirementobligations and the associated retirement costs related to reclamation andabandonment. The fair value of the liability of an asset retirement obligationis recorded when it is incurred and the corresponding increase to the asset isdepreciated over the life of the asset. The liability is increased over time toreflect an accretion element considered in the initial measurement at fairvalue. At 31 December 2004, the Company had an asset retirement obligationrelating to the development of its mineral properties in Greece. Impairment of long-lived assets Effective 1 January 2004, the Company adopted the new recommendations of CICAHandbook Section 3063 "Impairment of Long-lived Assets" on a prospective basis.Section 3063 requires that long-lived assets and intangibles to be held and usedby the Company be reviewed for possible impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. If changes in circumstances indicate that the carrying amount of anasset that an entity expects to hold and use may not be recoverable, future cashflows expected to result from the use of the asset and its disposition must beestimated. If the undiscounted value of the future cash flows is less than thecarrying amount of the asset, impairment is recognised based on the fair valueof the assets. Effective 31 December 2004, the Company decided to relinquish its80%-owned exploitation license for the Zlatna perimeter in Romania and aprovision for the costs of this property has been recorded. 5. Plant and equipment Exploration / Vehicles Land and Leasehold Total office buildings improvements equipment $ $ $ $ $Cost - 2003 At 31 December 2002 224,045 343,115 - - 567,160 Additions 79,481 15,119 - - 94,600Disposals - - - - -Currency translation 48,842 74,800 - - 123,642adjustment ------- ------- ------- ------- -------At 31 December 2003 352,368 433,034 - - 785,402 ------- ------- ------- ------- ------- Accumulated amortisation -2003 At 31 December 2002 69,634 77,220 - - 146,854 Provision for the year 85,922 37,481 - - 123,403Currency translation 15,180 13,287 - - 28,467adjustment ------- ------- ------- ------- -------At 31 December 2003 170,736 127,988 - - 298,724 ------- ------- ------- ------- ------- ------- ------- ------- ------- -------Net book value at 31 181,632 305,046 - - 486,678December 2003 ------- ------- ------- ------- ------- Cost - 2004 At 31 December 2003 352,368 433,034 - - 785,402 Additions 1,274,384 781,803 11,378,532 218,816 13,653,535Disposals (27,423) - - - (27,423)Currency translation 11,376 9,256 - - 20,632adjustmentTransfer to mineral (221,519) (102,750) - - (324,269)property ------- ------- ------- ------- -------At 31 December 2004 1,389,186 1,121,343 11,378,532 218,816 14,107,877 ------- ------- ------- ------- ------- Accumulated amortisation -2004 At 31 December 2003 170,736 127,988 - - 298,724 Provision for the year 137,397 84,799 15,769 10,841 248,806Disposals (3,143) - - - (3,143)Currency translation 4,486 2,647 - - 7,133adjustmentTransfer to mineral (177,414) 46,344 - - (131,070)property ------- ------- ------- ------- -------At 31 December 2004 132,062 261,778 15,769 10,841 420,450 ------- ------- ------- ------- ------- ------- ------- ------- ------- -------Net book value at 31 1,257,124 859,565 11,362,763 207,975 13,687,427December 2004 ------- ------- ------- ------- ------- 6. Mineral properties and deferred exploration and development costs Romanian mineral properties: Certej Zlatna Bolcana Baita-Craciunesti Voia Total $ $ $ $ $ $ ---------- --------- --------- --------- ------- ----------Balance - 31 December 11,772,931 2,690,008 1,611,719 1,057,317 88,758 17,220,7332002 ---------- --------- --------- --------- ------- ---------- Drilling and 665,062 129,280 6,212 200,424 14,464 1,015,442assayingGeosciences and tech. 420,837 229,364 16,907 91,672 30,332 789,112consultingSamplers, miners and 306,388 203,898 53,752 169,229 11,737 745,004surveyingProject management 301,215 191,133 23,313 87,495 34,553 637,709Project overhead 538,005 250,245 33,264 182,566 71,957 1,076,037Amortisation 92,031 13,147 13,147 13,147 - 131,472Currency adjustment 2,566,516 586,426 345,089 230,459 19,349 3,747,839 ---------- --------- --------- --------- ------- ---------- 4,890,054 1,603,493 491,684 974,992 182,392 8,142,615 ---------- --------- --------- --------- ------- ----------Balance - 31 December 16,662,985 4,293,501 2,103,403 2,032,309 271,150 25,363,3482003 ---------- --------- --------- --------- ------- ---------- Drilling and 2,323,291 211,403 35,602 278,576 6,457 2,855,329assayingGeosciences and tech. 458,131 47,995 20,084 44,806 34,055 605,071consultingSamplers, miners and 121,544 26,119 5,187 24,035 9,230 186,115surveyingProject management 204,780 33,251 23,520 38,493 24,699 324,743Project overhead 696,028 65,434 14,219 80,106 100,201 955,988Amortisation 108,224 15,461 15,461 15,461 2,108 156,715Currency adjustment 455,884 112,884 61,706 53,108 7,124 690,706Impairment of mineral - (4,806,048) - - - (4,806,048)property ---------- --------- --------- --------- ------- ---------- 4,367,882 (4,293,501) 175,779 534,585 183,874 968,619 ---------- --------- --------- --------- ------- ----------Balance - 31 December 21,030,867 - 2,279,182 2,566,894 455,024 26,331,9672004 ---------- --------- --------- --------- ------- ---------- As at 31 December 2004, the Company's 80%-owned subsidiary, Deva Gold, held fourmineral resource properties in Romania. Exploitation licences have been issuedto Deva Gold as titleholder for the Certej, Zlatna and Bolcana projects. Anexploration licence has been issued to Deva Gold as titleholder for theBaita-Craciunesti project. Minvest S.A. (a Romanian state owned mining company),together with three private Romanian companies, holds a 20% interest in DevaGold and the Company holds the pre-emptive right to acquire such 20% interest.The Company's wholly-owned subsidiary, European Goldfields (Romania) SRL, holdsthe Voia exploration licence. The Company is required to fund 100% of all costs related to the exploration anddevelopment of these properties. As a result, the Company is entitled to therefund of such costs (plus interest) out of future cash flows generated by DevaGold, prior to any dividends being distributed to shareholders. In January 2005, the Company's wholly-owned subsidiary, European Goldfields(Romania) SRL, has been awarded by The National Agency for Mineral Resources inRomania (NAMR) an exploration license for the Cainel perimeter located in thehistoric gold producing area of the "Golden Quadrilateral" area of Romania. Thelicence is for an initial term of three years, renewable for an additional termof three years under certain conditions. The licence covers an area of 31.3 km2and lies only 10 km to the northwest of the Company's 80%-owned Certej deposit.Concurrently, the Company decided to relinquish its 80%-owned exploitationlicence for the Zlatna perimeter in Romania and a provision for the costs inthis property has been recorded. This will allow the Company to concentrate itsexploration and pre-feasibility activities to the more contiguous Certej andCainel perimeters. Individual property spending commitments for the Certej, Zlatna, Bolcana andBaita-Craciunesti licences have been met as at 31 December 2004 and 2003. Greek mineral properties: Stratoni Skouries Olympias Total $ $ $ $ Acquisition cost 11,375,542 73,517,372 110,914,467 195,807,381 ---------- ---------- ----------- -----------Balance - 31 December 2004 11,375,542 73,517,372 110,914,467 195,807,381 ---------- ---------- ----------- ----------- As at 31 December 2004, the Company held a 65% interest (on a fully dilutedbasis) in Hellas Gold. Hellas Gold owns assets in Northern Greece which include70-year mining concessions over a total area of 317 km2 and three polymetallicnear-production deposits, known as Olympias, Stratoni and Skouries, whichcontain proven and probable reserves. The Stratoni and Olympias deposits werepreviously in production and benefit from significant infrastructure whichincludes underground mining development, two plants and a ship loading facilityon the Aegean Sea. Hellas Gold's assets also include potential revenuegenerating stockpiles and tailings located on the surface. Greek State Contract On 12 December 2003, Hellas Gold entered into a contract with the Greek State(the "Greek State Contract") pursuant to which Hellas Gold acquired the assetsreferred to in the preceding paragraph (the "Greek Assets"). The Greek StateContract was ratified by Greek parliament on 8 January 2004 and passed into lawon 28 January 2004. The purchase price paid by Hellas Gold to the Greek Statefor the Greek Assets was €11 million ($15 million) in