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Management's Discussion and A

14th Aug 2008 07:05

RNS Number : 2886B

European Goldfields Ltd

14 August 2008

Immediate Release

14 August 2008

European Goldfields Limited

MANAGEMENT'S DISCUSSION AND ANALYSIS

FOR THE THREE- AND SIX-MONTH PERIODS ENDED 30 JUNE 2008

The following discussion and analysis, prepared as at 14 August 2008, is intended to assist in the understanding and assessment of the trends and significant changes in the results of operations and financial conditions of European Goldfields Limited (the "Company"). Historical results may not indicate future performance. Forward-looking statements are subject to a variety of factors that could cause actual results to differ materially from those contemplated by these statements. The following discussion and analysis should be read in conjunction with the Company's unaudited consolidated financial statements for the three- and six-month periods ended 30 June 2008 and 2007 and accompanying notes (the "Consolidated Financial Statements").

Additional information relating to the Company, including the Company's Annual Information Form, is available on the Canadian System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com. Except as otherwise noted, all dollar amounts in the following discussion and analysis and the Consolidated Financial Statements are stated in United States dollars.

Overview

The Company, a company incorporated under the Yukon Business Corporations Act, is a resource company involved in the acquisition, exploration and development of mineral properties in Greece, Romania and South-East Europe.

The Company's Common Shares are listed on the AIM Market of London Stock Exchange plc and on the Toronto Stock Exchange (TSX) under the symbol "EGU".

Greece - European Goldfields holds a 95% interest in Hellas Gold S.A. Hellas Gold owns three major gold and base metal deposits in Northern Greece. The deposits are the polymetallic operation at Stratoni, the Olympias project which contains gold, zinc, lead and silver, and the Skouries copper/gold porphyry project. Hellas Gold commenced production at Stratoni in September 2005 and commenced selling an existing stockpile of gold concentrates from Olympias in July 2006. Hellas Gold is applying for permits to develop the Skouries and Olympias projects.

Romania - European Goldfields owns 80% of the Certej gold/silver project in Romania. The Company submitted in March 2007 a technical feasibility study to the Romanian government in support of a permit application to develop the project. In March 2008, European Goldfields submitted the Environmental Impact Study to the Romanian environmental authorities to start the assessment of the environmental impact of the Certej Project.

Results of operations

The Company's results of operations for the three- and six-month periods ended 30 June 2008 were comprised primarily of activities related to the results of operations of the Company's 95%-owned subsidiary Hellas Gold in Greece and the Company's exploration and development program in Romania. Hellas Gold's operational results for the eight most recently completed quarters are summarised in the following tables:

Stratoni Mine (Greece)
	2008 Q2	2008 Q1	2007 Q4	2007 Q3	2007 Q2	2007 Q1	2006 Q4	2006 Q3
Inventory (start of period)
Ore mined (wet tonnes)	2,816	-	4,868	4,603	843	2,499	3,617	12,326
Zinc concentrate (tonnes)	2,745	1,689	2,797	2	3,524	37	1,199	1,562
Lead/silver concentrate (tonnes)	2,213	49	2,042	2,150	1,846	214	1,345	674

Production
Ore mined (wet tonnes)	73,137	58,208	50,643	56,075	53,088	55,069	47,321	49,652

Ore milled (tonnes)	73,280	53,675	53,813	54,499	48,179	55,258	47,038	56,769
- Average grade: Zinc (%)	10.37	9.37	9.00	8.42	11.57	11.39	10.73	10.54
Lead (%)	6.21	5.35	8.12	7.55	9.14	7.38	6.56	5.78
Silver (g/t)	155	134	206	186	232	180	162	142

Zinc concentrate (tonnes)	14,139	9,427	9,082	8,506	10,485	11,731	9,263	10,768
- Containing: Zinc (tonnes)	7,004	4,644	4,425	4,194	5,170	5,760	4,619	5,468

Lead concentrate (tonnes)	6,443	4,035	6,012	5,586	5,955	5,406	3,993	4,368
- Containing: Lead (tonnes)	4,201	2,653	4,021	3,781	4,109	3,744	2,818	2,997
Silver (oz)	316,354	207,215	316,837	297,059	328,879	288,023	216,586	227,817

Sales
Zinc concentrate (tonnes)	11,224	8,371	10,191	5,710	14,007	8,244	10,425	11,130
- Containing payable: Zinc (tonnes)*	4,633	3,454	4,209	2,364	5,855	3,463	4,418	4,702

