15th May 2007 07:04
European Goldfields Ltd15 May 2007 Immediate Release 15 May 2007 European Goldfields Limited MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE THREE-MONTH PERIOD ENDED 31 MARCH 2007 The following discussion and analysis, prepared as at 15 May 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 thethree-month periods ended 31 March 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, alldollar amounts in the following discussion and analysis and the ConsolidatedFinancial 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 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 65% interest in Hellas Gold S.A ("Hellas Gold").Hellas Gold owns the three major gold and base metal deposits of Stratoni,Skouries and Olympias in Northern Greece. Hellas Gold commenced production atStratoni in September 2005 and commenced selling an existing stockpile of goldconcentrates from Olympias in July 2006. Hellas Gold is applying for permits todevelop the Skouries and Olympias projects. Romania - The Company owns 80% of the Certej gold/silver project in Romania. TheCompany submitted in March 2007 a technical feasibility study to the Romaniangovernment in support of a permit application to develop the project. Results of operations The Company's results of operations for the three-month period ended 31 March2007 were comprised primarily of activities related to the results of operationsof the Company's 65%-owned subsidiary Hellas Gold in Greece and the Company'sexploration and development program in Romania. The following table summarisesoperational results at Stratoni. Stratoni Mine (Greece) -------------------------------------------------- --------- -------- -------- -------- -------- Q1 2007 Q4 2006 Q3 2006 Q2 2006 Q1 2006---------------------------- --------- -------- -------- -------- --------Inventory (start of period)Ore mined (wet tonnes) 2,499 3,617 12,326 1,155 10,963Zinc concentrate (tonnes) 37 1,199 1,562 1,034 95Lead/silver concentrate(tonnes) 214 1,345 674 308 1,268 ProductionOre mined (wet tonnes) 55,069 47,321 49,652 47,966 31,752 Ore milled (tonnes) 55,258 47,038 56,769 35,810 40,333 - Average grade: Zinc (%) 11.39 10.73 10.54 9.45 8.89Lead (%) 7.38 6.56 5.78 5.83 7.28Silver (g/t) 179.56 161.73 142.29 146.09 183.45 Zinc concentrate (tonnes) 11,731 9,263 10,768 6,041 6,222 - Containing: Zinc (tonnes) 5,760 4,619 5,468 3,098 3,229 Lead concentrate (tonnes) 5,406 3,993 4,368 2,703 3,662 - Containing: Lead (tonnes) 3,744 2,818 2,997 1,881 2,667Silver (oz) 288,023 216,586 227,817 141,809 207,496 SalesZinc concentrate (tonnes) 8,244 10,425 11,130 5,513 5,283 - Containing payable: Zinc (tonnes)* 3,463 4,418 4,702 2,320 2,335 Lead concentrate (tonnes) 3,774 5,124 3,696 2,337 4,623 - Containing payable: Lead (tonnes)* 2,486 3,329 2,418 1,554 3,166Silver (oz)* 190,292 254,881 189,349 121,350 252,559 Cash operating costs pertonne milled ($) 138 147 109 115 90 Inventory (end of period)Ore mined (wet tonnes) 843 2,499 3,617 12,326 1,155Zinc concentrate (tonnes) 3,524 37 1,199 1,562 1,034Lead/silver concentrate(tonnes) 1,846 214 1,345 674 308 Financial information(in thousands of US dollars)Sales ($)** 17,083 19,870 15,211 8,274 9,083Gross profit ($)** 10,139 10,669 7,958 4,330 4,295Capital expenditure ($) 1,564 4,202 1,487 1,351 526Amortisation and depletion($) 773 1,119 796 942 456---------------------------- --------- -------- -------- -------- -------- * Net of smelter deductions ** Includes the sale of approximately 13,778 wmt of gold concentrates from anexisting stockpile at Olympias. Cash operating costs per tonne milled fell in Q1 2007 to $138 (€104) per tonne,compared to $147 (€114) per tonne in Q4 2006. The $9 per tonne decrease in costsconsisted of a $22/t (€17/t) reduction resulting from higher tonnage throughputat the mill, offset by cost increases at the Stratoni operation and thestrengthening of the Euro against the US dollar. Mill costs increased $5/t (€4/t) as a result of higher labour and maintenance costs, and mine costs increasedby $4/t (€3/t) mainly as a result of a significant increase in operationaldevelopment in the quarter, to access new levels in the upper area of the mine.The weakening US dollar also added approximately US$3/t to the dollar based costper tonne. Compared to 2006, labour costs have increased as a result of national labouragreements which have awarded a 7% salary increase effective 1 January 2007 anda second increase of 6% effective 1 May 2007. Under new contract arrangementswith Aktor S.A. (Hellas Gold's mining contractor), labour is now charged on anaccruals rather than a cash basis, which inflated Q1 costs compared to the fullyear. The Company's results of operations for the eight most recently completedquarters are summarised in the following table: ------------------ ------ ------ ------ ------ ------ ------ ------ ------(in thousandsof US dollars, 2007 2006 2006 2006 2006 2005 2005 2005except per share Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2amounts) $ $ $ $ $ $ $ $ ------------------ ------ ------ ------ ------ ------ ------ ------ ------Statement of lossand deficitSales 17,083 19,870 15,211 8,274 9,083 1,464 - 57Cost of sales 6,944 9,201 7,253 3,944 4,788 1,367 - -Gross profit 10,139 10,669 7,958 4,330 4,295 97 - 57Interest income 453 393 485 267 300 339 272 326Expenses 4,916 4,446 4,341 4,345 3,558 5,079 3,536 2,287Profit/(loss)before incometax 5,676 6,616 4,102 252 1,037 (4,643) (3,264) (1,904)Profit/(loss)after incometax 3,957 4,349 2,984 (311) 161 (4,251) (3,729) (846)Non-controlling interest (1,848) (1,973) (1,509) (225) (475) (58) 1,003 123Profit/(loss)for the period 2,109 2,376 1,475 (536) (314) (4,309) (2,726) (723)Earnings/(loss) per share 0.02 0.02 0.01 0.00 0.00 (0.04) (0.02) (0.01)Balance sheet (endof period)Working capital 45,201 41,854 39,666 36,453 34,515 33,765 39,171 49,544Total assets 325,501 311,943 294,719 292,236 274,381 266,618 295,914 298,948Non currentliabilities 79,183 74,603 70,080 69,018 64,684 62,807 70,053 71,056Statement of cashflowsDeferredexplorationanddevelopmentcosts -Romania 696 856 598 992 848 1,081 1,067 893Plant andequipment -Greece 1,577 4,144 1,268 1,599 568 1,298 2,506 2,453Deferreddevelopmentcosts - Greece 421 2,095 462 999 476 1,510 439 891---------------- ------ ------ ------ ------ ------ ------ ------ ------ The breakdown of deferred exploration and development costs per mineral propertyfor the three-month periods ended 31 March 2007 and 2006 is as follows: Three-month periods ended 31 March ------------------- ----------- -----------(in thousands of US dollars) 2007 2006 $ $ ----------- --------------------------Romanian mineral propertiesCertej 661 (95%) 772 (91%)Cainel -(-%) 17 (2%)Voia 10 (1%) 42 (5%)Baita-Craciunesti 25 (4%) 17 (2%)--------------- ----------- ----------- 696(100%) 848 (100%) --------------- ----------- -----------Greek mineral propertiesStratoni - (-%) - (-%)Skouries 219 (52%) 162 (34%)Olympias 202 (48%) 316 (66%)--------------- ----------- ----------- 421 (100%) 478 (100% Total 1,117 (100%) 1,326 (100%) --------------- ----------- ----------- The Certej exploitation licence and the Baita-Craciunesti exploration licenceare 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 threeprivate Romanian companies, hold the remaining 20% interest in Deva Gold and theCompany holds the pre-emptive right to acquire such 20% interest. The Company isrequired to fund 100% of all costs related to the exploration and development ofthese properties. As a result, the Company is entitled to the refund of suchcosts (plus interest) out of future cash flows generated by Deva Gold, prior toany dividends 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 $5.68 million for the three-monthperiod ended 31 March 2007, compared to a profit (before tax) of $1.04 millionfor the same period of 2006. The Company recorded a net profit (after tax andnon-controlling interest) of $2.11 million ($0.02 per share) for the three-monthperiod ended 31 March 2007, compared to a net loss of $0.31 million ($0.00 pershare) for the same period of 2006. The following factors have contributed tothe Company recording a profit (before tax) in Q1 2007, compared to a loss forthe same period of 2006: • In Q1 2007, Hellas Gold's Stratoni mine was operating at substantially higher levels than in Q1 2006: mine ore production increased 73% and mill throughput increased 37% over the same period in 2006. This translated into increased concentrate tonnages sold of 122% for zinc and 17% for lead. In addition, in Q1 2007 Hellas Gold sold 13,778 tonnes of pyrite concentrates, compared to nil in the prior year. These increased activity levels combined with higher metal prices yielded significantly increased revenues and profitability for Q1 2007 compared to Q1 2006. • As a result, the Company recorded $10.14 million in gross profit on revenues of $17.08 million in Q1 2007 for the sale of concentrates by Hellas Gold, compared to $4.30 million in gross profit on revenues of $9.08 million for the same period of 2006. Cost of sales of $6.94 million compared to $4.79 million for the same period of 2006, reflect the higher mine activity levels and included $0.77 million in amortisation and depletion expenses. • The Company's corporate administrative and overhead expenses have increased slightly from $0.53 million in Q1 2006, to $0.85 million for the same period 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 $0.46 million in Q1 2007, compared to $0.67 million for the same period of 2006. Whilst a higher number of restricted share units were outstanding in Q1 2007, the lower levels of charges reflect the increased level of development activities by corporate personnel. In Q1 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 $0.15 million in Q1 2007. This loss resulted primarily from unrealised losses on translation of Sterling denominated liabilities at the period end in a weakening United States dollar environment. In contrast, the Company realised a foreign exchange gain of $0.02 million in Q1 2006. • In Q1 2007, Hellas Gold's administrative and overhead expenses amounted to $2.21 million, compared to $0.74 million for the same period 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 Q1 2007 compared to the same period of 2006. The increase in costs relate to high current levels of community and local activities. The company is involved in several local projects including refurbishment of local buildings and amenities. • In Q1 2007, Hellas Gold incurred an expense of $1.10 