8th Aug 2007 07:02
European Goldfields Ltd08 August 2007 Immediate Release 8 August 2007 European Goldfields Limited MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE THREE- AND SIX-MONTH PERIODS ENDED 30 JUNE 2007 The following discussion and analysis, prepared as at 8 August 2007, 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 unaudited consolidated financial statements for the three-and six-month periods ended 30 June 2007 and 2006 and accompanying notes (the"Consolidated Financial Statements"). 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 London StockExchange plc and on the Toronto Stock Exchange (TSX) under the symbol "EGU". Greece - The Company holds a 95% interest in Hellas Gold S.A ("Hellas Gold").Hellas Gold owns three major gold and base metal deposits in Northern Greece.The deposits are the polymetallic operation at Stratoni, the Olympias projectwhich contain gold, zinc, lead and silver, and the Skouries copper/gold porphyryproject. Hellas Gold commenced production at Stratoni in September 2005 andcommenced selling an existing stockpile of gold concentrates from Olympias inJuly 2006. Hellas Gold is applying for permits to develop the Skouries andOlympias 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. Results of operations The Company's results of operations for the three- and six-month periods ended30 June 2007 were comprised primarily of activities related to the results ofoperations of the Company's 95%-owned subsidiary Hellas Gold in Greece and theCompany's exploration and development program in Romania. The following tablesummarises operational results at Stratoni. Stratoni Mine (Greece)-------------------- -------- -------- ------- ------- ------- -------- Q2 2007 Q1 2007 Q4 2006 Q3 2006 Q2 2006 Q1 2006-------------------- -------- -------- ------- ------- ------- --------Inventory (start ofperiod)Ore mined (wettonnes) 843 2,499 3,617 12,326 1,155 10,963Zinc concentrate(tonnes) 3,524 37 1,199 1,562 1,034 95Lead/silverconcentrate(tonnes) 1,846 214 1,345 674 308 1,268 ProductionOre mined (wettonnes) 53,088 55,069 47,321 49,652 47,966 31,752 Ore milled(tonnes) 48,179 55,258 47,038 56,769 35,810 40,333- Average grade:Zinc (%) 11.57 11.39 10.73 10.54 9.45 8.89Lead (%) 9.14 7.38 6.56 5.78 5.83 7.28Silver (g/t) 232.40 179.56 161.73 142.29 146.09 183.45 Zinc concentrate(tonnes) 10,485 11,731 9,263 10,768 6,041 6,222- Containing:Zinc (tonnes) 5,170 5,760 4,619 5,468 3,098 3,229 Lead concentrate(tonnes) 5,955 5,406 3,993 4,368 2,703 3,662- Containing:Lead (tonnes) 4,109 3,744 2,818 2,997 1,881 2,667Silver (oz) 328,879 288,023 216,586 227,817 141,809 207,496 SalesZinc concentrate(tonnes) 14,007 8,244 10,425 11,130 5,513 5,283- Containingpayable: Zinc(tonnes)* 5,855 3,463 4,418 4,702 2,320 2,335 Lead concentrate(tonnes) 5,651 3,774 5,124 3,696 2,337 4,623- Containingpayable: Lead(tonnes)* 3,636 2,486 3,329 2,418 1,554 3,166Silver (oz)* 285,349 190,292 254,881 189,349 121,350 252,559 Cash operatingcosts per tonnemilled ($) 135 138 147 109 115 90 Inventory (end of period) Ore mined (wettonnes) 4,603 843 2,499 3,617 12,326 1,155Zinc concentrate(tonnes) 2 3,524 37 1,199 1,562 1,034Lead/silverconcentrate(tonnes) 2,150 1,846 214 1,345 674 308 Financial information(in thousands of USdollars)Sales ($) 22,866 14,215 19,439 14,226 8,274 9,083Gross profit ($) 13,991 8,294 10,477 6,973 4,330 4,295Capitalexpenditure ($) 4,673 1,564 4,202 1,487 1,351 526Amortisation anddepletion ($) 837 653 1,119 796 942 456-------------------- -------- -------- ------- ------- ------- --------* Net of smelter payable deductions Sale of Gold Concentrates from Existing Stockpile at Olympias (Greece) -------------------- -------- -------- ------- ------- ------- -------- Q2 2007 Q1 2007 Q4 2006 Q3 2006 Q2 2006 Q1 2006-------------------- -------- -------- ------- ------- ------- -------- SalesGold concentrate(dmt) 12,686 17,090 3,313 6,134 1,905 - Financial information(in thousands of USdollars)Sales ($) 2,078 2,868 431 985 - -Gross profit ($) 958 1,845 192 985 - -Amortisation and depletion ($) 76 120 - - - --------------------- -------- -------- ------- ------- ------- -------- Despite a 13% fall in mill throughput, cash operating costs per tonne milledfell in Q2 2007 to $135 (€100) per tonne, compared to $138 (€104) per tonne inQ1 2007. In Q2 2007, direct mining costs remained at the same levels as Q1 2007,but there was an $11/t (€9) reduction relating to the classification ofoperating development as long-term and therefore capital in nature. Mill andgeneral and administrative costs increased by $5/t (€4) and $1/t (€1)respectively as a result of lower throughput. The weakening US dollar also addeda further US$2/t to the dollar based cost per tonne. Labour costs have increased in 2007 compared to 2006 as a result of nationallabour agreements which have awarded a 7% salary increase effective 1 January2007 and a second increase of 6% effective 1 May 2007. The Company's financial results for the eight most recently completed quartersare summarised in the following table: ------------------ ------ ------ ------ ------ ------ ------ ------ ------(in thousandsof US dollars, 2007 2007 2006 2006 2006 2006 2005 2005except per share Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3amounts) $ $ $ $ $ $ $ $------------------ ------ ------ ------ ------ ------ ------ ------ ------Statement of lossand deficitSales 24,944 17,083 19,870 15,211 8,274 9,083 1,464 -Cost of sales 9,995 6,944 9,201 7,253 3,944 4,788 1,367 -Gross profit 14,949 10,139 10,669 7,958 4,330 4,295 97 -Interestincome 1,116 453 393 485 267 300 339 272Expenses 5,140 4,916 4,446 4,341 4,345 3,558 5,079 3,536Profit/(loss)before incometax 10,925 5,676 6,616 4,102 252 1,037 (4,643) (3,264)Profit/(loss)after incometax 8,129 3,957 4,349 2,984 (311) 161 (4,251) (3,729)Non-controlling interest (2,794) (1,848) (1,973) (1,509) (225) (475) (58) 1,003Profit/(loss)for the period 5,335 2,109 2,376 1,475 (536) (314) (4,309) (2,726)Earnings/(loss) per share 0.04 0.02 0.02 0.01 0.00 0.00 (0.04) (0.02)Balance sheet (endof period)Workingcapital 211,637 45,201 41,854 39,666 36,453 34,515 33,765 39,171Total assets 729,774 325,501 311,943 294,719 292,236 274,381 266,618 295,914Non currentliabilities 170,970 79,183 74,603 70,080 69,018 64,684 62,807 70,053Statement of cashflowsDeferredexplorationanddevelopmentcosts -Romania 1,248 696 856 598 992 848 1,081 1,067Plant andequipment -Greece 4,673 1,577 4,144 1,268 1,599 568 1,298 2,506Deferreddevelopmentcosts - Greece 520 421 2,095 462 999 478 1,510 439------------------ ------ ------ ------ ------ ------ ------ ------ ------ The breakdown of deferred exploration and development costs per mineral propertyfor the three- andsix-month periods ended 30 June 2007 and 2006 is as follows: Six-month periods ended 30 June Three-month periods ended 30 June----------------- ----------- ----------- ----------- -----------(in thousands of 2007 2006 2007 2006US dollars) $ (%) $ (%) $ (%) $ (%) ----------------- ----------- ----------- ----------- -----------Romanian mineralpropertiesCertej 1,824 (93%) 1,635 (89%) 1,179 (94%) 863 (87%)Cainel 19 (1%) 20 (1%) 2 (0%) 3 (1%)Voia 72 (4%) 145 (8%) 47 (4%) 103 (10%)Baita-Craciunesti 29 (2%) 40 (2%) 20 (2%) 23 (2%)----------------- ----------- ----------- ----------- ----------- 1,944 (100%) 1,840 (100%) 1,248 (100%) 992 (100%)----------------- ----------- ----------- ----------- -----------Greek mineralpropertiesStratoni 114 (12%) - (-%) 114 (22%) - (-%)Skouries 510 (54%) 684 (46%) 291 (56%) 459 (46%)Olympias 317 (34%) 791 (54%) 115 (22%) 540 (54%)----------------- ----------- ----------- ----------- ----------- 941 (100%) 1,475 (100%) 520 (100%) 999 (100%)----------------- ----------- ----------- ----------- -----------Total 2,885 (100%) 3,315 (100%) 1,768 (100%) 1,991 (100%)----------------- ----------- ----------- ----------- ----------- The Certej exploitation licence and the Baita-Craciunesti exploration licenceare held by the Company's80%-owned subsidiary, Deva Gold S.A. ("Deva Gold"). Minvest S.A. (a Romanianstate owned mining company), together with three private Romanian companies,hold the remaining 20% interest in Deva Gold and the Company holds thepre-emptive right to acquire such 20% interest. The Company is required to fund100% 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. The Company recorded a profit (before tax) of $16.60 million for the six-monthperiod ended 30 June 2007, compared to a profit (before tax) of $1.29 millionfor the same period of 2006. The Company recorded a net profit (after tax andnon-controlling interest) of $7.44 million ($0.06 per share) for the six-monthperiod ended 30 June 2007, compared to a net loss of $0.85 million ($0.01 pershare) for the same period of 2006. The Company recorded a