22nd Mar 2007 07:04
European Goldfields Ltd22 March 2007 Immediate Release 22 March 2007 European Goldfields Limited Consolidated Financial Statements (Audited) 31 December 2006 and 2005 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 consolidated financial statements include someamounts that are based on management's best estimate using reasonable judgment. The consolidated financial statements have been prepared by management inaccordance with Canadian 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 consolidated financial statements have been audited by BDO Dunwoody LLP,Chartered Accountants, and their report follows. (s) David Reading (s) Timothy Morgan-WynneDavid Reading Timothy Morgan-WynneChief 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 2006 and 2005 and the consolidated statements of profit andloss, equity and cash flows for the years then ended. These consolidatedfinancial statements are the responsibility of the Company's management. Ourresponsibility is to express an opinion on these consolidated financialstatements 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 these consolidated financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in these consolidated financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. In our opinion, these consolidated financial statements present fairly, in allmaterial respects, the financial position of the Company as at 31 December 2006and 2005 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, Canada1 March 2007 Consolidated Balance Sheets As at 31 December 2006 and 2005(in thousands of US Dollars, except per shareamounts) 2006 2005 Note $ $Assets Current assetsCash and cash equivalents 34,587 30,536Accounts receivable 3 14,945 5,186Prepaid expenses 1,270 129Inventory 4 854 1,902 51,656 37,753 Non current assetsPlant and equipment 5 27,007 19,374Deferred exploration and development costs 6Greek production stage mineral properties 14,677 10,129Greek development stage mineral properties 182,157 162,738 196,834 172,867Romanian development stage mineral properties 31,782 27,843 228,616 200,710 Restricted investment 7 3,926 3,543 Future tax asset 8 738 5,238 311,943 266,618 Liabilities Current liabilitiesAccounts payable and accrued liabilities 9 9,802 3,988 Non current liabilitiesFuture tax liability 8 48,150 43,261Non-controlling interest 20,422 14,239Asset retirement obligation 10 6,031 5,307 74,603 62,807Shareholders' equityCapital stock 11 246,890 240,234Contributed surplus 11 7,135 6,197Cumulative translation adjustment 4,276 (12,843)Deficit (30,763) (33,765) 227,538 199,823 311,943 266,618 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'LearyTimothy Morgan-Wynne, Director Dr Jeffrey O'Leary, Director Consolidated Statements of Profit and Loss For the years ended 31 December 2006 and 2005 (in thousands of US Dollars, except per shareamounts) 2006 2005 Note $ $ IncomeSales 52,438 1,521Cost of sales (including amortisation and depletionof $3,225 in 2006) (25,186) (1,367) --------- ---------Gross profit 27,252 154 --------- --------- Other income --------- ---------Interest income 1,445 1,263 --------- --------- ExpensesCorporate administrative and overhead expenses 2,534 3,147Equity based compensation expense 2,810 1,823Foreign exchange loss 752 937Hellas Gold administrative and overhead expenses 5,504 2,113Hellas Gold water treatment expenses (non-operatingmines) 2,698 3,848Hellas Gold non-recurring rehabilitation cost(Stratoni mine) 1,630 -Accretion of asset retirement obligation 10 111 267Amortisation 650 236Impairment of mineral properties - 2,362 --------- --------- 16,689 14,733 --------- --------- --------- ---------Profit/(loss) for the year before income tax 12,008 (13,316) Income taxes 8Current taxes - -Future taxes - reduction of future tax asset 4,824 (1,694) --------- --------- 4,824 (1,694) --------- --------- --------- ---------Profit/(loss) for the year before non-controllinginterest 7,184 (11,622) Non-controlling interest (4,182) 1,212 --------- ---------Profit/(loss) for the year 3,002 (10,410) Deficit - Beginning of year (33,765) (23,355) --------- --------- Deficit - End of year (30,763) (33,765) --------- --------- Earnings/(loss) per share 17Basic 0.03 (0.09)Diluted 0.03 (0.09) Weighted average number of shares (in thousands)Basic 113,539 112,098Diluted 115,719 112,098 The accompanying notes are an integral part of these consolidated financial statements. Consolidated Statements of EquityAs at 31 December 2006 and 2005(in thousands of US Dollars, except per share amounts) Capital Contributed Cumulative Deficit Total Stock Surplus Translation $ $ $ $ Adjustment $ --------- --------- --------- --------- ---------Balance - 31 December2004 238,420 5,589 8,964 (23,355) 229,618 --------- --------- --------- --------- --------- Equity