RNS Number : 8685H
European Goldfields Ltd
11 November 2008
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE THREE- AND NINE-MONTH PERIODS ENDED 30 SEPTEMBER 2008
The following discussion and analysis, prepared as at 11 November 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 nine-month periods ended 30 September 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. In July 2008, the National Agency of Mineral
Resources approved the technical feasibility study in support of its permit application and issued a new mining permit for the Certej
project.
Results of operations
The Company's results of operations for the three- and nine-month periods ended 30 September 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 2008 2007 2007 2007 2007 2006
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
Inventory (start 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)
Production
Ore mined (wet tonnes) 69,847 73,137 58,208 50,643 56,075 53,088 55,069 47,321
Ore milled (tonnes) 63,040 73,280 53,675 53,813 54,499 48,179 55,258 47,038
- Average grade: Zinc (%) 8.82 10.37 9.37 9.00 8.42 11.57 11.39 10.73
Lead (%) 6.40 6.21 5.35 8.12 7.55 9.14 7.38 6.56
Silver (g/t) 160 155 134 206 186 232 180 162
Zinc concentrate (tonnes) 10,451 14,139 9,427 9,082 8,506 10,485 11,731 9,263
- Containing: Zinc (tonnes) 5,132 7,004 4,644 4,425 4,194 5,170 5,760 4,619
Lead concentrate (tonnes) 5,531 6,443 4,035 6,012 5,586 5,955 5,406 3,993
- Containing: Lead (tonnes) 3,726 4,201 2,653 4,021 3,781 4,109 3,744 2,818
Silver (oz) 280,305 316,354 207,215 316,837 297,059 328,879 288,023 216,586
Sales
Zinc concentrate (tonnes) 14,033 11,224 8,371 10,191 5,710 14,007 8,244 10,425
- Containing payable: Zinc 5,818 4,633 3,454 4,209 2,364 5,855 3,463 4,418
(tonnes)*
Lead concentrate (tonnes) 5,475 7,418 1,872 8,004 5,694 5,651 3,774 5,124
- Containing payable: Lead 3,495 4,628 1,188 5,082 3,759 3,636 2,486 3,329
(tonnes)*
Silver (oz)* 263,464 355,298 95,582 399,272 297,321 285,349 190,292 254,881
Cash operating cost per tonne 164 161 164 175 144 135 138 147
milled ($)
Cash operating cost per tonne 109 103 110 121 105 100 104 114
milled (EUR)
Inventory (end of period)
Ore mined (wet tonnes) 6,489 1,003 2,816 - 4,868 4,603 843 2,499
Zinc concentrate (tonnes) 2,078 5,660 2,745 1,689 2,797 2 3,524 37
Lead/silver concentrate 1,294 1,238 2,213 49 2,042 2,150 1,846 214
(tonnes)
Financial information
(in thousands of US dollars)
Sales ($) 13,250 13,000 10,097 18,483 16,634 22,866 14,215 19,439
Gross profit ($) 171 (198) 3,060 6,147 8,425 13,991 8,294 10,477
Capital expenditure ($) 2,496 2,086 3,111 3,779 12,142 4,673 1,564 4,202
Amortisation and depletion ($) 1,571 1,215 997 2,000 1,256 837 653 1,119
* Net of smelter payable deductions
Sale of Gold-Bearing Concentrates from Existing Stockpile at Olympias (Greece)
2008 2008 2008 2007 2007 2007 2007 2006
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
Sales
Gold concentrate (dmt) 12,710 22,479 9,778 21,385 28,393 12,686 17,090 3,299
Financial information
(in thousands of US dollars)
Sales ($) 2,851 5,461 2,611 4,232 5,029 2,078 2,868 431
Gross profit ($) 1,222 3,668 1,789 1,279 2,848 958 1,845 192
Amortisation and depletion ($) 72 129 56 (134) 265 76 120 -
Realised base metal prices in Q3 were lower than in Q2, but revenues remained at similar levels since Q2 sales had been depressed by a
$2.5 million prior quarter write down. Revenues from the sale of Olympias gold concentrates were lower than in Q2 as industrial action
continued at Thessaloniki port.
Operating costs in Q3 rose slightly to EUR109 per tonne from EUR103 per tonne in Q2. With the majority of mining costs fixed on a per tonne
basis, the change resulted solely from lower mill throughput which increased unit costs for the mill and mine G&A. At the end of the quarter
there was 6,489 tonnes of ore inventory, which will be processed in Q4 when unit costs will only benefit accordingly. In dollar terms, the
weakening euro offset the increase in euro costs so that Q3 dollar costs only moved up marginally to $164 per tonne from $161 per tonne in
Q2.