million, compared to $0.49 million for the same period 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 Q1 2007 than in the prior period in 2006. Additional costs were also incurred making underground areas safe for backfilling activities. • In Q1 2007, Hellas Gold incurred a non-recurring expense of $Nil million, compared to $0.90 million for the same period of 2006, for the maintenance of old adits and equipment at Stratoni. Any minor amounts which relate to rehabilitation work at the mine are charged directly to cost of sales. • The Company recorded a charge for income taxes of $1.72 million in Q1 2007, compared to a charge of $0.88 million for the same period of 2006. The charge in Q1 2007 has arisen due to the Company providing for current tax for the first time 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 Q1 2006 had arisen due to the Company reducing its future tax asset relating to the losses carried forward in Hellas Gold. • The Company recorded a charge of $1.85 million in Q1 2007 relating to the non-controlling shareholder's interest in Hellas Gold's profit (after tax) for this period, compared to a charge of $0.48 million for the same period of 2006, relating to the non-controlling shareholder's interest in Hellas Gold's loss (after tax) for this period. Comprehensive Income The Company is reporting comprehensive income for the first time, having adoptedthe new accounting standards for financial instruments which were effective forCanadian companies on January 1, 2007. The only component for comprehensiveincome was currency translation adjustments. Liquidity and capital resources As at 31 March 2007, the Company had cash and cash equivalents of $33.96million, compared to $34.59 million as at 31 December 2006, and working capitalof $45.20 million, compared to $41.85 million as at 31 December 2006. The small decrease in cash and cash equivalents as at 31 March 2007, compared tothe balances as at 31 December 2006, resulted primarily from a net increase inaccounts receivable vs. accounts payable ($2.21 million), an increase ininventory ($2.63 million), deferred exploration and development costs in Romania($0.70 million), capital expenditure in Greece ($1.58 million), deferreddevelopment costs in Greece ($0.42 million) and the effects of foreign currencytranslation on cash ($0.30 million), offset by operating profits ($7.25million). The following table sets forth the Company's contractual obligations includingpayments due for each of the next five years and thereafter: (in thousands of US dollars) Payments due by period---------------- -------- ---------- --------- --------- --------- Contractual Less than 1obligations Total year 1 - 3 years 4 - 5 years After 5 years ---------------- -------- ---------- --------- --------- --------- Operatinglease (Londonoffice) 840 187 373 280 -Explorationlicencespendingcommitments(Voia,Romania) 1,080 - 1,080 - ----------------- -------- ---------- --------- --------- ---------Totalcontractualobligations 1,920 187 1,453 280 ----------------- -------- ---------- --------- --------- --------- In 2007, the Company expects to spend a total of $81.31 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 $55.51 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 ore bodies 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, $5.00 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. Afterthe quarter end, Hellas Gold received $57.50 million from Silver Wheatonrelating to the sale of its silver stream 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: 115,004,621Common share options: 3,281,999Restricted share units: 1,185,000 --------------Common shares (fully-diluted): 119,471,620 Preferred shares: Nil Adoption of new accounting ftandards Effective 1 January 2007, the Company adopted the revised CICA Section 1506"Accounting Changes", which requires that: a voluntary change in accountingprinciples can be made if, and only if, the changes result in more reliable andrelevant information, changes in accounting policies are accompanied withdisclosures of prior period amounts and justification for the change, and forchanges in estimates, the nature and amount of the change should be disclosed.The company has not made any voluntary change in accounting principles since theadoption of the revised standard. Financial Instruments - Recognition and Measurement, Section 3855 This standard prescribes when a financial asset, financial liability, ornon-financial derivative is to be recognised on the balance sheet and whetherfair value or cost-based methods are used to measure the recorded amounts. Italso specifies how financial instrument gains and losses are to be presented. Effective 1 January 2007, the Company's cash equivalents, temporary investmentsand investments in marketable securities have been classified asavailable-for-sale and are recorded at fair value on the balance sheet. Fairvalues are determined directly by reference to published price quotations in anactive market. Changes in the fair value of these instruments are reflected inother comprehensive income and included in shareholders' equity on the balancesheet. All derivatives are to be recorded on the balance sheet at fair value.Mark-to-market adjustments on these instruments will