basedcompensation expense - 2,265 - - 2,265Share optionsexercised 287 (117) - - 170or exchangedMilestone sharesissued 725 (725) - - -as compensationShare issue costs (13) - - - (13)Movement in cumulativetranslation adjustment - - (21,807) - (21,807)Restricted share unitsvested 815 (815) - - -Loss for the period - - - (10,410) (10,410) --------- --------- --------- --------- --------- 1,814 608 (21,807) (10,410) (29,795) --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------Balance - 31 December2005 240,234 6,197 (12,843) (33,765) 199,823 --------- --------- --------- --------- --------- Equity basedcompensation expense - 5,099 - - 5,099Restricted share unitsvested 2,071 (2,071) - - -Share optionsexercised 4,585 (2,090) - - 2,495or exchangedMovement in cumulativetranslation adjustment - - 17,119 - 17,119Profit for the period - - - 3,002 3,002 --------- --------- --------- --------- --------- 6,656 938 17,119 3,002 27,715 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------Balance - 31 December2006 246,890 7,135 4,276 (30,763) 227,538 --------- --------- --------- --------- --------- The accompanying notes are an integral part of these consolidated financial statements. Consolidated Statements of Cash FlowsFor the years ended 31 December 2006and 2005(in thousands of US Dollars, except per share amounts) 2006 2005 Note $ $Cash flows from operating activitiesProfit/(loss) for the year 3,002 (10,410)Foreign exchange loss 568 1,384Amortisation 2,189 364Equity based compensation expense 2,810 1,956Impairment of mineral properties - 2,362Accretion of asset retirement obligation 10 111 267Future tax asset recognised 4,823 (1,729)Non-controlling interest 4,182 (1,212)Depletion of mineral properties 6 1,685 69 --------- --------- 19,370 (6,949) Net changes in non-cash working capital 13 (3,995) (4,769) --------- --------- 15,375 (11,718) --------- --------- Cash flows from investing activitiesDeferred exploration and development costs - Romania (3,294) (3,901)Plant and equipment - Greece (7,579) (7,839)Deferred development costs - Greece (4,032) (2,840)Proceeds from disposal of equipment - 42Purchase of equipment (166) (219)Restricted investment 23 (3,543) --------- --------- (15,048) (18,300) --------- --------- Cash flows from financing activitiesProceeds from exercise of share options 2,495 170Share issue costs - (14) --------- --------- 2,495 156 --------- --------- Effect of foreign currency translation on cash 1,229 (4,855) --------- --------- Increase/(decrease) in cash and cash equivalents 4,051 (34,717) Cash and cash equivalents - Beginning of year 30,536 65,253 --------- --------- Cash and cash equivalents - End of year 34,587 30,536 --------- --------- The accompanying notes are an integral part of these consolidated financial statements. Notes to Consolidated Financial Statements For the years ended 31 December 2006 and 2005 (in thousands of US Dollars, except per share amounts) 1. Nature of operations European Goldfields Limited (the "Company"), a company incorporated under theYukon Business Corporations Act, is a resource company involved in theacquisition, 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 StockExchange and on the Toronto Stock Exchange (TSX) under the symbol "EGU". Greece - The Company holds a 65% interest in Hellas Gold S.A ("Hellas Gold").Hellas Gold owns the three major gold and base metal deposits of Stratoni,Skouries and Olympias in Northern Greece.Hellas Gold commenced production at Stratoni in September 2005 and selling anexisting stockpile of Olympias gold concentrates in July 2006. Hellas Gold isapplying for permits to develop the Skouries and Olympias projects. Romania - The Company owns 80% of the Certej gold/silver project in Romania. TheCompany submitted in March 2007 a technical feasibility study to the Romaniangovernment, in support of a permit application to develop the project. The underlying value of the deferred exploration and development costs formineral properties 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. Significant accounting policies These consolidated financial statements have been prepared on the going concernbasis in accordance with accounting principles generally accepted in Canada("Canadian GAAP") and reflect the following significant accounting 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) Limited England 100% ownedDeva Gold (Barbados) Ltd Barbados 100% ownedCastle Europa Ltd * Barbados 100% ownedDeva Gold S.A. Romania 80% ownedEuropean Goldfields Deva SRL Romania 100% ownedEuropean Goldfields Mining (Netherlands) B.V. Netherlands 100% ownedEuropean Goldfields (Greece) B.V. Netherlands 100% ownedGlobal Mineral Resources Limited * Barbados 100% ownedGlobal Mineral Resources Holdings S.a.r.l.** Luxembourg 100% ownedGlobal Mineral Resources S.a.r.l.