Lead concentrate (tonnes)	7,418	1,872	8,004	5,694	5,651	3,774	5,124	3,696
- Containing payable: Lead (tonnes)*	4,628	1,188	5,082	3,759	3,636	2,486	3,329	2,418
Silver (oz)*	355,298	95,582	399,272	297,321	285,349	190,292	254,881	189,349

Cash operating cost per tonne milled ($)	161	164	175	144	135	138	147	109

Inventory (end of period)
Ore mined (wet tonnes)	1,003	2,816	-	4,868	4,603	843	2,499	3,617
Zinc concentrate (tonnes)	5,660	2,745	1,689	2,797	2	3,524	37	1,199
Lead/silver concentrate (tonnes)	1,238	2,213	49	2,042	2,150	1,846	214	1,345

Financial information (in thousands of US dollars)
Sales ($)	13,000	10,097	18,483	16,634	22,866	14,215	19,439	14,226
Gross profit ($)	(198)	3,060	6,147	8,425	13,991	8,294	10,477	6,973
Capital expenditure ($)	2,086	3,111	3,779	12,142	4,673	1,564	4,202	1,487
Amortisation and depletion ($)	476	997	2,000	1,256	837	653	1,119	796

* Net of smelter payable deductions

Sale of Gold-Bearing Concentrates from Existing Stockpile at Olympias (Greece)
	2008 Q2	2008 Q1	2007 Q4	2007 Q3	2007 Q2	2007 Q1	2006 Q4	2006 Q3
Sales
Gold concentrate (dmt)	22,479	9,778	21,385	28,393	12,686	17,090	3,299	6,134

Financial information (in thousands of US dollars)
Sales ($)	5,461	2,611	4,232	5,029	2,078	2,868	431	985
Gross profit ($)	3,668	1,789	1,279	2,848	958	1,845	192	985
Amortisation and depletion ($)	129	56	(134)	265	76	120	-	-

Base metal concentrate revenues suffered from both falling metal prices during and particularly at the end of Q2. At the end of each quarter, Hellas Gold is required to mark to market any sales with provisional pricing. Sharp falls in the lead price at the end of June meant that all Q2 provisional invoices were repriced at lower prices than originally invoiced. In addition, final pricing in Q2 of Q1 provisional base metal invoices resulted in a reduction of Q2 sales totalling over $2.5m.

Although the mining industry is facing severe upward pressure on costs, Hellas Gold was able to reduce Euro unit cash operating costs by 6% in Q2 2008 to €103 ($161) per tonne, compared to €110 ($164) per tonne in Q1 2008. In Q2 2008, mining costs per tonne remained at similar levels to Q1 2008 as the fixed price mining contract limited any upward cost pressure, but there was a €7 ($11) reduction in mill and G&A costs primarily due to the increased throughput at the mill. In US dollar terms, a weaker US dollar in Q2 2008 compared to Q1 2008 also increased the US dollar cost by US$8 per tonne.

The Company's financial results for the eight most recently completed quarters are summarised in the following table:

(in thousands of US dollars, except per share amounts)	2008 Q2 $	2008 Q1 $	2007 Q4 $	2007 Q3 $	2007 Q2 $	2007 Q1 $	2006 Q4 $	2006 Q3 $
Statement of loss and deficit
Sales	18,461	12,708	22,715	21,663	24,944	17,083	19,870	15,211
Cost of sales	14,991	7,859	15,289	10,390	9,995	6,944	9,201	7,253
Gross profit	3,470	4,849	7,426	11,273	14,949	10,139	10,669	7,958
Interest income	1,502	1,757	2,699	2,320	1,116	453	393	485
Foreign exchange gain/(loss)	(27)	2,674	(2,173)	6,494	(265)	(152)	(903)	(67)
Hedge contract profit	391	-	-	-	-	-	-	-
Expenses	5,058	5,017	6,385	4,819	4,875	4,764	3,543	4,274
Share of loss in equity investment	(36)	-	-	-	-	-	-	-
Profit/(loss) before income tax	242	4,263	1,567	15,268	10,925	5,676	6,616	4,102
Profit after income tax	886	3,642	3,629	12,504	8,129	3,957	4,349	2,984
Non-controlling interest	(74)	(233)	(29)	(348)	(2,794)	(1,848)	(1,973)	(1,509)
Profit for the period	812	3,409	3,600	12,156	5,335	2,109	2,376	1,475
Earnings per share	0.00	0.02	0.02	0.07	0.04	0.02	0.02	0.01
Balance sheet (end of period)
Working capital	216,822	225,673	226,431	224,289	211,637	45,201	41,854	39,666
Total assets	796,537	794,911	782,131	744,998	729,774	325,501	311,943	294,719
Non current liabilities	189,559	188,210	185,433	175,019	170,970	79,183	74,603	70,080
Statement of cash flows
Deferred exploration and development costs - Romania	1,092	1,603	2,133	1,658	1,248	696	856	598
Plant and equipment - Greece	3,065	7,147	3,779	12,142	4,673	1,577	4,144	1,268
Deferred development costs - Greece	656	769	915	491	520	421	2,095	462