cash. Under the GreekState Contract, among other things: a) Hellas Gold must prepare an investment plan for development of the GreekAssets and construction/operation of a gold processing plant on or before 28January 2006 and the Greek Government must review the investment plan within twomonths of its submission and issue necessary licences and approvals within tenmonths; b) Hellas Gold must commence preparatory work in respect of the Madem Lakkos andMavres Petres mines in order to allow recommencement of production activitieswithin a reasonable period of time; c) Hellas Gold must take all required actions and procedures to protect theenvironment as directed by the Minister of Development for Greece, including theadoption of measures for water re-treatment; d) Hellas Gold does not have any environmental liabilities arising before thedate of ratification of the Greek State Contract; e) all licences and approvals which were issued by an administrative or othergovernment authority and which expire before 31 December 2006 were automaticallyextended to 31 December 2006; f) if Hellas Gold is evicted from any of the transferred property, no claim canbe made by Hellas Gold in order to reduce the purchase price; and g) if either party breaches the terms of the Greek State Contract, thenon-defaulting party may terminate the contract and, on termination, all assetsare to be returned to the Greek Government and the purchase price repaid withoutinterest. The non-defaulting party may be entitled to compensation for damagesresulting from the termination. 7. Transactions with related parties As part of the Acquisition described in Note 3, the Company acquired fromcompanies owned by Frank Timis or over which he exercised control or direction,an obligation to subscribe for a 21% interest (on a fully-diluted basis) inHellas Gold for an aggregate subscription price $23.48 million (€18 million).Prior to the Acquisition, Frank Timis owned, or exercised control or directionover, approximately 9% of the issued and outstanding common shares of theCompany. After completion of the Acquisition and the Placing described in Note3, Frank Timis owned, or exercised control or direction over, approximately18.9% of the issued and outstanding common shares of the Company. As part of the Acquisition, the Company acquired a 14% interest (on afully-diluted basis) in Hellas Gold from Dimitrios Koutras. Prior to theAcquisition, Dimitrios Koutras owned, or exercised control or direction over,Nil% of the issued and outstanding common shares of the Company. Aftercompletion of the Acquisition and the Placing, Dimitrios Koutras owned, orexercised control or direction over, approximately 12.7% of the issued andoutstanding common shares of the Company. The Acquisition was approved by the disinterested shareholders of the Company ata Special Meeting of Shareholders held on 26 November 2004, and was completedfollowing the rules of the TSX Venture Exchange and the AIM Market of the LondonStock Exchange. During the financial year ended 31 December 2004, Hellas Gold recorded expensesof $3,644,605 (2003 - Nil) for management, technical and engineering servicesreceived from a related party, Aktor S.A. As at 31 December 2004, Hellas Goldhad accounts payable of $1,366,095 (2003 - Nil) to Aktor S.A. These expenseswere contracted in the normal course of operations and are recorded at theexchange amount agreed by the parties. 8. 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 Amount Shares $ ---------- ----------Balance - 31 December 2002 22,016,126 27,651,584 ---------- ---------- Share options exercised 5,000 5,174Share issue costs - (354,737) ---------- ---------- 5,000 (349,563) ---------- ---------- ---------- ----------Balance - 31 December 2003 22,021,126 27,302,021 ---------- ---------- Shares issued on conversion of convertible loan notes 8,309,947 14,919,593(a)Shares issued from non-brokered private placement (b) 9,458,750 18,079,386Shares issued from non-brokered private placement (c) 5,882,000 17,766,618Shares issued from brokered private placement (d) 29,629,630 75,728,892Shares issued as consideration for shares in Hellas 30,423,280 77,425,937Gold S.A. (e)Milestone shares issued as compensation (f) 755,000 1,801,592Share options exercised 1,350,000 2,588,210Warrants exercised 3,918,975 7,428,171Share issue