** Luxembourg 100% ownedHellas Gold S.A. Greece 65% owned* Dissolved during the financial year ended 31 December 2005.** Dissolved during the financial year ended 31 December 2006. The 20% minority interest held in the Company's 80% owned subsidiary, Deva GoldS.A. ("Deva Gold"), is not accounted for in these consolidated financialstatements. The basis for this treatment is that the Company is required to fund100% of all costs related to the exploration and development of the mineralproperties held by Deva Gold. As a result, the Company is entitled to the refundof such costs (plus interest) out of future cash flows generated by Deva Gold,prior to any dividends being distributed to shareholders. 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 ofdeferred exploration and development costs for mineral properties.While management believes that these estimates and assumptions are reasonable,actual results could 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 assets and liabilities are determined based on differencesbetween the financial reporting and tax bases of assets and liabilities, and aremeasured using the substantially enacted tax rates and laws that will be ineffect when the differences are expected to reverse. The benefit of thetemporary differences is not recognised to the extent the recoverability offuture income tax assets is not 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. 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 to fair value accordingly and thewrite-down amount charged 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. The Company accounts for allsubsidiaries except Hellas Gold as integrated foreign subsidiaries. Self-sustaining foreign subsidiaries are accounted for under the current ratemethod. Under this method, all assets and liabilities are translated at theexchange rate in effect at the balance sheet date. Revenue and expenses aretranslated at actual or average rates for the period. Exchange gains or lossesarising from the translation are recorded in equity in the cumulativetranslation adjustment account. The Company accounts for Hellas Gold as aself-sustaining foreign subsidiary. Revenue recognition Revenues from the sale of concentrates are recognised and are recorded at marketprices when title transfers and the rights and obligations of ownership pass tothe customer. A number of the Company's concentrate products are sold underpricing arrangements where final prices are determined by quoted market pricesin a period subsequent to the date of sale. These concentrates are provisionallypriced at the time of sale based on forward prices for the expected date of thefinal settlement. The terms of the contracts result in non-hedge derivativesthat do not qualify for hedge accounting treatment, because of the differencebetween the provisional price and the final settlement price. These embeddedderivatives, if material, are adjusted to fair value through revenue each perioduntil the date of final price determination. Subsequent variations in the priceare recognised as revenue adjustments as they occur until the price isfinalised. Earnings per share ("EPS") EPS is calculated based on the weighted average number of common shares issuedand outstanding during 2006 being 113,538,772 (2005 - 112,098,010). Diluted pershare amounts are calculated using the treasury stock method whereby proceedsdeemed to be received on the exercise or exchange of share options and warrantsand on the granting of restricted share units in the per share calculation areapplied to reacquire common shares. Financial instruments The Company's financial instruments consist of cash and cash equivalents,accounts receivable, restricted investments, future income tax assets andliabilities, accounts payable and accrued liabilities.Unless otherwise noted, it is management's opinion that the Company is notexposed to significant interest or credit risks arising from these financialinstruments. The fair values of these financial instruments approximate theircarrying values unless 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$2,859 denominated in euros. The Company does not currently have any hedging policies or practices in place. Equity-based compensation The Company operates a share option plan and a restricted share unit plan. TheCompany accounts for equity-based compensation granted under such plans usingthe fair value method of accounting. Under such method, the cost of equity-basedcompensation is estimated at fair value and is recognised in the profit and lossstatement as an expense, or capitalised to deferred exploration and developmentcosts when the compensation can be attributed to mineral properties. This costis amortised over the relevant vesting period for grants to directors, officersand employees, and recorded in full on