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 2008 2007 2007 2007 2007 2006 2006
Q2 Q1 Q4 Q3 Q2 Q1 Q4 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 2,213 49 2,042 2,150 1,846 214 1,345 674
(tonnes)
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 4,633 3,454 4,209 2,364 5,855 3,463 4,418 4,702
(tonnes)*
Lead concentrate (tonnes) 7,418 1,872 8,004 5,694 5,651 3,774 5,124 3,696
- Containing payable: Lead 4,628 1,188 5,082 3,759 3,636 2,486 3,329 2,418
(tonnes)*
Silver (oz)* 355,298 95,582 399,272 297,321 285,349 190,292 254,881 189,349
Cash operating cost per tonne 161 164 175 144 135 138 147 109
milled ($)
Inventory (end of period)
Ore mined (wet tonnes) 1,003 2,816 - 4,868 4,603 843 2,499 3,617
Zinc concentrate (tonnes) 5,660 2,745 1,689 2,797 2 3,524 37 1,199
Lead/silver concentrate 1,238 2,213 49 2,042 2,150 1,846 214 1,345
(tonnes)
Financial information
(in thousands of US dollars)
Sales ($) 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 ($) 476 997 2,000 1,256 837 653 1,119 796
* Net of smelter payable deductions
Sale of Gold-Bearing Concentrates from Existing Stockpile at Olympias (Greece)
2008 2008 2007 2007 2007 2007 2006 2006
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
Sales
Gold concentrate (dmt) 22,479 9,778 21,385 28,393 12,686 17,090 3,299 6,134
Financial information
(in thousands of US dollars)
Sales ($) 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 EUR103 ($161) per tonne, compared to EUR110 ($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 EUR7 ($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:
2008 2008 2007 2007 2007 2007 2006 2006
(in thousands of US dollars, Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
except per share amounts) $ $ $ $ $ $ $ $
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 (36) - - - - - - -
investment
Profit/(loss) before income 242 4,263 1,567 15,268 10,925 5,676 6,616 4,102
tax
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 1,092 1,603 2,133 1,658 1,248
development costs - Romania 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 - 656 769 915 491 520 421 2,095 462
Greece
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 1,106 192 385 385 144
office)
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
MSCQXLFFVVBBBBL
European Gold (LSE:EGU)
Historical Stock Chart
From Jun 2024 to Jul 2024
European Gold (LSE:EGU)
Historical Stock Chart
From Jul 2023 to Jul 2024