be included in net profit,unless the instruments are designated as part of a cash flow hedge relationship.In accordance with the standard's transitional provisions, the Companyrecognises as separate assets and liabilities only embedded derivatives acquiredor substantively modified on or after 1 January 2003. All other financial instruments will be recorded at cost or amortised cost,subject to impairment reviews. The criteria for assessing on other thantemporary impairment remain unchanged. Transaction costs incurred to acquirefinancial instruments are included in the underlying balance. The Company hasdetermined that the adoption of Section 3855 had no effect on these financialstatements. Hedges, Section 3865 This standard is applicable when a company chooses to designate a hedgingrelationship for accounting purposes. It builds on the previous AcG-13 "HedgingRelationships" and Section 1650 "Foreign Currency Translation", by specifyinghow hedge accounting is applied and what disclosures are necessary when it isapplied.The Company has determined that the adoption of Section 3865 had noeffect on these financial statements. Comprehensive Income, Section 1530 This standard requires the presentation of a statement of comprehensive incomeand its components. Comprehensive income includes both net earnings and othercomprehensive income. Other comprehensive income includes holding gains andlosses on available-for-sale investments, gains and losses on certain derivativeinstruments and foreign currency gains and losses relating to self-sustainingforeign operations, all of which are not included in the calculation of netearnings until realised. This statement has been included in the consolidatedfinancial statements starting this period. 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 reached over 175,000 tonnes in 2006, and is expected tosteadily increase to 400,000 tonnes per annum by year five. In January 2006, Hellas Gold submitted a business plan to the Greek State forthe joint development of its major gold and base metal projects of Skouries andOlympias. This submission represents a significant milestone in obtaining thepermits for these projects. The business plan focuses on a phased approach to the development of theprojects with emphasis on achieving full production at the Skouries gold-copperporphyry deposit as soon as possible, and the phasing of the Olympiasgold-lead-zinc-silver deposit. This approach minimises financial risk by thephased injection of capital. The principal revenue stream in the early phaseswill be through the sale of concentrates. In March 2006, Hellas Gold received an official response from the Greek Ministryof Development (the "Ministry") on the business plan. The response states thatthe Ministry is in agreement with the principles stated in the business plan,and that the Ministry considers the business plan to be in the best interests ofthe Greek economy. This response was received by Hellas Gold within thetimeframe provided for in its contract with the Greek State. In March 2006, Hellas Gold submitted a preliminary environmental impact study(PEIS) to the Greek State, on which comments are expected shortly. Hellas Goldis currently finalising a full environmental impact study (EIS) addressing anycomments made on the PEIS. On approval of the EIS, the environmental permits forSkouries and Olympias are expected to be issued. Hellas Gold will then submit to the Greek government a final technical report onthe Skouries and Olympias projects, which will restate the principles of thebusiness plan and take into account any conditions detailed in the environmentalpermit. The mining permits are expected to be issued on approval of thetechnical report by the Greek government. Hellas Gold also holds 317 km(2) of highly prospective exploration licences innorthern Greece. Recent work by the Company has highlighted a total of twentyexploration targets, including six advance targets and extensions to knowndeposits, seven targets of known mineralisation for follow-up work and sevenconceptual targets. An exploration programme has been undertaken focusing onthese targets. Romania - The Company has completed all necessary Environmental ImpactAssessments (EIA Levels I and II) for the Certej project. The Company submittedin March 2007 a technical feasibility study to the Romanian government, insupport of a permit application to develop the project. To complete itsapplication, the Company plans to submit a final Environmental Impact Study tothe Romanian government in Q3 2007. Finally, the Company continues to conduct an exploration programme in Romaniafocusing on extending the life-of-mine of the Certej project and increasing thenumber of conceptual and regional targets for further exploration in the SouthApuseni Mountain area. 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. Documents sent to shareholders Copies of the Company's Annual Report, Management's Discussion and Analysis andConsolidated Financial Statements for the year ended 31 December 2006, andcopies of the Notice of Meeting and Management Proxy Circular for the AnnualMeeting of shareholders of the Company to be held on 21 May 2007 have been sentto shareholders and 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