costs - (4,620,834) ---------- ---------- 89,727,582 211,117,565 ---------- ---------- ---------- ----------Balance - 31 December 2004 111,748,708 238,419,586 ---------- ---------- a) In December 2003, the Company raised $14.92 million by way of abrokered private placement of convertible loan notes. Following the completionof certain transactions (the "Conversion Events"), the convertible loan noteswere automatically converted in March 2004 into 8,309,947 common shares of theCompany at a price of C$2.35 per share. The convertible loan notes werenon-interest bearing unless the Conversion Events did not occur by 31 March 2004or certain other events of default occurred, in which case they would have borninterest at a rate of 18% per annum thereafter. The present value of interestforgone, amounting to $751,928, attributable to the convertibility features ofthe convertible loan notes has been credited to contributed surplus. b) In February 2004, the Company raised $18.08 million by way of anon-brokered private placement of 9,458,750 special warrants at a price ofC$2.50 per warrant. The warrants were exercised in February 2004 into 9,458,750common shares of the Company. c) In May 2004, the Company completed a non-brokered private placementwith Commerzbank A.G. of 5,882,000 common shares of the Company at a price of£1.70 (C$4.18) per share for total subscription proceeds of £10 million ($17.76million). d) In November 2004, the Company raised $75.73 million by way of abrokered private placement of 29,629,630 common shares of the Company at a priceof £1.35 (C$3.07) per share. e) In November 2004, the Company issued 30,423,280 common shares at aprice of £1.75 (C$3.98) per share in partial payment ($95.83 million) of thepurchased price paid by the Company for the acquisition of a controllinginterest in Hellas Gold. This was accounted for at a price per share of £1.38(C$3.14) amounting to $77.43 million, representing the then fair market value ofsuch shares. f) During the financial year ended 31 December 2004, the Companyissued a total of 755,000 common shares to senior officers of the Company underits Milestone Share Compensation Plan, 250,000 of which at a deemed price ofC$2.71 per share, 100,000 at a deemed price of C$3.36 per share and 405,000 at adeemed price of £1.35 (C$3.07) per share. Furthermore, in July 2004, the Companyundertook to issue in March 2005 an additional 350,000 commons shares at adeemed price of C$2.71 per share to a senior officer of the Company under itsMilestone Share Compensation Plan. Such shares were issued on 17 March 2005. g) As at 31 December 2004, the Company had 35,038,764 common shares heldin escrow or in respect of which trading restrictions applied. Contributed surplus: 2004 2003 $ $Share option compensation expense 5,010,946 1,078,127Equity component of convertible loan notes - 751,928Capital raising costs - Convertible loan notes - (70,458)Broker warrants 577,839 614,478 --------- --------- 5,588,785 2,374,075 --------- --------- 9. Share options and milestone shares Share Option Plan The Company operates a Share Option Plan (together with its predecessor, the"Share Option Plan") authorising the directors to grant options to acquirecommon shares of the Company to the directors, officers, employees andconsultants of the Company and its subsidiaries, on terms that the Board ofDirectors may determine, within the limitations of the Share Option Plan. As at 31 December 2004, outstanding share options were as follows: Number of Exercise options price C$Expiry date2005 15,000 1.402005 200,000 2.502005 500,000 2.802006 211,000 1.402006 64,000 2.502007 300,000 2.502008 175,000 2.202009 1,025,000 2.802009 265,000 3.202009 275,000 4.202009 625,000 3.072009 360,000 3.15 --------- --------- 4,015,000 2.85 --------- --------- During the financial year ended 31 December 2004, share options were granted,exercised and cancelled as follows: Number of Weighted options average exercise price C$ --------- ---------Balance - 31 December 2002 1,895,000 1.90 --------- --------- Options granted -2003 800,000 2.10Options exercised - 2003 (5,000) 1.40 --------- ---------Balance - 31 December 2003 2,690,000 1.96 --------- --------- Options granted - 2004 3,260,000 3.05Options exercised - 2004 (1,350,000) 1.80Related Shares:
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