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

	Six-month periods ended 30 June				Three-month periods ended 30 June
	2008		2007		2008		2007
(in thousands of US dollars)	$	%	$	%	$	%	$	%
Romanian mineral properties
Certej	2,430	91	1,824	93	946	87	1,179	94
Cainel	63	2	19	1	38	3	2	0
Voia	121	4	72	4	60	6	47	4
Baita-Craciunesti	81	3	29	2	48	4	20	2
	2,695	100	1,944	100	1,092	100	1,248	100
Greek mineral properties
Stratoni	467	33	114	12	182	28	114	22
Skouries	835	59	510	54	391	60	291	56
Olympias	123	8	317	34	83	12	115	22
	1,425	100	941	100	656	100	520	100
Total	4,120		2,885		1,748		1,768

The Certej exploitation licence and the Baita-Craciunesti exploration licence are held by the Company's 80%-owned subsidiary, Deva Gold S.A. ("Deva Gold"). Minvest S.A. (a Romanian state owned mining company), together with three private Romanian companies, hold the remaining 20% interest in Deva Gold. The Company is required to fund 100% of all costs related to the exploration and development of these properties. As a result, the Company is entitled to the refund of such costs (plus interest) out of future cash flows generated by Deva Gold, prior to any dividends being distributed to shareholders. The Voia and Cainel exploration licences are held by the Company's wholly-owned subsidiary, European Goldfields Deva SRL.

The Company recorded a profit (before tax) of $4.51 million for the six-month period ended 30 June 2008, compared to a profit (before tax) of $16.60 million for the same period of 2007. The Company recorded a net profit (after tax and non-controlling interest) of $4.22 million ($0.02 per share) for the six-month period ended 30 June 2008, compared to a net profit of $7.44 million ($0.06 per share) for the same period of 2007.

The Company recorded a profit (before tax) of $0.24 million for the three-month period ended 30 June 2008, compared to a profit (before tax) of $10.93 million for the same period of 2007. The Company recorded a net profit (after tax and non-controlling interest) of $0.81 million ($0.00 per share) for the three-month period ended 30 June 2008, compared to a net profit of $5.34 million ($0.04 per share) for the same period of 2007.

The following factors have contributed to the above:

In the first half of 2008, the price of zinc, the Stratoni mine's primary sales product, averaged approximately $2,300 per tonne. This was substantially lower than the corresponding period in 2007 which averaged over $3,500 per tonne. Hellas Gold's Stratoni mine was operating at substantially higher levels in H1 2008 than in the same period of 2007, with mine ore production increasing 21% and mill throughput increasing 23% in the first half of 2008 over the same period in 2007. However, lower grades in 2008 meant that concentrate production and sales were at similar levels to H1 2007, but profitability was lower. In the first half of 2008, Hellas Gold sold 32,257 tonnes of gold bearing pyrite concentrates from Olympias, compared to 29,776 in the same period of 2007. Gold prices were higher in Q2 2008 averaging $911 per ounce compared to $659 per ounce for the same period in 2007. Overall, however, lower base metal prices offset any benefits from the gold sales and meant that revenues and profitability declined for the first half of 2008 compared to the same period of 2007. In addition, final pricing of Q1 2008 sales which took place in Q2 2008 resulted in a net reduction in Q2 2008 sales of over $2.5 million.

