29th Mar 2006 07:03
European Goldfields Ltd29 March 2006 For Immediate Release 29 March 2006 EUROPEAN GOLDFIELDS LTD RESULTS FOR 2005 COMMENCED PRODUCTION AT STRATONI INAUGURAL GROSS PROFIT IN GREECE FOR Q4 2005 BUSINESS PLANS COMPLETED FOR OLYMPIAS & SKOURIES CERTEJ PROJECT MOVING FORWARD European Goldfields Limited (AIM: EGU / TSX: EGU) ("European Goldfields" or the"Company") today reports its results for the financial year ended 31 December2005. Highlights of the year are: Greece: • Commenced production at Stratoni in October 2005 • Hellas Gold awarded all environmental and mining permits for its Stratoni mine; plant commissioned in September 2005, underground mining commenced in late October, off-take agreements signed in November and first concentrates shipped in December • Hellas Gold records inaugural gross profit for Q4 2005; first revenue booked in December 2005 from sale of Stratoni concentrates • Work progressing on new Stratoni decline, leading to production ramp-up in 2007 • Business plans submitted to the Greek government in January 2006, the first major step in applying for permits to develop major projects of Skouries and Olympias • Increased Stratoni reserve by 17% Romania: • In-house pre-feasibility study on Certej completed, confirming that a high-grade gold/silver concentrate can be produced at a gold recovery of > 87% from open-pit mining • Letters of interest received for sale of Certej gold/silver concentrate • Environmental Impact Assessments completed • Promising exploration results on Certej satellites; joint venture signed for the exploration of a new mining concession in Romania at Magura Tebii Corporate: • Management team-building completed with appointments of Neil Hepworth as VP Operations and Jeff O'Leary as Non-executive Director • Loss for 2005 down by almost 50% compared to 2004; US$34 million in cash assets and financial instruments at 31 December 2005; funded through 2007 until permits awarded for Olympias, Skouries and Certej • Increased analyst coverage; broadened shareholder base and improved share liquidity; appointed Williams de Broe and RBC Capital Markets as brokers Commenting on the results, David Reading, Chief Executive Officer of EuropeanGoldfields, said: "European Goldfields had a successful year in its evolution toa mid-tier producer by delivering on its promises in 2005: production from ourbase metal mine at Stratoni commenced in late October, cash flow has beensecured through off-take agreements for the sale of concentrates produced atStratoni, business plans were submitted to the Greek government for thedevelopment of the major gold and base metals projects of Skouries and Olympias,and the in-house pre-feasibility study on the Certej deposit in Romania wascompleted, demonstrating the viability of the project. These events have createdthe platform for European Goldfields to become one of Europe's most significantmining and development companies." Stratoni underpins the value The year 2005 was a busy one at the Stratoni mine. Refurbishment of existingunderground, plant and port facilities was completed by mid year and bySeptember all the necessary environmental and mining permits were received. Themill and flotation plant was successfully commissioned in the same month and bylate October we were in the position to start underground mining operations. During the two months to the end of December, the Stratoni plant processed over16,000 tonnes of ore and a further 11,000 remained on the stockpile. InDecember, some 2,500 tonnes of concentrates grading 52% zinc was shipped andsold. The modest Stratoni figures represent a promising start as over tenworking ends were opened up and the underground infrastructure was repaired andequipped in order to increase production. This preparatory work has facilitateda solid platform for production build-up, which saw us move from 300 tonnes perday (tpd) in December to 400 tpd in January and 500 tpd in March 2006.Furthermore, the plant was commissioned without any technical problems, andoptimum recoveries of above 90% are now being achieved. Good progress has also been made on the new decline, which is now 130 metres in,and through the bad ground associated with the footwall fault zone. The declineis not necessary for mining in 2006 but becomes critical for the futureproduction ramp-up involving the deeper portions of the orebody as well asproviding potential exploration upside. The ore production forecast for 2006 is170,000 tonnes, which is expected to increase steadily thereafter up to amaximum of 400,000 tonnes per annum. The Stratoni project underpins the value of the Company. Off-take agreements forthe sale of concentrates have been signed and secure our sales until mid 2008.The Company negotiated very favourable terms which included some of the lowesttreatment charges on record. This reflects the fact that Stratoni is the onlynew zinc and lead producer to come on stream in 2005 and coincides with a strongupturn in the prices of these metals. The fourth-quarter results for our 65% Greek subsidiary, Hellas Gold, reflectthis robustness with the announcement of an inaugural gross profit for thequarter. In summary, Stratoni is a robust business with minimal capital investment duethe extensive existing infrastructure and also has well-defined reserves over asix-year life. The project has exciting exploration upside as the orebody isopen in all directions and the new decline is transgressing the zone betweenold, mined-out areas and the current reserve. All these areas will be thesubject to new exploration drilling during the forthcoming year. Permit process for gold projects commences with submission of business plans In January 2006, Hellas Gold submitted