the date of grant for grants tonon-employees. Any consideration received by the Company on exercise of shareoptions is credited to share capital. Cash and cash equivalents Cash and cash equivalents include cash and deposits with original maturities ofthree months or less. Asset retirement obligation The fair value of the liability of an asset retirement obligation is recordedwhen it is legally incurred and the corresponding increase to the mineralproperty is depreciated over the life of the mineral property.The liability is increased over time to reflect an accretion element consideredin the initial measurement at fair value. As at 31 December 2006, the Companyhad an asset retirement obligation relating to its Stratoni property in Greece. Impairment of long-lived assets All long-lived assets and intangibles held and used by the Company are reviewedfor possible impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable. If changes incircumstances indicate that the carrying amount of an asset that an entityexpects to hold and use may not be recoverable, future cash flows expected toresult from the use of the asset and its disposition must be estimated. If theundiscounted value of the future cash flows is less than the carrying amount ofthe asset, impairment is recognised based on the fair value of the assets. Inventory Inventories of ore mined and metal concentrates are valued at the lower ofcombined production cost and net realisable value. Production costs include thecosts directly related to bringing the inventory to its current condition andlocation, such as materials, labour, mine site overheads, related depreciationof mining and processing facilities, related depletion of mineral properties anddeferred exploration and development costs. Exploration materials and suppliesare valued at the lower of cost and net realisable value. 3. Accounts receivable, prepaid expenses and supplies This balance comprises the following: 2006 2005 $ $Value added taxes recoverable 8,079 2,950Accounts receivable 6,866 2,236 --------- --------- 14,945 5,186 --------- --------- 4. Inventory This balance comprises the following: 2006 2005 $ $Ore mined 225 583Metal concentrates 154 1,274Material and supplies 475 45 --------- --------- 854 1,902 --------- --------- 5. Plant and equipment Exploration / Vehicles Land and Leasehold Total office buildings Improvements equipment $ $ $ $ $ Cost - 2005 At 31 December2004 1,389 1,121 11,379 219 14,108 Additions 4,318 190 3,546 4 8,058Disposals - (42) - - (42)Currencytranslationadjustment (148) (135) (1,523) - (1,806) -------- -------- -------- ---------- --------At 31 December2005 5,559 1,134 13,402 223 20,318 -------- -------- -------- ---------- -------- Accumulatedamortisation -2005 At 31 December2004 132 262 16 11 421 Provision forthe year 321 150 134 22 627Disposals - - - - -Currencytranslationadjustment (33) (40) (31) - (104) -------- -------- -------- ---------- --------At 31 December2005 420 372 119 33 944 -------- -------- -------- ---------- -------- -------- -------- -------- ---------- --------Net book valueat 31 December2005 5,139 762 13,283 190 19,374 -------- -------- -------- ---------- -------- Cost - 2006 At 31 December 2005 5,559 1,134 13,402 223 20,318 Additions 7,059 - 653 33 7,745Disposals (2) - - - (2)Currency translation adjustment 604 102 1,554 - 2,260 -------- -------- -------- ---------- --------At 31 December 2006 13,220 1,236 15,609 256 30,321 -------- -------- -------- ---------- -------- Accumulated amortisation - 2006 At 31 December 2005 420 372 119 33 944 Provision for the year 1,170 265 699 26 2,160Disposals (1) - - - (1)Currency translation adjustment 92 52 67 - 211 -------- -------- -------- ---------- --------At 31 December 2006 1,681 689 885 59 3,314 -------- -------- -------- ---------- -------- -------- -------- -------- ---------- --------Net book value at 31 December 11,539 547 14,724 197 27,0072006 -------- -------- -------- ---------- -------- 6. Deferred exploration and development costs Greek mineral properties: Stratoni Olympias Skouries Total $ $ $ $ ---------- ---------- ----------- ---------Balance - 31 December 2004 16,108 108,068 71,631 195,807 ---------- ---------- ----------- --------- Deferred development costs 421 1,939 687 3,047Depletion of mineral properties (168) - - (168)Currency translation adjustment (1,500) (14,625) (9,694) (25,819) ---------- ---------- ----------- --------- (1,247) (12,686) (9,007) 22,940 ---------- ---------- ----------- ---------Balance - 31 December 2005 14,861 95,382 62,624 172,867 ---------- ---------- ----------- --------- Deferred development costs 167 1,531 4,069 5,767Depletion of mineral properties (1,527) (81) - (1,608)Currency translation adjustment 1,176 11,246 7,386 19,808 ---------- ---------- ----------- --------- (184) 