8th Nov 2007 07:02
European Goldfields Ltd08 November 2007 Immediate Release 8 November 2007 European Goldfields Limited MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE THREE- AND NINE-MONTH PERIODS ENDED 30 SEPTEMBER 2007 The following discussion and analysis, prepared as at 8 November 2007, isintended to assist in the understanding and assessment of the trends andsignificant changes in the results of operations and financial conditions ofEuropean Goldfields Limited (the "Company"). Historical results may not indicatefuture performance. Forward-looking statements are subject to a variety offactors that could cause actual results to differ materially from thosecontemplated by these statements. The following discussion and analysis shouldbe read in conjunction with the Company's unaudited consolidated financialstatements for the three- and nine-month periods ended 30 September 2007 and2006 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 nine-month periods ended30 September 2007 were comprised primarily of activities related to the resultsof operations of the Company's 95%-owned subsidiary Hellas Gold in Greece andthe Company's exploration and development program in Romania. The followingtable summarises operational results at Stratoni. Stratoni Mine (Greece) -------------------------------------------------- ------ ------ ------ ------ ------ ------- Q3 2007 Q2 2007 Q1 2007 Q4 2006 Q3 2006 Q2 2006 Q1 2006-------------------- -------- ------ ------ ------ ------ ------ -------Inventory (start ofperiod)Ore mined (wet tonnes) 4,603 843 2,499 3,617 12,326 1,155 10,963Zincconcentrate (tonnes) 2 3,524 37 1,199 1,562 1,034 95Lead/silverconcentrate (tonnes) 2,150 1,846 214 1,345 674 308 1,268 ProductionOre mined (wettonnes) 56,075 53,088 55,069 47,321 49,652 47,966 31,752 Ore milled(tonnes) 54,499 48,179 55,258 47,038 56,769 35,810 40,333- Averagegrade: Zinc(%) 8.42 11.57 11.39 10.73 10.54 9.45 8.89Lead (%) 7.55 9.14 7.38 6.56 5.78 5.83 7.28Silver (g/t) 186.35 232.40 179.56 161.73 142.29 146.09 183.45 Zincconcentrate(tonnes) 8,506 10,485 11,731 9,263 10,768 6,041 6,222- Containing:Zinc (tonnes) 4,194 5,170 5,760 4,619 5,468 3,098 3,229 Leadconcentrate(tonnes) 5,586 5,955 5,406 3,993 4,368 2,703 3,662- Containing:Lead (tonnes) 3,781 4,109 3,744 2,818 2,997 1,881 2,667Silver (oz) 279,059 328,879 288,023 216,586 227,817 141,809 207,496 SalesZincconcentrate(tonnes) 5,710 14,007 8,244 10,425 11,130 5,513 5,283- Containingpayable: Zinc(tonnes)* 2,364 5,855 3,463 4,418 4,702 2,320 2,335 Leadconcentrate(tonnes) 5,694 5,651 3,774 5,124 3,696 2,337 4,623- Containingpayable: Lead (tonnes)* 3,759 3,636 2,486 3,329 2,418 1,554 3,166Silver (oz)* 297,321 285,349 190,292 254,881 189,349 121,350 252,559 Cash operatingcosts pertonne milled ($) 144 135 138 147 109 115 90 Inventory (end ofperiod)Ore mined (wettonnes) 4,868 4,603 843 2,499 3,617 12,326 1,155Zincconcentrate(tonnes) 2,797 2 3,524 37 1,199 1,562 1,034Lead/silverconcentrate(tonnes) 2,042 2,150 1,846 214 1,345 674 308 Financialinformation(in thousands of USdollars)Sales ($) 16,634 22,866 14,215 19,439 14,226 8,274 9,083Gross profit ($) 8,425 13,991 8,294 10,477 6,973 4,330 4,295Capitalexpenditure ($) 12,142 4,673 1,564 4,202 1,487 1,351 526Amortisationand depletion ($) 1,256 837 653 1,119 796 942 456-------------------- -------- ------ ------ ------ ------ ------ -------* Net of smelter payable deductions Sale of Gold-Bearing Concentrates from Existing Stockpile at Olympias (Greece) -------------------------------------------------- --- ------ ------ ------ ------ ------ ------- Q3 2007 Q2 2007 Q1 2007 Q4 2006 Q3 2006 Q2 2006 Q1 2006-------------------- -------- ------ ------ ------ ------ ------ -------SalesGoldconcentrate(dmt) 28,393 12,686 17,090 3,299 6,134 1,905 - Financialinformation(in thousands of USdollars)Sales ($) 5,029 2,078 2,868 431 985 - -Gross profit ($) 2,848 958 1,845 192 985 - -Amortisationand depletion ($) 265 76 120 - - - --------------------- -------- ------ ------ ------ ------ ------ ------- Cash operating cost per tonne of ore milled increased from $135 (€100) per tonnein the second quarter of 2007 to $144 (€105) per tonne in the third quarter of2007. Of the increase, $9 (€7) was the result of the second quarter benefitingfrom a one off credit relating to operating development. The appreciation of theEuro against the US dollar in the third quarter of 2007 added a further $2 pertonne, offset by higher throughput levels at the mill. As at 30 September 2007, concentrate inventory levels represented approximatelyone shipment each of lead and zinc concentrates. The Company's financial results for the eight most recently completed quartersare summarised in the following table:------------------ ------ ------ ------ ------ ------ ------ ------ ------(in thousandsof US dollars, 2007 2007 2007 2006 2006 2006 2006 2005except per share Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4amounts) $ $ $ $ $ $ $ $------------------ ------ ------ ------ ------ ------ ------ ------ ------Statement of lossand deficitSales 21,663 24,944 17,083 19,870 15,211 8,274 9,083 1,464Cost of sales 10,390 9,995 6,944 9,201 7,253 3,944 4,788 1,367Gross profit 11,273 14,949 10,139 10,669 7,958 4,330 4,295 97Interestincome 2,320 1,116 453 393 485 267 300 339Foreignexchangegain/(loss) 6,494 (265) (152) (903) (67) 202 16 (36)Expenses 4,819 4,875 4,764 3,543 4,274 4,547 3,574 5,043Profit/(loss)before incometax 15,268 10,925 5,676 6,616 4,102 252 1,037 (4,643)Profit/(loss)after incometax 12,504 8,129 3,957 4,349 2,984 (311) 161 (4,251)Non-controlling interest (348) (2,794) (1,848) (1,973) (1,509) (225) (475) (58)Profit/(loss)for the period 12,156 5,335 2,109 2,376 1,475 (536) (314) (4,309)Earnings/(loss) per share 0.07 0.04 0.02 0.02 0.01 0.00 0.00 (0.04)Balance sheet (endof period)Workingcapital 224,289 211,637 45,201 41,854 39,666 36,453 34,515 33,765Total assets 744,998 729,774 325,501 311,943 294,719 292,236 274,381 266,618Non currentliabilities 175,019 170,970 79,183 74,603 70,080 69,018 64,684 62,807Statement of cashflowsDeferredexplorationanddevelopmentcosts -Romania 1,658 1,248 696 856 598 992 848 1,081Plant andequipment -Greece 12,142* 4,673 1,577 4,144 1,268 1,599 568 1,298Deferreddevelopmentcosts - Greece 491 520 421 2,095 462 999 478 1,510---------------- ------ ------ ------ ------ ------ ------ ------ ------* Includes a deposit of €6.25 million ($8.90 million) paid in July 2007 toOutotec Minerals OY for the purchase of over €30 million worth of mill and plantequipment. The breakdown of deferred exploration and development costs per mineral propertyfor the three- andnine-month periods ended 30 September 2007 and 2006 is as follows: Nine-month periods ended 30 Sept. Three-month periods ended 30 Sept. -------------------- ------------------ ----------- -----------(in thousands ofUS dollars) 2007 2006 2007 2006 $ (%) $ (%) $ (%) $ (%) ---------------- ----------- ----------- ----------- -----------Romanian mineralpropertiesCertej 3,367 (94%) 2,131 (87%) 1,476 (89%) 495 (83%)Cainel 16 (1%) 21 (1%) 34 (2%) 2 (1%)Voia 161 (4%) 217 (9%) 131 (8%) 72 (11%)Baita-Craciunesti 58 (1%) 69 (3%) 17 (1%) 29 (5%)---------------- ----------- ----------- ----------- ----------- 3,602 (100%) 2,438 (100%) 1,658 (100%) 598 (100%) ---------------- ----------- ----------- ----------- -----------Greek mineralpropertiesStratoni 240 (17 %) - (-%) 126 (26%) - (-%)Skouries 1,115 (78 %) 1,140 (59%) 605 (123%) 273 (59%)Olympias 77 (5 %) 797 (41%) (240) (-49%) 189 (41%)---------------- ----------- ----------- ----------- ----------- 1,432 (100%) 1,937 (100%) 491 (100%) 462 (100%) ---------------- ----------- ----------- ----------- ----------- Total 5,034 (100%) 4,375 (100%) 2,149 (100%) 1,060 (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 $31.87 million for the nine-monthperiod ended 30 September 2007, compared to a profit (before tax) of $5.39million for the same period of 2006. The Company recorded a net profit (aftertax and non-controlling interest) of $19.60 million ($0.14 per share) for thenine-month period ended 30 September 2007, compared to a net profit of $0.63million ($0.01 per share) for the same period of 2006. The Company recorded a profit (before tax) of $15.27 million for the three-monthperiod ended 30 September 2007, compared to a profit (before tax) of $4.10million for the same period of 2006. The Company recorded a net profit (aftertax and non-controlling interest) of $12.16 million ($0.07 per share) for thethree-month period ended 30 September 2007, compared to a net profit of $1.48million ($0.01 per share) for the same period of 2006. The following factors have contributed to the above: • In the first nine months of 2007, Hellas Gold's Stratoni mine was operating at substantially higher levels than in the same period of 2006. Mine ore production increased 27% and mill throughput increased by 19% in the first nine months of 2007 over the same period in 2006. This translated into increased concentrate tonnages sold of 28% for zinc and 42% for lead. In addition, in the nine months of 2007, Hellas Gold sold 58,169 tonnes of gold-bearing pyrite concentrates from Olympias, compared to 8,039 tonnes in the same period of 2006. These increased activity levels combined with higher metal prices yielded significantly increased revenues and profitability for the first nine months of 2007 compared to the same period of 2006. • As a result, the Company recorded a gross profit of $36.36 million in the first nine months of 2007 and $11.27 million in Q3 2007, on revenues of $63.69 million and $21.66 million, respectively, compared to a gross profit of $16.58 million in the first nine months of 2006 and $7.96 million in Q3 2006, on revenues of $32.57 million and $15.21 million, respectively. Cost of sales of $27.33 million in the first nine months of 2007 and $10.39 million in Q3 2007, compared to $15.99 million and $7.25 million, respectively, for the same periods of 2006, reflect the higher mine activity levels and included $3.21 million in amortisation and depletion expenses in the first nine months of 2007, compared to $1.92 million for the same period of 2006. • The Company's corporate administrative and overhead expenses have increased from $1.65 million in the first nine months of 2006 and $0.64 million in Q3 2006, to $2.60 million and $0.87 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 $1.51 million in the first nine months of 2007 and $0.60 million in Q3 2007, compared to $2.10 million and $0.67 million, respectively, for the same periods of 2006. Whilst a higher number of restricted share units were outstanding in the first nine months of 2007, the lower levels of charges reflect the increased level of development activities by corporate personnel. In the first nine months 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 gain of $6.1 million in the first nine months of 2007 and $6.5 million in Q3 2007. This gain resulted primarily from unrealised gains on translation into US dollars of funds held in various other currencies, in a weakening US dollar environment. The Company realised a foreign exchange gain of $0.15 million in the first nine months of 2006 and a loss of $0.07 million in Q3 2006. • Hellas Gold's administrative and overhead expenses amounted to $6.66 million in the first nine months of 2007 and $2.13 million in Q3 2007, compared to $3.54 million and $1.74 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 nine months 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 $3.25 million in the first nine months of 2007 and $1.07 million in Q3 2007, compared to $2.14 million and $0.76 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 nine months 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 nine months of 2007 and $Nil in Q3 2007, compared to a non-recurring expense of $2.30 million and $0.27 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 $7.28 million in the first nine months of 2007 and $2.76 million in Q3 2007, compared to $2.56 million and $1.12 million, respectively, for the same periods of 2006. The charge in the first nine months 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 nine months 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 $4.99 million in the first nine months of 2007 and $0.35 million in Q3 2007 relating to the non-controlling shareholder's 35% interest (5% since 28 June 2007) in Hellas Gold's profit (after tax) for this period, compared to $2.21 million and $1.51 million, respectively, for the same periods of 2006. In general, the increase in 2007 reflects higher profits in Hellas Gold being attributable to outside shareholders. However, at the end of Q2, Aktor's investment in Hellas Gold fell from 35% to 5% and therefore there was a large reduction in Q3's outside shareholder's interest relating to this change in ownership structure. Liquidity and capital resources As at 30 September 2007, the Company had cash and cash equivalents of $211.57million, compared to$34.59 million as at 31 December 2006, and working capital of $224.29 million,compared to $41.85 million as at 31 December 2006. The increase in cash and cash equivalents as at 30 September 2007, compared tothe balances as at31 December 2006, resulted primarily from the net proceeds of an equityfinancing ($130.06 million), deferred revenue ($59.68 million) and operatingcash flow ($28.78 million) and the effect of foreign currency translation oncash ($9.80 million), offset by a net increase in accounts receivable vs.accounts payable($8.78 million), cash paid to Aktor in July 2007 as partialconsideration for the acquisition by the Company of an additional 30% interestin Hellas Gold in June 2007 (incl costs) ($9.00 million), share issue costs($7.06 million), capital expenditure in Greece ($17.83 million), deferredexploration and development costs in Romania ($3.60 million), an increase ininventory ($3.66 million) and deferred development costs in Greece ($1.43million). 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 periodContractual Total Less than 1 1 - 3 years 4 - 5 years After 5 yearsobligations -------- year --------- --------- ------------------------- ----------Operatinglease (Londonoffice) 655 187 373 95 -Explorationlicencespendingcommitments(Voia,Romania) 970 - 970 - ----------------- -------- ---------- --------- --------- ---------Totalcontractualobligations 1,625 187 1,343 95 ----------------- -------- ---------- --------- --------- --------- In 2007, the Company expects to spend a total of $30.44 million in capitalexpenditures to fund the development of its project portfolio. This amountcomprises $10.53 million at its existing operation at Stratoni, $1.64 million atOlympias, in order to start the refurbishment of the mine, and $12.52 million atSkouries, as the Company puts in orders for the long lead time equipment itemsand site preparation. At Certej, the Company expects to spend $5.75 million asit finalises its bankable feasibility study and increases exploration on itsinferred resources and potential satellite orebodies close to Certej. Inaddition to its capital expenditure programme, the Company expects to spend$1.00 million in exploration over the wider licence area in Greece, $13.21million on Hellas Gold administrative and overhead and water treatment expensesand $3.50 million on corporate administrative and overhead expenses. The Companyexpects to fund all such costs from existing cash balances and operating cashflow 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: 178,503,057Common share options: 3,171,665Restricted share units: 840,000Common shares (fully-diluted): 182,514,722 Preferred shares: Nil Outlook Reference is made to the Company's news release dated 8 November 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