business plans to the Greek governmentfor the major gold and base metals projects of Skouries and Olympias,effectively starting the permitting process for these mines. The emphasis is on a phased approach for capital and project development, withpriority assigned to full production from the Skouries copper - gold project. AtOlympias, the initial development is designed to utilise existing infrastructureand focus on the sale of concentrates with production ramp-up and building of agold plant occurring in later years. The phased strategy reflects cognizance of project history, a practical approachto project building and takes into account the concerns and issues of localstakeholders. The submission of these plans is a major milestone in theCompany's history involving the collaboration of our Greek and London teams, aswell as extensive input from external consultants. Skouries is a robust project at copper prices of $1.06/lb and gold at $400/oz.The project has simple metallurgy and a low strip ratio, with open-pit miningfollowed by underground development. Skouries will produce some 750,000 tonnesof copper metal and 3.6 Moz of gold over a 20-year life. Skouries is located onan uninhabited, high plateau, but close to roads, power and waterinfrastructures. The latest paste production technology has been incorporated inthe tailings management facility to minimise and control active waste areas. TheSkouries project is well researched, and updating the bankable feasibility studywill be straightforward and achievable during 2006. We believe that on receiptof the permits the project can be built in approximately 18 months. Olympias has two distinct advantages: existing shaft and undergroundinfrastructure down to a depth of400 metres below surface, and stockpiles of gold concentrates (270,000 tonnesgrading +20 g/t gold), which we intend to sell as soon as possible, some in2006. The business plan is phased with underground production expected tocommence at 250,000 tonnes per annum (tpa) and ramping-up to 900,000 tpa overeight years. The sale of surface stockpiles will generate early cash flow andthe plan is to continue selling gold and base metal concentrates during theproduction ramp-up. In the final phase, a new decline will be used to convey oreto a plant complex involving concentrator, gold plant and tailings managementfacility that will be centralised in the Stratoni valley. The phasing of theproject allows time for optimisation and development of the metallurgicalprocess for the treatment of auriferous arsenopyrite/pyrite concentrates, asthis is still in the research and development stage. Submission of the business plans is a significant milestone in the Company'sdevelopment as it effectively engages the Greek government and the localcommunities in our development plans for the projects, and starts the clock oncountdown to receiving the necessary permits to commence mining. Turning the corner in Romania In 2005, the Romanian exploration and feasibility team took great steps towardsproject development by understanding the grade, mining potential and metallurgyof our Certej gold project. A promising in-house pre-feasibility study wascompleted showing that Certej could produce a viable return at a gold price of$425/oz and above by way of open-pit mining and production of high-gradeconcentrates, which could be sold commercially or oxidised on site to producegold dore. With this study, the project has now turned the corner. We are now completing afinal feasibility study for submission to the Romanian government in support ofour permit application. We have completed final pit optimisation studies basedon new geotechnical drilling and levels I and II of the Environmental ImpactAssessment have been completed. We have also received letters of interest frommetal traders for the Certej concentrate, which will enable us to file forproject reserves in Q2 2006. On the exploration front, our teams continue to evaluate satellite targetssurrounding Certej, and encouraging results to date suggest we can probablysupply additional gold ounces to the Certej project. The Company has alsoentered into a JV agreement with a local Romanian company to drill-test theMagura Tebii prospect, an attractive exploration target located 35 km north-westof Certej. European Goldfields: a mining and development company Many of our longstanding shareholders have remarked that European Goldfields isa very different company from the one that they knew over two years ago. Thisstatement is endorsed by the instalment of new management and technical teams,our project pipeline, the commencement of production and revenue-generation, ourstrong cash position and reduction in expenditure, and finally the broadening ofour shareholder base and improvement in share liquidity during the second halfof 2006. All these events have transformed the Company into a mining anddevelopment group that is on track to become a mid-tier producer by the end of2008. In addition to Hellas Gold's inaugural gross profit for Q4 2005, we are alsopleased to report that European Goldfields' loss for 2005 was down by almost 50%compared to 2004, reflecting the Company's increasing control over costs andbetter management of assets. The Company also had US$34 million in cash assetsand financial instruments at 31 December 2005, which is expected to providefunding through 2007, covering the permitting process for Olympias, Skouries andCertej. 