12,696 11,455 23,967 ---------- ---------- ----------- ---------Balance - 31 December 2006 14,677 108,078 74,079 196,834 ---------- ---------- ----------- --------- The Stratoni, Skouries and Olympias properties are held by the Company's65%-owned subsidiary, Hellas Gold. In September 2005, the Stratoni propertycommenced production. Romanian mineral properties: Certej Bolcana Baita-Craciunes Voia Cainel Total ti $ $ $ $ $ $ -------- -------- -------- -------- -------- --------Balance - 31December 2004 21,031 2,279 2,567 455 - 26,332 -------- -------- -------- -------- -------- -------- Drilling andassaying 487 10 157 1 396 1,051Geosciences andtech.consulting 429 20 48 25 189 711Samplers,miners andsurveying 89 8 6 - 153 256Projectmanagement 269 1 (8) 24 78 364Projectoverhead 995 31 165 7 161 1,359Amortisation 100 13 13 1 5 132Impairment ofmineralproperties - (2,362) - - - (2,362) -------- -------- -------- -------- -------- -------- 2,369 (2,279) 381 58 982 1,511 -------- -------- -------- -------- -------- --------Balance - 31December 2005 23,400 - 2,948 513 982 27,843 -------- -------- -------- -------- -------- -------- Drilling and assaying 802 - 9 109 2 922Geosciences and tech. 685 - 38 70 7 800consultingSamplers, miners and 55 - 5 5 - 65surveyingProject management 266 - 6 28 - 300Project overhead 1,581 - 50 118 11 1,760Amortisation 73 - 8 1 10 92 -------- -------- -------- -------- -------- -------- 3,462 - 116 331 30 3,939 -------- -------- -------- -------- -------- --------Balance - 31 December 2006 26,862 - 3,064 844 1,012 31,782 -------- -------- -------- -------- -------- -------- The Certej exploitation licence and the Baita-Craciunesti exploration licenceare held by the Company's 80%-owned subsidiary, Deva Gold. Minvest S.A. (aRomanian state owned mining company), together with three private Romaniancompanies, hold the remaining 20% interest in Deva Gold and the Company holdsthe pre-emptive right to acquire such 20% interest. The Company is required tofund 100% of all costs related to the exploration and development of theseproperties. 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 anydividends being distributed to shareholders. The Voia and Cainel explorationlicences are held by the Company's wholly-owned subsidiary, European GoldfieldsDeva SRL. Effective 31 December 2005, the Company relinquished its exploitation licensefor the Bolcana perimeter in Romania and a provision for the costs of thisproperty was recorded. Individual property spending commitments for each of the Company's Romanianlicences have been met as at 31 December 2006. 7. Restricted investment The balance consists of an amount of $3,926 (€3 million) pledged by Hellas Goldto the National Bank of Greece as collateral for a letter of guarantee issued bythe National Bank of Greece to the Greek Ministry of Development to guaranteeHellas Gold's environmental commitments under its mining permit at Stratoni. Theletter of guarantee expires on 31 December 2010. The investment bears a rate ofinterest of Euribor plus 0.8% per annum. 8. Income taxesThe following table reconciles the expected income tax recovery at the Canadianstatutory income tax rate to the amounts recognised in the consolidatedstatements of profit and loss: 2006 2005 $ $ --------- ---------Income tax rate 37.12% 36.12%Income taxes at statutory rates 4,457 (4,373)Tax rate difference from foreign jurisdictions (1,399) 501Permanent differences 1,004 757Change in tax rate 603 (64)Currency translation adjustment - -Change in valuation allowance 159 1,451Large corporations tax - 9Other - 25 --------- --------- 4,824 (1,694) --------- --------- The following table reflects future income tax assets: 2006 2005 $ $Loss carry forwards 6,620 10,280Retirement obligation 251 1,388Plant and equipment 17 22Inventory - 9Personal indemnities 26 -Accruals 444 -Valuation allowance (6,620) (6,461) --------- ---------Future income tax recognised 738 5,238 --------- --------- The following table reflects future income tax liabilities: 2006 2005 $ $ --------- ---------Mineral properties 45,674 41,213Plant and equipment 244 1,276Exploration and development expenditure 2,232 772 --------- --------- 48,150 43,261 --------- --------- The tax liability arises as a result of the increase in value placed on themineral properties held by Hellas Gold on acquisition by the Company. Thisfuture tax liability will reverse as the corresponding mineral properties areamortised. As at 31 December 2006, the Company has available tax losses for income taxpurposes of approximately $14,545 (2005 - $32,158) which may be carried forwardto reduce taxable income derived in future years. The non-capital losses willexpire as follows: 2006 $ --------- 2009 793 2010 1,943 2014 6,428 2015 2,598 Non expiring losses 2,783 --------- 14,545 --------- In