The Company's financial results for the eight most recently completed quarters are summarised in the following table:
2008 2008 2008 2007 2007 2007 2007 2006
(in thousands of US dollars, Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
except per share amounts) $ $ $ $ $ $ $ $
Statement of profit and loss
Sales 16,101 18,461 12,708 22,715 21,663 24,944 17,083 19,870
Cost of sales 14,708 14,991 7,859 15,289 10,390 9,995 6,944 9,201
Gross profit 1,393 3,470 4,849 7,426 11,273 14,949 10,139 10,669
Interest income 1,306 1,502 1,757 2,699 2,320 1,116 453 393
Foreign exchange gain/(loss) (2,800) (27) 2,674 (2,173) 6,494 (265) (152) (903)
Hedge contract profit 1,362 391 - - - - - -
Expenses 6,054 5,058 5,017 6,385 4,819 4,875 4,764 3,543
Share of loss in equity (66) (36) - - - - - -
investment
Profit/(loss) before income (4,859) 242 4,263 1,567 15,268 10,925 5,676 6,616
tax
Profit/(loss) after income tax (5,310) 886 3,642 3,629 12,504 8,129 3,957 4,349
Non-controlling interest 267 (74) (233) (29) (348) (2,794) (1,848) (1,973)
Profit/(loss) for the period (5,043) 812 3,409 3,600 12,156 5,335 2,109 2,376
Earnings/(loss) per share (0.03) 0.00 0.02 0.02 0.07 0.04 0.02 0.02
Balance sheet (end of period)
Working capital 208,609 216,822 225,673 226,431 224,289 211,637 45,201 41,854
Total assets 775,369 796,537 794,911 782,131 744,998 729,774 325,501 311,943
Non current liabilities 187,275 189,559 188,210 185,433 175,019 170,970 79,183 74,603
Statement of cash flows
Deferred exploration and 1,420 1,092 1,603 2,133 1,658 1,248
development costs - Romania 696 856
Plant and equipment - Greece 2,971 3,065 7,147 3,779 12,142 4,673 1,577 4,144
Deferred development costs - 519 656 769 915 491 520 421 2,095
Greece
The breakdown of deferred exploration and development costs per mineral property for the three- and nine-month periods ended 30
September 2008 and 2007 is as follows:
Nine-month periods ended 30 September Three-month periods ended 30 September
2008 2007 2008 2007
(in thousands of US dollars) $ % $ % $ % $ %
Romanian mineral properties
Certej 3,868 94 3,367 94 1,392 98 1,476 89
Cainel 42 1 16 1 - - 34 2
Voia 123 3 161 4 14 1 131 8
Baita-Craciunesti 82 2 58 1 14 1 17 1
4,115 100 3,602 100 1,420 100 1,658 100
Greek mineral properties
Stratoni 514 26 240 17 47 9 126 26
Skouries 1,145 59 1,115 78 310 60 605 123
Olympias 285 15 77 5 162 31 (240) (49)
1,944 100 1,432 100 519 100 491 100
Total 6,059 5,034 1,939 2,149
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 loss (before tax) of $0.35 million for the nine-month period ended 30 September 2008, compared to a profit
(before tax) of $31.87 million for the same period of 2007. The Company recorded a net loss (after tax and non-controlling interest) of
$0.82 million ($0.00 per share) for the nine-month period ended 30 September 2008, compared to a net profit of $19.6 million ($0.14 per
share) for the same period of 2007.
The Company recorded a loss (before tax) of $4.86 million for the three-month period ended 30 September 2008, compared to a profit
(before tax) of $15.27 million for the same period of 2007. The Company recorded a net loss (after tax and non-controlling interest) of
$5.04 million ($0.03 per share) for the three-month period ended 30 September 2008, compared to a net profit of $12.16 million ($0.07 per
share) for the same period of 2007.
The following factors have contributed to the above:
� The key revenue drivers have been commodity prices in particular zinc, lead grades and sale of gold concentrate: in the
first nine months of 2008, the price of zinc which is the primary sales product from the Stratoni mine, averaged approximately $2,130 per
tonne. This was substantially lower than the corresponding period in 2007 which averaged almost $3,450 per tonne. Hellas Gold*s Stratoni
mine was operating at substantially higher levels in the first nine months of 2008 than in the same period of 2007, with mine ore production
increasing 23% and mill throughput increasing 20%. However, lower grades for lead in 2008 meant that lead concentrate production and sales
were at similar levels to the same period in 2007, but with lower levels of profitability. In the first nine months of 2008, Hellas Gold
sold 44,967 tonnes of gold bearing pyrite concentrates from Olympias, a reduction of 23% compared to the same period of 2007 but higher gold
prices more than offset this fall in volumes and resulted in higher gold revenues. In Q3 2008, sales of gold concentrate were down 55% compared to the same period in 2007. Despite higher gold
prices revenues fell 43%. Overall, lower base metal prices and grades and lower gold concentrates shipments outweighed any benefits from the
higher gold prices, with the result that revenues and profitability declined for the first nine months of 2008 and in Q3 2008 compared to
the same periods of 2007.
� As a result, the Company recorded a gross profit of $9.71 million in the first nine months of 2008 and $1.39 million in Q3
2008, on revenues of $47.27 million and $16.10 million, respectively, compared to 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. Cost of sales of $37.56 million in
the first nine months of 2008 and $14.71 million in Q3 2008, compared to $27.33 million and $10.39 million, respectively, for the same
periods of 2007, reflect the higher tonnages mined and processed, and the effect of a weak US dollar increasing the Euro based costs, and
included $4.04 million in amortisation and depletion expenses in the first nine months of 2008, compared to $3.21 million for the same
period of 2007.