2006 and beyond: a new commodity cycle The forthcoming year is a very important one for European Goldfields. Our production team in Greece is focused on mining and processing 170,000 tonsof ore from Stratoni and completing the new decline. Subsequent to submission ofthe business plans for the major gold and base metal projects of Skouries andOlympias, we are now in the permitting process and currently preparing ourEnvironmental Impact Assessment. In parallel with this work, we will be updatingthe Skouries feasibility study and completing our final mining studies forOlympias. Our view on permitting is that we have successfully completed thisprocess once for Stratoni, and will be dealing with all of the same governmentand local stakeholders again for the Skouries and Olympias projects. In Romania, considerable progress has been made in the completion of the pitoptimisation and metallurgical studies in order to file for reserves. Workcontinues on the forthcoming submission of a final feasibility study to thegovernment so that we can begin the permitting process on the Certej project. The Company's project pipeline gives many value-creating opportunities withinthe current commodity cycle. These include the ability to sell our stockpile ofgold concentrates at Olympias (270,000 tonnes grading +20 g/t gold) and theopportunity to immediately monetise a portion of our Stratoni silver reserve. Weare currently aggressively pursuing these opportunities in order to giveourselves flexibility in the financing of the Skouries and Olympias projects. In 2006, we will also initiate a focused exploration programme at Stratoni todefine further resources within ore-bearing marble horizons between the twoknown deposits and around the peripheries of the existing reserves. In additionto this, we have also initiated a generative study to outline targets forfollow-up exploration. This work will form a solid platform for brown fieldexploration for further major Olympias and Skouries-style deposits in 2007within our 317 km(2) of highly prospective permits in northern Greece. In summary, the Company now has a clear strategic direction with a managementteam capable of delivering on our promises. It is a great time to be a silver,zinc and lead producer and the revenue-generation provides a strong platform forfurther project development. European Goldfields is now well on the way toachieving its mission statement and becoming a mid-tier, gold and base metalsproducer within South-East Europe by the end of 2008. For further information please contact: European Goldfields: e-mail: [email protected] Reading, Chief Executive Officer website: www.egoldfields.comOffice: +44 (0)20 7408 9534 ------------------------------ Buchanan Communications: e-mail: [email protected] Morse / Ben WilleyOffice: +44 (0)20 7466 5000Mobile: +44 (0)7802 875 227 The Sherbourne Group: e-mail: [email protected] WestOffice: +1 416 203 2200 Resources & reserves parameters For additional information on the resource and reserve estimates quoted in thisnews release, please refer to the Company's Resources & Reserves Declaration atwww.egoldfields.com/goldfields/resources.jsp.Patrick Forward, General Manager, Exploration of the Company, was the QualifiedPerson under Canadian National Instrument 43-101 responsible for reviewing thedisclosure of resource and reserve estimates quoted in this news release. Forward-looking statements Certain information included in this news release, including any information asto the Company's future financial or operating performance and other statementsthat express management's expectations or estimates of future performance,constitute "forward-looking statements". The words "expect", "will", "intend","estimate" and similar expressions identify forward-looking statements.Forward-looking statements are necessarily based upon a number of estimates andassumptions that, while considered reasonable by management, are inherentlysubject to significant business, economic and competitive uncertainties andcontingencies. The Company cautions the reader that such forward-lookingstatements involve known and unknown risks, uncertainties and other factors thatmay cause the actual financial results, performance or achievements of theCompany to be materially different from its estimated future results,performance or achievements expressed or implied by those forward-lookingstatements and the forward-looking statements are not guarantees of futureperformance. These risks, uncertainties and other factors include, but are notlimited to: changes in the worldwide price of gold, base metals or certain othercommodities (such as fuel and electricity) and currencies; the successful andtimely permitting of the Company's Skouries, Olympias and Certej projects;legislative, political, social or economic developments in the jurisdictions inwhich the Company carries on business; operating or technical difficulties inconnection with mining or development activities; the speculative nature of goldand base metals exploration and development, including the risks of diminishingquantities or grades of reserves; and the risks normally involved in theexploration, development and mining business. These factors are discussed ingreater detail in the Company's Annual Information Form for the year ended 31December 2005, filed on SEDAR at www.sedar.com. The Company disclaims anyintention or obligation to update or revise any forward-looking statementswhether as a result of new information, future events or otherwise. MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED 31 DECEMBER 2005 The following discussion and analysis, prepared as at 29 March 2006, is intendedto assist in the understanding and assessment of the trends and significantchanges in the results of operations and financial conditions of EuropeanGoldfields Limited (the "Company"). Historical results may not indicate futureperformance. Forward-looking statements are subject to a variety of factors thatcould cause actual results to differ materially from those contemplated by thesestatements. The following discussion and analysis should be read in conjunctionwith the Company's audited consolidated financial statements for the years ended31 December 2005 and 2004 and accompanying notes (the "Consolidated FinancialStatements"). Additional information relating to the Company, including the Company's AnnualInformation Form, is available on the Canadian System for Electronic DocumentAnalysis and Retrieval (SEDAR) at www.sedar.com.Except as otherwise noted, all dollar amounts in the following discussion andanalysis and the Consolidated Financial Statements are stated in United Statesdollars. Overview The Company, a company incorporated under the Yukon Business Corporations Act,is a resource company involved in the acquisition, exploration and developmentof 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 - The Company holds a 65% interest in Hellas Gold S.A. ("Hellas Gold").Hellas Gold owns assets in northern Greece which consist of three depositswithin 70-year mining concessions covering a total area of 317 km(2). Thedeposits include the polymetallic projects of Stratoni and Olympias whichcontain gold, lead, zinc and silver, and the copper/gold porphyry body referredto as Skouries. All three deposits have been well defined with over 200,000metres of drilling and the completion of feasibility studies and laterengineering studies. The total proven and probable reserves of these assets are 7.6 Moz gold, 65.8Moz silver, 0.7 Mt copper,0.7 Mt lead and 0.9 Mt zinc, from a measured and indicated resource base of 9.4Moz gold, 74.5 Moz silver, 1.0 Mt copper, 0.8 Mt lead and 1.1 Mt zinc (65%attributable). These assets represent some of the largest defined deposits in Europe. The threedeposits are located within a 10 km radius of each other, making thiseffectively a gold and base metals centre. Furthermore, both Stratoni andOlympias were previously in production and have extensive existing mining andplant infrastructure and a ship-loading facility on the Aegean Sea. Hellas Gold's assets also include potential revenue-generating stockpiles ofgold concentrates. In September 2005, Hellas Gold resumed production at Stratoni following theaward by the Greek State of all necessary environmental and mining permits.Hellas Gold is in the process of applying for similar permits for Olympias andSkouries, having met its first milestone by submitting business plans to theGreek government in January 2006. Romania - The Company holds five mineral properties located within the "GoldenQuadrilateral" area of Romania, where it has recently completed an in-housepre-feasibility study underpinning the value of its80%-owned Certej deposit. The Certej deposit hosts measured and indicatedresources of 31.4 Mt grading2.1 g/t gold and 11 g/t silver for 2.2 Moz gold and 11.0 Moz silver (80%attributable). Results of operations The Company's results of operations for the year and three-month period ended 31December 2005 were comprised primarily of activities related to the results ofoperations of the Company's 65%-owned subsidiary Hellas Gold in Greece and theCompany's regional exploration programs in Romania. The Company currently incurslosses and until significant revenues are generated, the Company will continueto do so. In September 2005, Hellas Gold commenced production at its Stratoni mine inGreece. The following table summarises operational results at Stratoni for thethree-month period ended 31 December 2005. Stratoni Mine (Greece) Three-month period ended 31 December 2005ProductionStart of period inventory of ore 13,188mined (tonnes)Ore mined (tonnes) 13,800 Ore processed (tonnes) 16,025 - Average grade: Zinc (%) 7.80 Lead (%) 7.10 Silver (g/t) 182 Zinc concentrate (tonnes) 2,385 - Containing: Zinc (tonnes) 1,254 Lead concentrate (tonnes) 1,268 - Containing: Lead (tonnes) 907 Silver (kg) 2,284 End of period inventory of ore 10,963mined (tonnes) SalesZinc concentrate (tonnes) 2,290 - Containing: Zinc (tonnes)* 1,009 Lead concentrate (tonnes) Nil - Containing: Lead (tonnes)* Nil Silver (kg)* Nil * Net of smelter deductions The Company's results of operations for the eight most recently completedquarters are summarised in the following table: (in thousands of 2005 2005 2005 2005 2004 2004 2004 2004US dollars,except per share Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1amounts) $ $ $ $ $ $ $ $ Statement of lossand deficitSales 1,464 - 57 - - - - -Cost of sales 1,367 - - - - - - -Gross profit 97 - 57 - - - - -Interest income 339 272 326 326 279 143 60 18Expenses 5,079 3,536 2,287 3,831 9,225 2,854 2,848 5,042Loss 4,309 2,726 723 2,652 8,134 2,190 3,580 5,279Loss per share 0.04 0.02 0.01 0.02 0.17 0.05 0.09 0.18Balance sheetWorking capital 33,765 39,171 49,544 57,285 63,480 29,045 31,117 14,413Total assets 266,618 295,914 298,948 300,689 305,541 86,879 83,517 67,875Non current 62,807 70,053 71,056 71,179 72,103 - - -liabilitiesStatement of cashflowsDeferred 1,081 1,067 893 860 2,462 1,172 943 1,394exploration anddevelopment costs- RomaniaPlant and 1,298 2,506 2,453 1,582 - - - -equipment -GreeceDeferred 1,510 439 891 - - - - -development costs- Greece The Company's results of operations for the years ended 31 December 2005, 2004and 2003, and the three-month periods ended 31 December 2005 and 2004 aresummarised in the following table: Years ended 31 December Three-month periods ended 31 December (in thousands of US 2005 2004 2003 2005 2004dollars) $ $ $ $ $ -------- -------- -------- ----------- -----------Statement of loss anddeficitSales 1,521 - - 1,464 -Cost of sales 1,367 - - 1,367 -Gross profit 154 - - 97 -Interest Income 1,263 500 170 339 279Expenses 14,733 19,969 2,627 5,079 9,224Loss 10,410 