addition, the Company incurred share issue costs and other deductibletemporary differences, which have not yet been claimed for income tax purposes,totalling approximately $3,117 as at 31 December 2006 (2005 - $5,050). Subjectto certain restrictions, exploration and development expenditures available toreduce taxable income in Romania was $27,343 as at 31 December 2006 (2005 -$23,405). A valuation allowance has been provided as a portion of the potential income taxbenefits of these carry-forward non-capital losses and deductible temporarydifferences and the realisation thereof is not considered more likely than not. 9. Accounts payable and accrued liabilities The balance principally comprises amounts outstanding for normal operations andongoing costs. The average credit period taken during the financial year ended31 December 2006 was 30 days(2005 - 30 days). 10. Asset retirement obligation Management has estimated the total future asset retirement obligation based onthe Company's net ownership interest in the Olympias, Skouries and Stratonimines and facilities. This includes all estimated costs to dismantle, remove,reclaim and abandon the facilities at the Stratoni property, and the estimatedtime period during which these costs will be incurred in the future. Thefollowing table reconciles the asset retirement obligation for the financialyears ended 31 December 2006 and 2005: 2006 2005 $ $ --------- ---------Asset retirement obligation - Beginning of year 5,307 5,811Currency translation adjustment 613 (771)Accretion expense 111 267 --------- ---------Asset retirement obligation - End of year 6,031 5,307 --------- --------- As at 31 December 2006, the undiscounted amount of estimated cash flows requiredto settle the obligation is $6,639 (2005 - $5,970). The estimated cash flow hasbeen discounted using a credit adjusted risk free rate of 5.04%. The expectedperiod until settlement is six years. 11. 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 2004 111,748,708 238,420 --------- --------- Restricted share units vested 425,000 815Milestone shares issued as compensation 350,000 725Share options exercised 75,000 287Share issue costs - (13) --------- --------- 850,000 1,814 --------- --------- --------- ---------Balance - 31 December 2005 112,598,708 240,234 --------- --------- Restricted share units vested 830,000 2,071Share options exercised or exchanged 1,373,140 4,585Share issue costs - - --------- --------- 2,203,140 6,656 --------- --------- --------- ---------Balance - 31 December 2006 114,801,848 246,890 --------- --------- As at 31 December 2006, the Company had Nil common shares held in escrow or inrespect of which trading restrictions applied. Contributed surplus: 2006 2005 $ $Equity based compensation expense 6,557 5,619Broker warrants 578 578 --------- --------- 7,135 6,197 --------- --------- 12. Share options, restricted share units and milestone shares Share Option Plan The Company operates a Share Option Plan (together with its predecessor, the"Share Option Plan") authorising the directors to grant options to acquirecommon shares of the Company to the directors, officers, employees andconsultants of the Company and its subsidiaries, on terms that the Board ofDirectors may determine, within the limitations of the Share Option Plan. Themaximum number of common shares of the Company which may be reserved forissuance for all purposes under the Share Option Plan shall not exceed 15% ofthe common shares issued and outstanding from time to time (17,220,277 shares asat 31 December 2006) An optionee under the Share Option Plan may elect to dispose of its rights underall or part of its options(the "Exchanged Rights") in exchange for the following number of common sharesof the Company (or at the Company's option for cash) in settlement thereof (the"Settlement Common Shares"): Number of = Number of Optioned X (Current Price - Exercise Price)Settlement Shares issuable onCommon exercise of theShares Exchanged Rights Current Price As at 31 December 2006, the following share options were outstanding: Number of Exercise Options price C$Expiry date 2007 50,000 2.50 2009 325,000 2.80 2009 120,000 3.20 2009 250,000 4.20 2009 535,000 3.07 2009 125,000 3.15 2010 708,665 2.00 2010 50,000 2.11 2010 150,000 2.40 2011 100,000 3.25 2011 600,000 3.85 2011 200,000 4.10 --------- --------- 3,213,665 3.06 --------- --------- During the financial years ended 31 December 2006 and 2005, share options weregranted, exercised, exchanged and cancelled as follows: Number of Weighted Options average exercise price C$ --------- ---------Balance - 31 December 2004 4,015,000 2.85 --------- --------- Options granted 1,626,000 2.04Options exercised (75,000) 2.80Options cancelled (881,667) 2.78 --------- ---------Balance - 31 December 2005 4,684,333 2.58 --------- --------- Options