profit (before tax) of $10.93 million for the three-monthperiod ended 30 June 2007, compared to a profit (before tax) of $0.25 millionfor the same period of 2006. The Company recorded a net profit (after tax andnon-controlling interest) of $5.34 million ($0.04 per share) for the three-monthperiod ended 30 June 2007, compared to a net loss of $0.54 million ($0.00 pershare) for the same period of 2006. The following factors have contributed to the above: • In the first half of 2007, Hellas Gold's Stratoni mine was operating at substantially higher levels than in the same period of 2006. Mine ore production increased 34% and mill throughput increased 36% in the first half of 2007 over the same period in 2006. This translated into increased concentrate tonnages sold of 81% for zinc and 78% for lead. In addition, in the first half of 2007, Hellas Gold sold 29,776 tonnes of gold bearing pyrite concentrates from Olympias, compared to Nil in the same period of 2006. These increased activity levels combined with higher metal prices yielded significantly increased revenues and profitability for the first half of 2007 compared to the same period of 2006. • As a result, the Company recorded 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, compared to a gross profit of $8.63 million in the first half of 2006 and $4.33 million in Q2 2006, on revenues of $17.36 million and $8.27 million, respectively. Cost of sales of $16.94 million in the first half of 2007 and $10.00 million in Q2 2007, compared to $8.73 million and $3.94 million, respectively, for the same periods of 2006, reflect the higher mine activity levels and included $1.68 million in amortisation and depletion expenses in the first half of 2007, compared to $1.17 million for the same period of 2006. • The Company's corporate administrative and overhead expenses have increased from $1.00 million in the first half of 2006 and $0.47 million in Q2 2006, to $1.73 million and $0.88 million, respectively, for the same periods of 2007. This reflects higher general levels of corporate activity compared to the prior period. • The Company recorded a non-cash equity-based compensation expense of $0.91 million in the first half of 2007 and $0.45 million in Q2 2007, compared to $1.43 million and $0.76 million, respectively, for the same periods of 2006. Whilst a higher number of restricted share units were outstanding in the first half of 2007, the lower levels of charges reflect the increased level of development activities by corporate personnel. In the first half of 2007, 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 loss of $0.42 million in the first half of 2007 and $0.27 million in Q2 2007. This loss resulted primarily from unrealised losses on translation of US dollar denominated balances in the books of Hellas Gold. In contrast, the Company realised a foreign exchange gain of $0.22 million in the first half of 2006 and $0.20 million in Q2 2006. • Hellas Gold's administrative and overhead expenses amounted to $4.53 million in the first half of 2007 and $2.32 million in Q2 2007, compared to $1.80 million and $1.06 million, respectively, for the same periods of 2006. Hellas Gold's administrative and overhead expenses are mostly attributable to operations related to the Stratoni mine and plant, and have increased significantly in the first half of 2007 compared to the same period of 2006 due to continued higher levels of community and local activities. The Company is involved in several local projects including refurbishment of local buildings and amenities. • Hellas Gold incurred an expense of $2.18 million in the first half of 2007 and $1.08 million in Q2 2007, compared to $1.39 million and $0.89 million, respectively, for the same periods of 2006, 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. At Madem Lakkos, in particular, a significantly higher amount of backfilling of underground voids took place in the first half of 2007 compared to the same period of 2006. Additional costs were also incurred making underground areas safe for backfilling activities. • Hellas Gold incurred an expense of $Nil in the first half of 2007 and $Nil in Q2 2007, compared to a non-recurring expense of $2.03 million and $1.12 million, respectively, for the same periods of 2006, for the maintenance of old adits and equipment at Stratoni. • The Company recorded a charge for income taxes of $4.52 million in the first half of 2007 and $2.80 million in Q2 2007, compared to $1.44 million and $0.56 million, respectively, for the same periods of 2006. The charge in the first half of 2007 has arisen due to the Company providing for current tax on Hellas Gold profits and a residual future tax liability resulting from the elimination of the future tax asset based on losses carried forward in Hellas Gold. The charge in the first half of 2006 had arisen due to the Company reducing its future tax asset relating to the reduction of losses carried forward in Hellas Gold. • The Company recorded a charge of $4.64 million in the first half of 2007 and $2.79 million in Q2 2007 relating to the non-controlling shareholder's 35% interest in Hellas Gold's profit (after tax) for this period, compared to $0.70 million and $0.23 million, respectively, for the same periods of 2006 relating to the non-controlling shareholder's interest in Hellas Gold's loss (after tax) for this period. On 28 June 2007, European Goldfields acquired an additional 30% interest in Hellas Gold, as a result of which, the relative levels of this charge will reduce in future periods. Liquidity and capital resources As at 30 June 2007, the Company had cash and cash equivalents of $221.60million, compared to$34.59 million as at 31 December 2006, and working capital of $211.64 million,compared to $41.85 million as at 31 December 2006. The increase in cash and cash equivalents as at 30 June 2007, compared to thebalances as at31 December 2006, resulted primarily from the net proceeds of an equityfinancing ($130.06 million), deferred revenue ($57.50 million) and operatingcash flow ($18.96 million), offset by share issue costs ($7.15 million), capitalexpenditure in Greece ($6.25 million), deferred exploration and developmentcosts in Romania($1.95 million), an increase in inventory ($1.74 million), a net increase inaccounts receivable vs accounts payable ($1.61 million) and deferred developmentcosts in Greece ($0.94 million). The following table sets forth the Company's contractual obligations includingpayments due for each of the next five years and thereafter: (in thousands Payments due by periodof US dollars) -------------- -------- ---------- --------- --------- ---------Contractual Total Less than 1 - 3 years 4 - 5 years After 5 yearsobligations 1 year -------------- -------- ---------- --------- --------- ---------Operatinglease (Londonoffice) 702 187 373 142 -Explorationlicencespendingcommitments(Voia,Romania) 1,080 - 1,080 - --------------- -------- ---------- --------- --------- ---------Totalcontractualobligations 1,782 187 1,453 142 --------------- -------- ---------- --------- --------- --------- In 2007, the Company expects to spend a total of $55.80 million in capitalexpenditures to fund the development of its project portfolio. This amountcomprises $10.53 million at its existing operation at Stratoni, and furtheramounts of $12.09 million at Olympias, in order to start the refurbishment ofthe mine and concentrator plant, and $30.00 million at Skouries, as the Companyputs in orders for the long lead time equipment items and site preparation. AtCertej, the Company expects to spend a further $3.18 million as it finalises itsbankable feasibility study and increases exploration on its inferred resourcesand potential satellite orebodies close to Certej. In addition to its capitalexpenditure programme, the Company expects to spend $2.04 million in explorationover the wider licence area in Greece, $12.00 million on Hellas Goldadministrative and overhead and other expenses and $3.00 million on corporateadministrative and overhead expenses. The Company expects to fund all such costsfrom existing cash balances and operating cash flow generated at Stratoni. Outstanding share data The following represents all equity shares outstanding and the numbers of commonshares into which all securities are convertible, exercisable or exchangeable: Common shares: 178,292,645Common share options: 3,249,999Restricted share units: 790,000Common shares (fully-diluted): 182,332,644 Preferred shares: Nil Outlook Reference is made to the Company's news release dated 8 August 2007 whichaccompanies this Management's Discussion and Analysis. 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 2006, filed on SEDAR at www.sedar.com. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
EGU.L