19,183 2,457 4,309 8,134Loss per share 0.09 0.39 0.11 0.04 0.17Balance sheetWorking capital 33,765 63,480 5,058 33,765 63,480Total assets 266,618 305,541 45,943 266,618 305,541Non current liabilities 62,807 72,103 - 62,807 72,103Statement of cash flowsDeferred exploration and 3,901 5,971 4,257 1,081 2,462development costs -RomaniaPlant and equipment - 7,839 - - 1,298 -GreeceDeferred development 2,840 - - 1,510 -costs - Greece The breakdown of deferred exploration and development costs per mineral propertyfor the years ended 31 December 2005, 2004 and 2003, and the three-month periods ended 31 December2005 and 2004 is as follows: Years ended 31 December Three-month periods ended 31 December (in thousands of US 2005 2004 2003 2005 2004 dollars) $ $ $ $ $ Romanian mineral propertiesCertej 2,380(61%) 4,516(76%) 2,251(53%) 724(67%) 1,799(73%)Cainel 1,014(26%) - (-%) - (-%) 205 (19%) - (-%)Zlatna - (-%) 530 (9%) 985 (23%) - (-%) 266 (11%)Voia 78 (2%) 182 (3%) 158 (4%) 11 (1%) 74 (3%)Baita-Craciunesti 390(10%) 553 (9%) 721 (17%) 130 (12%) 157 (6%)Bolcana 39 (1%) 190 (3%) 142 (3%) 11 (1%) 166 (7%)--------------- -------- --------- -------- ----------- ----------- 3,901(100%) 5,971(100%)4,257 (100%) 1,081 (100%) 2,462 (100%) Greek mineralpropertiesStratoni 421 (14%) 11,376 (6%) - 11 (1%) 11,376 (6%)Skouries 687 (23%) 110,914(57%) - 118 (7%) 110,914 (57%)Olympias 1,939(63%) 73,517(37%) - 1,588 (92%) 73,517 (37%)--------------- -------- --------- -------- ----------- ----------- 3,047(100%) 195,807(100%) - (-%) 1,717 (100%) 195,807(100%)--------------- -------- --------- -------- ----------- -----------Total 6,948(100%) 201,778(100%)4,257(100%) 2,798 (100%) 198,270(100%) The Company incurred a loss of $10.41 million ($0.09 per share) for the yearended 31 December 2005, compared to $19.18 million ($0.39 per share) for 2004.The Company incurred a loss of $4.31 million ($0.04 per share) for the three-month period ended 31 December 2005, compared to $8.13 million ($0.17 per share) for the same period of 2004. The following factors have contributed to this large reduction in loss for theyear and three-month period ended 31 December 2005, compared to the same periodsof 2004: • Hellas Gold commenced production at its Stratoni mine in September 2005. As a result, the Company recorded $0.15 million in gross profit on revenues of $1.52 million in 2005 and $1.46 million in Q4 2005 for the sale of concentrates by Hellas Gold, compared to $Nil for the same periods of 2004. Cost of sales of $1.37 million included non-recurring costs relating to the start-up of operations at Stratoni, fixed costs disproportionate to production output in a ramp-up phase, and $0.20 million in amortisation and depletion expenses. • The Company's interest income has increased to $1.26 million in 2005 and $0.34 million in Q4 2005, from $0.50 million and $0.23 million, respectively, for the same periods of 2004, primarily as a result of the Company holding significantly higher cash balances during 2005 following the completion of private placements during 2004. • On 9 February 2004, the Company acquired an initial 37.97% interest in Hellas Gold. From 9 February 2004 to 30 November 2004, the Company's interest in Hellas Gold was accounted for as an equity investment. On 30 November 2004, the Company completed the acquisition of additional shares in Hellas Gold, increasing its total interest from 37.97% to 55.70% (65% on a fully-diluted basis). The acquisition was accounted for as a purchase and the operating expenses of Hellas Gold were included in the consolidated statements of loss and deficit from 30 November 2004, the effective date of the acquisition. In 2005, Hellas Gold's administrative and overhead expenses amounted to $2.11 million, compared to the Company's share of loss in equity investment of $0.73 million from 9 February to 30 November 2004 and Hellas Gold's administrative and overhead expenses of $0.30 million for the remainder of 2004. Hellas Gold's administrative and overhead expenses in 2005 and 2004 are mostly attributable to the various costs involved in preparing the commencement of production at Stratoni in September 2005, and preparing studies and business plans for Hellas Gold's projects of Skouries and Olympias. In 2005, Hellas Gold incurred an expense of $3.85 million, compared to $1.47 million from 30 November to 31 December 2004, for ongoing water pumping and treatment at its non-operating mines of Olympias and Stratoni (Madem Lakkos) (including non-recurring costs in 2005 of approximately $2.0 million associated with the refurbishment of pumps and pipes), in compliance with Hellas Gold's commitment to the environment under its contract with the Greek State. • The Company's corporate administrative and overhead expenses have decreased significantly from $6.25 million in 2004 and $1.95 million in Q4 2004, to $3.15 million and $1.06 million, respectively, for the same periods of 2005, primarily as a result of the Company's newly adopted practice of recharging costs and overheads to its operating subsidiaries in 2005, a portion of which is capitalised by such subsidiaries. • Effective 31 December 2005, the Company relinquished its 80%-owned exploitation license for the Bolcana perimeter in Romania and an impairment cost of $2.36 million was recorded for the year and three-month period ended 31 December 2005, compared to a greater impairment cost of $4.81 million for the same periods of 2004 relating to the relinquishment of the Zlatna perimeter in Romania effective 31 December 2004. • The Company recorded a non-cash equity-based compensation expense of $1.82 million in 2005 and $1.06 million in Q4 2005, compared to $6.42 million and $1.88 million, respectively, for