granted 900,000 3.84Options exercised (1,109,168) 2.53Options exchanged for shares (592,334) 2.56Options cancelled (669,166) 2.43 --------- ---------Balance - 31 December 2006 3,213,665 3.06 --------- --------- Of the 3,213,665 share options outstanding as at 31 December 2006, 2,346,999were fully vested and had a weighted average exercise price of C$2.90 per share. The weighted average grant date fair value of the 900,000 share options grantedduring the financial year ended 31 December 2006 (2005 - 1,626,000) was C$3.84(2005 - C$2.04). For outstanding share options which were not fully vestedduring the financial year ended 31 December 2006, the Company incurred a totalequity-based compensation cost of $1,538 (2005 - $940) of which $1,156 (2005 -$498) has been recognised as an expense in the income statement and $382 (2005 -$442) has been capitalised to deferred exploration and development costs. The fair value of the share options granted has been estimated at the date ofgrant using a Black-Scholes option pricing model with the following assumptions:weighted average risk free interest rate of 2.75%(2005 - 2.25%); volatility factor of the expected market price of the Company'sshares of 52% to 59%(2005 - 53.98% to 60.60%); and a weighted average expected life of the shareoptions of five years(2005 - 5 years). Restricted Share Unit Plan The Company operates a Restricted Share Unit Plan (the "RSU Plan") authorisingthe directors, based on recommendations received from the CompensationCommittee, to grant Restricted Share Units ("RSUs") to designated directors,officers, employees and consultants. The RSUs are "phantom" shares that rise andfall in value based on the value of the Company's common shares and are redeemedfor actual common shares on the vesting dates determined by the Board ofDirectors when the RSUs are granted. The RSUs vest on the dates below howeverupon a change of control of the Company they would typically become 100% vested.The maximum number of common shares of the Company which may be reserved forissuance for all purposes under the RSU Plan shall not exceed 2.5% of the commonshares issued and outstanding from time to time (2,870,046 shares as at 31December 2006). As at 31 December 2006, the following RSUs were outstanding: Vesting date Number of Grant date RSUs fair value of underlying shares C$ 31 May 2007 75,000 3.2430 June 2007 60,000 3.241 July 2007 * 250,000 4.0431 December 2007 350,000 2.1931 December 2007 235,000 4.0431 December 2007 ** 60,000 3.2431 May 2008 75,000 3.24 --------- --------- 1,105,000 3.26 --------- ---------* Or earlier if certain operational milestones are achieved. Vesting conditionalupon such milestones being achieved by 1 July 2007.** Provided certain operational milestones are achieved by 1 July 2007. During the financial years ended 31 December 2006 and 2005, RSUs were granted,vested and cancelled as follows: --------- Number of Weighted RSUs average grant date fair value of underlying shares C$ --------- ---------Balance - 31 December 2004 - - --------- --------- RSUs granted 1,175,000 2.20RSUs vested (425,000) 2.22RSUs cancelled - - --------- ---------Balance - 31 December 2005 750,000 2.19 --------- --------- RSUs granted 1,335,000 3.75RSUs vested (830,000) 2.94RSUs cancelled (150,000) 4.04 --------- ---------Balance - 31 December 2006 1,105,000 3.26 --------- --------- The weighted average grant date fair value of underlying shares of the 1,335,000RSUs granted during the financial year ended 31 December 2006 (2005 - 1,175,000)was C$3.75 (2005 - $2.20). For outstanding RSUs which were not fully vestedduring the financial year ended 31 December 2006, the Company incurred a totalequity-based compensation cost of $3,561 (2005 - $1,324) of which $1,654 (2005 -$324) has been recognised as an expense in the income statement and $1,907 (2005- $Nil) has been capitalised to deferred exploration and development costs. 13. Supplementary cash flow information 2006 2005 $ $ --------- ---------Changes in non-cash operating accounts:Accounts receivable and prepaid expenses (10,863) (3,305)Inventory 1,055 (1,633)Accounts payable and accrued liabilities 5,813 169 --------- --------- (3,995) (4,769) --------- --------- Supplemental cash flow information:Income taxes paid - 34 Supplemental disclosure of non-cash transactions:Share options issued for non-cash consideration 5,099 -Milestone shares issued as compensation - (725)Exercise or exchange of share options - Transfer fromcontributed surplus (2,090) (117)to share capitalVesting of restricted share units (2,071) (815) 14. Commitments As at 31 December 2006, the Company had remaining spending commitments of $1,129(2005 - $1,459) over the remaining term of its Voia exploration licence inRomania which expires in March 2007. The Company has spending