As a result, the Company recorded a gross profit of $8.32 million in the first half of 2008 and $3.47 million in Q2 2008, on revenues of $31.17 million and $18.46 million, respectively, compared to a gross profit of $25.09 million in the first half of 2007 and $14.95 million in Q2 2007, on revenues of $42.03 million and $24.94 million, respectively. Cost of sales of $22.85 million in the first half of 2008 and $14.99 million in Q2 2008, compared to $16.94 million and $10.00 million, respectively, for the same periods of 2007, reflect the higher tonnages mined and processed, the effect of a weak US dollar increasing the Euro based costs, and included $2.40 million in amortisation and depletion expenses in the first half of 2008, compared to $1.68 million for the same period of 2007.

The Company's corporate administrative and overhead expenses have increased from $1.73 million in the first half of 2007 and $0.88 million in Q2 2007, to $2.57 million and $1.30 million, respectively, for the same periods of 2008. This reflects higher general levels of corporate activity and higher wage costs compared to the prior period.

The Company recorded a non-cash equity-based compensation expense of $1.00 million in the first half of 2008 and $0.54 million in Q2 2008, compared to $0.91 million and $0.45 million, respectively, for the same periods of 2007. In the first half of 2008, the Company continued a practice of recharging some of its equity-based compensation expense to its operating subsidiaries, a portion of which is capitalised by such subsidiaries.

The Company recorded a foreign exchange gain of $2.65 million in the first half of 2008 and a foreign exchange loss of $0.03 million in Q2 2008. This profit resulted primarily from profits on translation of Euro cash balance held by a subsidiary into a US$ functional currency, and occurred in Q1 2008 during a period of increasing Euro strength against the US dollar. In contrast, the Company realised a foreign exchange loss of $0.42 million in the first half of 2007, and a loss of 0.27 million in Q1 2007.

Hellas Gold's administrative and overhead expenses amounted to $4.01 million in the first half of 2008 and $1.95 million in Q2 2008, compared to $4.53 million and $2.32 million, respectively, for the same periods of 2007. Hellas Gold's administrative and overhead expenses include the costs of the Athens based office, environmental and water treatment expenses not directly attributable to the Stratoni operation and the costs of various projects in communities around the mine. The principal change was a fall in the total amount spent on local community projects.

Hellas Gold incurred an expense of $2.09 million in the first half of 2008 and $1.05 million in Q2 2008, compared to $2.18 million and $1.08 million, respectively, for the same periods of 2007, for ongoing water pumping and treatment at its non-operating mines of Olympias and Stratoni (Madem Lakkos), in compliance with Hellas Gold's commitment to the environment under its contract with the Greek State.

The Company recorded a credit for income taxes of $0.02 million in the first half of 2008 and $0.64 million in Q2 2008, compared to charges of $4.52 million and $2.80 million, respectively, for the same periods of 2007. Lower revenues in Q2 2008 meant that Hellas Gold recorded an income tax credit for the quarter, offsetting the charge reported in Q1 2008. Higher metal prices and profitability in the prior periods led to charges for taxation being made.

The Company recorded a charge of $0.30 million in the first half of 2008 and $0.07 million in Q2 2008 relating to the non-controlling shareholder's interest in Hellas Gold's profit (after tax) for this period, compared to $4.64 million and $2.79 million, respectively, for the same periods of 2007 relating to the non-controlling shareholder's interest in Hellas Gold's loss (after tax) for this period. This reflects the non-controlling shareholder's investment falling from 35% to 5% at the end of Q2 2007.

Liquidity and capital resources

As at 30 June 2008, the Company had cash and cash equivalents of $201.01 million, compared to $218.84 million as at 31 December 2007, and working capital of $216.82 million, compared to $226.43 million as at 31 December 2007.

The decrease in cash and cash equivalents as at 30 June 2008, compared to the balances as at 31 December 2007, resulted primarily from capital expenditure in Greece ($10.21 million), changes in working capital balances ($8.11 million), deferred exploration and development costs in Romania ($2.70 million), the purchase of land in Romania ($2.71 million), investment in an associate ($1.86 million), deferred development costs in Greece ($1.43 million) and investment in a subsidiary ($0.12 million), offset by the effect of foreign currency translation on cash ($2.17 million), advanced sales proceeds from offtakers ($3.56 million) and operating cash flow ($3.67 million).