the same periods of 2004. This decrease in 2005 reflects the fact that fewer share options and shares were granted as compensation in that period compared to the same periods of 2004, and that the cost of share options granted in 2005 has been amortised according to the vesting periods of such share options, in contrast with the share options granted in 2004 which, for the most part, vested immediately upon grant. Also, in 2005, the Company adopted a practice of recharging some of its equity-based compensation expense to its operating subsidiaries, a portion of which is capitalised by such subsidiaries. • Effective 1 October 2004, the Company changed its functional currency from the Canadian dollar to the United States dollar. Despite this, during 2005, the Company retained significant cash balances in Euro in order to meet a Euro subscription obligation in Hellas Gold in Q1 2005. Hellas Gold also retained significant cash balances in Euro in order to meet operating, administrative and overhead expenses. Consequently, the Company recorded a foreign exchange loss of $0.94 million and $0.04 million in 2005 and Q4 2005, respectively. The loss resulted primarily from a strengthening of the United States dollar against the Euro as at 31 December 2005 compared to 31 December 2004. In contrast, the Company had realised a foreign exchange gain of $0.51 million and $1.27 million in 2004 and Q4 2004, respectively. • The Company's amortisation expense has increased to $0.24 million in 2005 from $0.09 million in 2004, primarily as a result of the Company acquiring significant assets through the acquisition of a 65% interest in Hellas Gold in November 2004. • In December 2003, the Company raised $15.09 million by way of a brokered private placement of convertible loan notes, for which the Company recorded a non-cash expense for financing costs of $1.12 million in 2004 and $Nil in Q4 2004, compared to $Nil for the same periods of 2005. • The Company recorded a credit for income taxes of $1.70 million in 2005 and $0.39 million in Q4 2005, compared to a lesser credit of $0.48 million and $0.53 million, respectively, for the same periods of 2004. The credits have arisen due to the Company recognising a future tax asset for the losses carried forward in Hellas Gold. The credits for 2005 have increased compared to 2004 due to the increase in losses in Hellas Gold. Liquidity and capital resources As at 31 December 2005, the Company had cash and cash equivalents of $30.54million, compared to$65.25 million as at 31 December 2004, and working capital of $33.77 million,compared to $63.48 million as at 31 December 2004. The decrease in cash and cash equivalents as at 31 December 2005, compared tothe balances as at31 December 2004, resulted primarily from operating losses ($8.21 million),capital expenditure in Greece($7.84 million), the effects of foreign currency translation on cash ($4.86million), deferred exploration and development costs in Romania ($3.90 million),funds pledged as collateral to guarantee environmental commitments at Stratoni($3.54 million), a net increase in accounts receivable vs. accounts payable($3.14 million), deferred development costs in Greece ($2.84 million), anincrease in inventory ($1.63 million), purchase of equipment ($0.22 million) andcapital raising costs ($0.01 million), offset by interest earned($1.26 million) and the exercise of options ($0.17 million). In September 2005, Hellas Gold pledged $3.54 million (€3.00 million) to theNational Bank of Greece as collateral for a Letter of Guarantee issued by theNational Bank of Greece to the Greek Ministry of Development to guarantee HellasGold's environmental commitments under its mining permit at Stratoni. The Letterof Guarantee expires on 31 December 2010. The investment bears a rate ofinterest of Euribor plus 0.8% per annum. The following table sets forth the Company's contractual obligations includingpayments due for each of the next five years and thereafter: +----------------------------------------------------------------------------------+| Payments due by period ||(in thousands of US dollars) |+----------------------+----------+------------+-----------+-----------+-----------+|Contractual | Total | Less than 1|1 - 3 years|4 - 5 years| After 5||obligations | | year| | | years|| | | | | | |+----------------------+----------+------------+-----------+-----------+-----------+|Operating lease | 933 | 187 | 373 | 373 | - ||(London office) | | | | | |+----------------------+----------+------------+-----------+-----------+-----------+|Exploration licence | 1,459 | - | 1,459 | - | - ||spending commitments | | | | | ||(Voia, Romania) | | | | | |+----------------------+----------+------------+-----------+-----------+-----------+|Total contractual | 2,392 | 187 | 1,832 | 373 | - ||obligations | | | | | - |+----------------------+----------+------------+-----------+-----------+-----------+ In 2006, the Company expects to spend (i) $12.80 million in capital expendituresto fund the development of its projects of Stratoni ($11.05 million), Olympias($1.75 million), Skouries ($Nil) and Certej ($Nil),(ii) $6.63 million in exploration and development costs for Greece ($4.05million) and Romania ($2.58 million), and (iii) $3.39 million on corporate administrative and overhead expenses. The Company expects to fund such costs fromexisting cash balances and operating cash flow generated at Stratoni. Transactions with related parties During the financial year ended 31 December 2005, Hellas Gold incurred costs of$9.66 million (2004 - $3.65 million) for management, technical and engineeringservices received from a related party, Aktor S.A., a 35% shareholder in HellasGold. As at 31 December 2005, Hellas Gold had accounts payable of $1.47 million(2004 - $1.37 million) to Aktor S.A. These expenses were contracted in thenormal course of operations and are recorded at the exchange amount agreed bythe parties. Significant acquisition in 2004 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 as follows: (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 fair market 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 $23.48 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. 