commitments of $187 per year (plus service charges andvalue added tax) for a term of ten years under the lease for its office inLondon, England, which commenced in April 2004. The rent will be reviewed on thefifth anniversary of the commencement of the term to reflect any increase inrents in the market. As at 31 December 2006, Hellas Gold had entered into off-take agreementspursuant to which Hellas Gold agreed to sell the following quantities of metalconcentrates during the financial years ending31 December 2006, 2007 and 2008: 2006 2007 2008 (dry metric tonnes) ----------------------- --------- --------- Zinc concentrates (Stratoni) 42,700 51,000 15,000Lead/silver concentrates (Stratoni) 25,000 26,000 20,000Gold concentrates (Olympias) 15,940 43,000 - --------- --------- --------- 83,640 120,000 35,000 --------- --------- --------- As at 31 December 2006, 34,649 dmt of zinc concentrates, 15,735 dmt of lead/silver concentrates and 15,546 dmt of gold concentrates had been sold on accountof the 2006 commitments. 15. Transactions with related parties During the financial year ended 31 December 2006, Hellas Gold incurred costs of$18,045 (2005 - $9,657) for management, technical and engineering servicesreceived from a related party, Aktor S.A.,a 35% shareholder in Hellas Gold. As at 31 December 2006, Hellas Gold hadaccounts payable of $4,181 (2005 - $1,466) to Aktor S.A. These expenses werecontracted in the normal course of operations and are recorded at the exchangeamount agreed by the parties. 16. Segmented information The Company has one operating segment: the acquisition, exploration anddevelopment of precious and base metal mineral resources properties located inGreece and Romania. Geographic segmentation of plant and equipment and deferred exploration anddevelopment costs and operating liabilities is as follows: 2006 2005 $ $ --------- --------- RevenueCanada - -Greece 52,438 1,521Romania - -United Kingdom - - --------- --------- 52,438 1,521 --------- --------- Plant and equipment and deferred exploration and development costsCanada - -Greece 223,286 191,659Romania 32,010 28,081United Kingdom 325 344 --------- --------- 255,621 220,084 --------- --------- Operating liabilitiesCanada 226 214Greece 7,625 3,144Romania 304 310United Kingdom 1,647 320 --------- --------- 9,802 3,988 --------- --------- 17. Earnings per share The calculation of the basic and diluted earnings per share attributable toholders of the Company's common shares is based as follows: 2006 2005 $ $ --------- ---------Earnings 3,002 (10,410)Effect of dilutive potential common shares - - --------- ---------Diluted earnings 3,002 (10,410) --------- --------- Weighted average number of common shares for the purposeof basic earnings per share 113,539 112,098Incremental shares - share options 867 -Incremental shares - restricted share units 1,313 - --------- ---------Weighted average number of common shares for the purposeof diluted earnings per share 115,719 112,098 --------- --------- 18. Reclassification of comparative figures Certain comparative figures have been reclassified to conform to the currentyear's presentation. 19. Legal proceedings The Company, from time to time, is involved in various claims, legal proceedingsand complaints arising in the ordinary course of business, including withrespect to its licences and permits. Such legal proceedings are, in the opinionof management, either unfounded (in fact or in law) or would not have a materialadverse effect on the consolidated financial condition or future results of theCompany. There are no such proceedings known to the Company to be contemplated. 20. Post balance sheet event Since 31 December 2006, the Company granted 180,000 restricted share units underthe Company's Restricted Share Unit Plan. Since 31 December 2006, the Company issued 44,747 common shares pursuant to theexchangeof 92,000 outstanding share options under the Company's Share Option Plan. In February 2007, Hellas Gold entered into an off-take agreement with GoldenChina Resources Corporation for the sale of 100,000 tonnes of gold bearingpyrite concentrates previously produced at the Olympias mine in Greece. Thisconcentrate will be treated over a three year period on an equal profit sharebasis at Golden China's new dedicated bacterial oxidation plant in Shandong,China, which is expected to be commissioned in September 2007. In May 2006,Hellas Gold signed an initial contract for the sale of 18,000 tonnes ofconcentrates by April 2007 for processing at Golden China's existing bacterialoxidation plant in Shandong. This initial contract has also been extended forthe sale of an additional 30,000 tonnes of concentrates between May 2007 and 31December 2008. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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