The following table sets forth the Company's contractual obligations including payments due for each of the next five years and thereafter:

Payments due by period
(in thousands of US dollars)
Contractual obligations	Total	Less than 1 year	1 - 3 years	4 - 5 years	After 5 years
Operating lease (London office)	1,106	192	385	385	144
Exploration licence spending commitments (Voia, Romania)	635	-	635	-	-
Outotec OT - Processing Plant	42,707	39,983	2,724	-	-
Total contractual obligations	44,448	40,175	3,744	385	144

In 2008, the Company now expects to spend a total of $48 million in capital expenditures to fund the development of its project portfolio. This amount comprises $10 million at its existing operation at Stratoni to complete and expand the internal underground infrastructure at Mavres Petres and upgrade the mill, $10 million at Olympias in order to start the refurbishment of the mine and process plant, and $15 million at Skouries as the Company expects to continue to spend on long lead time equipment and commence site preparation. At Certej, the Company expects to spend $13 million as it finalises its bankable feasibility study and increases exploration on potential satellite orebodies close to Certej. In addition to its capital expenditure programme, the Company expects to spend $2 million in exploration over the wider licence area in Greece, $13 million on Hellas Gold administrative and overhead and water treatment expenses, and $4 million on corporate administrative and overhead expenses. The Company expects to fund all such costs from existing cash balances and operating cash flow generated at Stratoni.

Significant changes in accounting policies

Capital Disclosures - Effective 1 January 2008, the Company adopted CICA Handbook, Section 1535, Capital disclosures. The new standard requires disclosures of qualitative and quantitative information that enables users of financial statements to evaluate the Company's objectives, policies and processes for managing capital.

Inventories - Effective 1 January 2008, the Company adopted the CICA Handbook Section 3031, Inventories. The new section requires inventories to be measured at the lower of cost and net realisable value and provides guidance on the cost methodology used to assign costs to inventory, disallows the use of last-in-first-out inventory costing methodology and requires that, when circumstances which previously caused inventories to be written down below cost no longer exist, the amount previously written down is to be reversed. Upon adoption, the impact to the financial statements arising was immaterial.

Standards of Financial Statement Presentation - Effective 1 January 2008, the Company adopted CICA Handbook Section 1400, General Standards of Financial Statement Presentation. This section provides guidance related to management's assessment of the Company's ability to continue as a going concern. The adoption of this standard had no impact on the Company's presentation of its financial position.

Financial Instruments Presentation and Disclosures - Effective 1 January 2008, the Company adopted CICA Handbook Sections 3862 - Financial instruments - disclosures, and 3863 - Financial instruments - Presentation. These new Sections are a replacement of and represent a revision and enhancement to Section 3861 - Financial instruments - Presentation and disclosure. Under the new standards, the Company is required to disclose information about the significance of financial instruments for its financial position and performance and qualitative and quantitative information about its exposure to risks arising from financial instruments, as well as management's objectives, policies and processes for managing such risks. The adoption of these standards did not have an impact on the classification and valuation of financial instruments.

Change in functional currency - During the three month period ended 31 March 2008, Hellas Gold completed a long term planning exercise on its Stratoni mine. As a stand alone business, Stratoni was shown to generate excess of US dollar revenues over Euro expenses for its life of mine. Hellas Gold also has a series of development projects which will increase the excess of US dollar revenues over Euro denominated costs. Also taken into consideration along with the net cash flows were the following factors:

·; All sales are priced in US dollars;

·; Sales markets are international, rather than domestic to Greece;

·; Day to day activities are financed by US dollar denominated sales;

·; Significant amounts of future financing earmarked for the development projects has already been raised in US dollars by European Goldfields Limited, and other financing in Hellas Gold, prepaid sales receipts, have all been US dollar denominated;

·; Labour and materials are predominantly denominated in Euros.

Overall, it was deemed that the net exposure to the US dollar was greater than the exposure to the Euro, and that the functional currency of Hellas Gold should change to the US dollar. The change in functional currency was effective 1 January 2008.

Outstanding share data

The following represents all equity shares outstanding and the numbers of common shares into which all securities are convertible, exercisable or exchangeable:

Common shares: 179,382,381

Common share options: 3,581,665

Restricted share units: 180,000

Common shares (fully-diluted): 183,144,046

Preferred shares: Nil

Outlook

Reference is made to the Company's news release dated 14 August 2008 which accompanies this Management's Discussion and Analysis.

Risks and uncertainties

The risks and uncertainties affecting the Company, its subsidiaries and their business are discussed in the Company's Annual Information Form for the year ended 31 December 2007, filed on SEDAR at .

This information is provided by RNS

The company news service from the London Stock Exchange

END

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