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 the cumulativetranslation adjustment account in the equity section of the balance sheet. Significant accounting policies In this document, unless otherwise indicated, all financial data and discussionis based upon consolidated financial statements prepared on the going concernbasis in accordance with Canadian GAAP and reflect the following significantaccountant policies. Basis of consolidation - Business acquisitions are accounted for under thepurchase method and the results of operations of these businesses are includedin these consolidated financial statements from the acquisition date.Investments in affiliated companies over which the Company has significantinfluence are accounted for using the equity method. Investments in otherbusinesses are recorded at cost. Estimates, risks and uncertainties - The preparation of financial statements inconformity with generally accepted accounting principles requires management tomake estimates and assumptions that affect the reported amount of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amount of revenues and expenses duringthe period.Significant estimates and assumptions include those related to therecoverability of deferred exploration and development costs for mineralproperties. While management believes that these estimates and assumptions arereasonable, actual results could vary significantly. Deferred exploration and development costs - Acquisition costs of resourceproperties, together with direct exploration and development costs incurredthereon, are deferred and capitalised. Upon reaching commercial production,these capitalised costs are transferred from exploration properties to producingproperties on the consolidated balance sheets and are amortised into operationsusing the unit-of-production method over the estimated useful life of theestimated 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 UnitedStates dollar. Monetary assets and liabilities denominated in foreign currenciesare translated at the exchange rate in effect at the balance sheet date.Non-monetary assets and liabilities and revenue and expenses arising fromforeign currency transactions are translated at the exchange rate in effect atthe 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 Deva Gold andEuropean Goldfields Deva SRL 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 average rates for the period. Exchange gains or losses arisingfrom the translation are recorded in equity in the cumulative translationadjustment account. The Company accounts for Hellas Gold as a self-sustainingforeign subsidiary. Financial instruments - The Company's financial instruments consist of cash andcash equivalents, accounts receivable and accounts payable and accruedliabilities. Unless otherwise noted, it is management's opinion that the Companyis not exposed to significant interest or credit risks arising from thesefinancial instruments. The fair values of these financial instrumentsapproximate their carrying 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$12.15 million denominated in euros. The Company does not currently have any hedging policies or practices in place. Revenue recognition - Revenues from the sale of concentrates are recognised andare recorded at market prices when title transfers and the rights andobligations of ownership pass to the customer. A number of the Company'sconcentrate products are sold under pricing arrangements where final prices aredetermined 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 forwardprices for the expected date of the final settlement. The terms of the contractsresult in non-hedge derivatives that do not qualify for hedge accountingtreatment, because of the difference between the provisional price and the finalsettlement price. These embedded derivatives, if material, are adjusted to fairvalue through revenue each period until the date of final price determination.Subsequent variations in the price are recognised as revenue adjustments as theyoccur until the price is finalised. Equity-based compensation - The Company operates a share option plan and arestricted share unit plan, which are described in Note 14. The Company accountsfor equity-based compensation granted under such plans using the fair valuemethod of accounting. Under such method, the cost of equity-based compensationis estimated at fair value and is recognised in the income statement as anexpense, or capitalised to deferred exploration and development costs when thecompensation can be attributed to mineral properties. This cost is amortisedover the relevant vesting period for grants to directors, officers andemployees, 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. Asset retirement obligation - Effective 1 January 2004, the Company adopted theCICA Handbook Section 3110 "Asset Retirement Obligations", which establishedstandards for asset retirement obligations and the associated retirement costsrelated to reclamation and abandonment. The fair value of the liability of anasset retirement obligation is recorded when it is incurred and thecorresponding increase to the asset is depreciated over the life of the asset.The liability is increased over time to reflect an