� The Company*s corporate administrative and overhead expenses have increased from $2.60 million in the first nine months of
2007 and $0.87 million in Q3 2007, to $3.92 million and $1.35 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 $1.55 million in the first nine months of 2008 and
$0.54 million in Q3 2008, compared to $1.51 million and $0.60 million, respectively, for the same periods of 2007. In the first nine months
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 loss of $0.15 million in the first nine months of 2008 and a foreign exchange loss
of $2.80 million in Q3 2008. The Q3 loss resulted from the translation of Euro working capital balances held by Hellas Gold into a US dollar
functional currency, and occurred at the end of Q3 2008 during a period of rapid Euro weakness against the US dollar. In contrast, the
Company realised a foreign exchange gain of $6.1 million in the first nine months of 2007, and a gain of $6.5 million in Q3 2007 as the
Company gained from holding a basket of Sterling, Canadian dollars and Euros during a period of US dollar weakness.
� Hellas Gold*s administrative and overhead expenses amounted to $6.20 million in the first nine months of 2008 and $2.19
million in Q3 2008, compared to $6.66 million and $2.13 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.
� Hellas Gold incurred an expense of $3.86 million in the first nine months of 2008 and $1.76 million in Q3 2008, compared to
$3.25 million and $1.07 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 increase in Q3 2008 relates to higher costs incurred accessing old voids at Madem Lakkos to allow backfilling activities
to continue.
� The Company recorded a charge for income taxes of $0.43 million in the first nine months of 2008 and $0.45 million in Q3
2008, compared to charges of $7.28 million and $2.76 million, respectively, for the same periods of 2007. Lower profitability in 2008 meant
that Hellas Gold recorded a much lower charge for income tax in the first nine months of 2008 and Q3 2008. Higher metal prices and
profitability in the prior periods led to higher charges for taxation.
� The Company recorded a charge of $0.04 million in the first nine months of 2008 and a credit of $0.27 million in Q3 2008
relating to the non-controlling shareholder*s interest in Hellas Gold*s profit (after tax) for this period, compared to charges of $4.99
million and $0.35 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.
Liquidity and capital resources
As at 30 September 2008, the Company had cash and cash equivalents of $187.56 million, compared to
$218.84 million as at 31 December 2007, and working capital of $208.61 million, compared to $226.43 million as at 31 December 2007.
The decrease in cash and cash equivalents as at 30 September 2008, compared to the balances as at
31 December 2007, resulted primarily from capital expenditure in Greece ($13.18 million), changes in working capital balances ($13.44
million), deferred exploration and development costs in Romania ($4.12 million), the purchase of land ($2.71 million), investment in an
associate ($1.86 million) and deferred development costs in Greece ($1.94 million), offset by advanced sales proceeds from offtakers ($3.56
million) and operating cash flow ($2.58 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 1,043 190 379 379 95
office)
Exploration licence spending
commitments (Voia, Romania) 634 - 634 - -
Outotec OT - Processing Plant 38,750 36,278 2,472 - -
Total contractual obligations 40,427 36,468 3,485 379 95
In 2008, the Company now expects to spend a total of $32 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, $3 million at Olympias in preparation for the refurbishment of the mine and process
plant, and $10 million at Skouries as the Company expects to continue to spend on long lead time equipment and engineering studies. At
Certej, the Company expects to spend $9 million as it finalises its bankable feasibility study, progresses through the final stages of
permitting and continues exploration around Certej to increase the life of mine. In addition to its capital expenditure programme, the
Company expects to spend $1 million in exploration over the wider licence area in Greece, $13 million on Hellas Gold administrative and
overhead and water treatment expenses, and $5 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 nine-month period ended 30 September 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.
International Financial Reporting Standards ("IFRS") - In 2006, the Canadian Accounting Standards Board ("AcSB") published a new
strategic plan that will significantly affect financial reporting requirements for Canadian companies. The AcSB strategic plan outlines the
convergence of Canadian GAAP with IFRS over an expected five year transitional period. In February 2008, the AcSB confirmed that publicly
listed companies will be required to adopt IFRS for interim and annual financial statements relating to fiscal years beginning on or after
January 1, 2011, and in April 2008, the AcSB issued for comment its Omnibus Exposure Draft, Adopting IFRS in Canada. Early adoption may be
permitted, however it will require exemptive relief on a case by case basis from the Canadian Securities Administrators.
The Company has begun assessing the adoption of IFRS and is in the process of completing its overall conversion plan. The plan assesses
the possible benefits of early adoption, the key differences between IFRS and Canadian GAAP including disclosures as well as a timeline for
implementation.
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: 3,941,666
Restricted share units: 355,000
Common shares (fully-diluted): 183,679,047
Preferred shares: Nil
Outlook
Reference is made to the Company's news release dated 11 November 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 www.sedar.com.
This information is provided by RNS
The company news service from the London Stock Exchange
END
QRTURVWRWARAAAA
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