accretion element consideredin the initial measurement at fair value. At 31 December 2005, the Company hadan asset retirement obligation relating to its mineral properties in Greece. Impairment of long-lived assets - Effective 1 January 2004, the Company adoptedthe new recommendations of CICA Handbook Section 3063 "Impairment of Long-livedAssets" on a prospective basis. Section 3063 requires that long-lived assets andintangibles to be held and used by the Company be reviewed for possibleimpairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable. If changes in circumstancesindicate that the carrying amount of an asset that an entity expects to hold anduse may not be recoverable, future cash flows expected to result from the use ofthe asset and its disposition must be estimated. If the undiscounted value ofthe future cash flows is less than the carrying amount of the asset, impairmentis recognised based on the fair value of the assets.Effective 31 December 2004, the Company relinquished its 80%-owned exploitationlicense for the Zlatna perimeter in Romania and a provision for the costs ofthis property has been recorded. Effective 31 December 2005, the Companyrelinquished its 80%-owned exploitation license for the Bolcana perimeter inRomania and a provision for the costs of this property has been recorded. Inventory - Inventories of ore mined and metal concentrates are valued at thelower of combined production cost and net realisable value. Production costsinclude the costs directly related to bringing the inventory to its currentcondition and location, such as materials, labour, mine site overheads andrelated depreciation of mining and processing facilities, related depletion ofmineral properties and deferred exploration and development costs. Explorationsupplies are valued at the lower of cost and net realisable value. Disclosure controls and procedures & internal control over financial reporting The Chief Executive Officer and the Chief Financial Officer of the Company (the"Certifying Officers") have established and maintained in the year ended 31December 2005 disclosure controls and procedures and internal control overfinancial reporting for the Company. The Certifying Officers have caused disclosure controls and procedures to bedesigned under their supervision, to provide reasonable assurance that materialinformation relating to the Company and its subsidiaries is made known to theCertifying Officers by others within those entities, as appropriate to allowdecisions regarding required disclosure within the time periods specified bylegislation, particularly during the period in which interim and annual filingsare being prepared. The Certifying Officers have evaluated the effectiveness of the Company'sdisclosure controls and procedures as at 31 December 2005 and have concludedthat such procedures are adequate to meet the objectives for which they wereestablished. The Certifying Officers believe that "cost effective" disclosurecontrols and procedures and internal control systems can only provide reasonableassurance, and not absolute assurance, that such objectives are met. The Certifying Officers have caused internal control over financial reporting tobe designed under their supervision, to provide reasonable assurance regardingthe reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with Canadian GAAP. During the year ended 31 December 2005, there has been no change in theCompany's internal control over financial reporting that have materiallyaffected, or is reasonably likely to materially affect, the Company's internalcontrol over financial reporting. Outstanding share data The following represents all equity shares outstanding and the number of commonshares into which all securities are convertible, exercisable or exchangeable: Common shares: 112,688,708Common share options: 4,017,667Restricted share units: 850,000Common shares (fully-diluted): 117,556,375 Preferred shares: Nil Outlook Greece - In September 2005, Hellas Gold resumed production at Stratoni followingthe award by the Greek State of all necessary environmental and mining permits.Production of ore is expected to reach170,000 tonnes by the end of the first year of production, steadily increasingto 400,000 tonnes per annum by year five. In January 2006, Hellas Gold submitted business plans to the Greek governmentfor its major gold and base metals projects of Skouries and Olympias. Thissubmission represents a significant milestone in obtaining the necessaryenvironmental and mining permits to develop the projects. The Company also continues to look for new discoveries through focusedexploration programmes. Romania - In July 2005, the Company completed an in-house pre-feasibility studyon its 80%-owned Certej project. The study confirms that a gold/silver flotationconcentrate can be produced with high grades and recoveries. In addition, the Company is pursuing a metallurgical testwork programmeinvestigating the feasibility of producing gold dore on site by a cost effectiveprocess design. Environmental Impact Assessments (EIA Levels I and II) were completed inDecember 2005. The next stage will be to complete an Environmental Impact Study(EIS) in order to progress to full feasibility study, permit application andproject development. Finally, the Company continues to conduct focused exploration programmes toexpand the resource base in Romania. Risks and uncertainties The risks and uncertainties affecting the Company, its subsidiaries and theirbusiness are discussed in the Company's Annual Information Form for the yearended 31 December 2005, filed on SEDAR at www.sedar.com. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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