TIDMEGU
RNS Number : 9460C
European Goldfields Ltd
15 March 2011
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED 31 DECEMBER 2010
The following discussion and analysis, prepared as at 15 March
2011, 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"). The following discussion and analysis should be read in
conjunction with the Company's audited consolidated financial
statements for the years ended 31 December 2010 and 2009 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 thousands of 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".
European Goldfields is a developer-producer with globally
significant gold reserves located within the European Union. The
Company generates cash flow from its 95% owned Stratoni operation,
a high grade lead/zinc/silver mine in North-Eastern Greece.
European Goldfields will evolve into a mid tier producer through
responsible development of its project pipeline of gold and base
metal deposits at Skouries and Olympias in Greece and Certej in
Romania. The Company plans future growth through development of its
highly prospective exploration portfolio in Greece, Romania and
Turkey.
Cautionary statement on forward-looking information
Certain statements and information contained in this document,
including any information as to the Company's future financial or
operating performance and other statements that express
management's expectations or estimates of future performance,
constitute forward-looking information under provisions of Canadian
provincial securities laws. When used in this document, the words
"anticipate", "expect", "will", "intend", "estimate", "forecast",
"planned" and similar expressions are intended to identify
forward-looking statements or information. Forward-looking
statements include, but are not limited to, the estimation of
mineral reserves and mineral resources, the timing and amount of
estimated future production, costs and timing of development of new
deposits, permitting time lines and expectations regarding metal
recovery rates. Forward-looking statements are necessarily based
upon a number of estimates and assumptions that, while considered
reasonable by management, are inherently subject to significant
business, economic and competitive uncertainties and contingencies.
The Company cautions the reader that such forward-looking
statements involve known and unknown risks, uncertainties and other
factors that may cause the actual financial results, performance or
achievements of the Company to be materially different from its
estimated future results, performance or achievements expressed or
implied by those forward-looking statements and the forward-looking
statements are not guarantees of future performance. These risks,
uncertainties and other factors include, but are not limited to:
global economic conditions, share price volatility, future
issuances of Company securities, the fact that the Company has
never paid cash dividends, legislative, political, social or
economic developments in the jurisdictions in which the Company
carries on business; operating or technical difficulties in
connection with exploration, mining or development activities;
uncertainty of mineral reserves, mineral resources, grades and
recovery estimates; uncertainty of future production; capital
expenditures and other costs; financing and additional capital
requirements; the risks normally involved in the exploration,
development and mining business; ; the speculative nature of gold
and base metals exploration and development, including the risks of
diminishing quantities or grades of mineral reserves; changes in
the price of gold, base metals or certain other commodities (such
as fuel and electricity) and currencies; risks associated with the
acquisition of mineral properties; currency fluctuations; the fact
that the Company currently has negative cash flow and operating
results; counterparty credit risk; the successful and timely
permitting of the Company's Skouries, Olympias and Certej projects;
title matters; environmental and other regulatory requirements; the
risks associated with health, safety and community relations
matters; tax residency; dependence on key management; competition
in the mining industry; conflicts of interest and related party
transactions; legal proceedings; the fact that substantially all of
the assets of the Company are located outside Canada; labour laws
and unions; the carrying value of property and the fact the Company
currently sells all of its production to a single offtaker. For a
more detailed discussion of such risks and material factors or
assumptions underlying these forward-looking statements, see
information under the heading "Risk Factors". The Company does not
intend, and does not assume any obligation, to update or revise any
forward-looking statements whether as a result of new information,
future events or otherwise, except as required by law.
RESULTS OF OPERATIONS
The Company's results of operations for the year and three-month
period ended 31 December 2010 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 programmes in Romania and Turkey.
GREECE SUMMARY
EIS - Public consultation concluded with unanimous support - In
December, the Company was pleased to announce that the public
consultation process for the development of the Project concluded
with unanimous support from the local Prefectural Council for the
Environmental Impact Study ("EIS"). This was the conclusion of the
formal public consultation process as required by law. The
endorsement of the Prefectural Council was sent to the Ministry of
Environment, Energy and Climate Change for its final approval of
the EIS.
The Project consists of:
. Continuation of operations at the Mavres Petres deposit of the
Stratoni Mine.
. The next stages of the Olympias project, namely the mining and
processing of ore and metallurgical treatment of the concentrate,
in accordance with the business plan as originally submitted. This
includes the reprocessing of previously mined tailings.
C. The development of mining and processing at the Skouries
project; and
D. The expansion of port facilities at Stratoni in service of
the above projects' operations.
Project Finance - Mandate for $300m Hellas Gold debt financing
signed - The Company has signed a mandate letter with a group of
financial institutions (collectively, the "MLAs") to arrange a
US$300 million secured term and revolving facility for its Greek
subsidiary Hellas Gold SA ("Hellas Gold"). The Facility will be
used to fund the development of the Skouries open pit and
associated processing facilities, the Olympias concentrator and
underground mine refurbishment and general corporate purposes.
The mandate letter has been signed on the basis of a term sheet
which has been agreed between the Company and the MLAs, each of
which has received approval to proceed with the mandate through
their respective initial credit processes. The terms of the
facility include no gold or silver hedging requirement and a
scheduled tenor of seven years. Since the year end, two additional
banks have received initial approvals to join the facility. SRK has
also been appointed to undertake technical due diligence on behalf
of the MLAs and has recently visited site in that capacity.
Skouries Project -European Goldfields in conjunction with
URS/Scott Wilson Mining have undertaken a new National Instrument
43-101 technical study to revise the Resources and Reserves in line
with current metal prices and operating and capital costs. The
update will be in line with the EIS documentation currently being
evaluated by the Greek authorities.
The final phase of the basic engineering of the process plant by
Greek engineering group, Enoia, is effectively complete and
detailed tender packages to carry out the civil engineering work
have been prepared.
Olympias Project - Hellas Gold has fully depleted the surface
stockpile of pyrite gold concentrate at Olympias. Sales of Olympias
gold concentrate will resume once Hellas Gold receives the permits
to process 2.4Mt of stockpiled tailings arising from the previous
operations at Olympias and when plant rehabilitation is completed.
The sales of pyrite concentrates over the past 8 quarters were as
follows:
Sale of Gold-Bearing Concentrates from Existing Stockpile (100%
basis)
---------------------------------------------------------------------------------
2010 2010 2010 2010 2009 2009 2009 2009
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
------------- ------ ------ ------ ------ ------- ------- ------- -------
Sales
Gold
concentrate
(dmt) Nil Nil Nil Nil 34,182 21,734 32,134 26,832
Olympias mine and plant rehabilitation in progress - In
preparation for tailings reprocessing to produce pyrite
arsenopyrite gold rich concentrate, repair work to the concentrator
building and plant is nearing completion. A mechanical and
electrical audit of the plant has been carried out and the
necessary purchase orders prepared ready for placement. Production
of the pyrite arsenopyrite gold rich concentrate is scheduled to
commence later in 2011.
The refurbishment and enlargement of the mine access decline has
also progressed in preparation for the commencement of extending
the mine development to allow ore production once the reclamation
of tailings is finished.
The Company is currently working toward updating the resources
and reserves for Olympias. The update will reflect current metal
prices as well as updating operating and capital costs and be in
line with the EIS documentation currently being evaluated by the
Greek authorities.
Stratoni operations -The Company's cash flow positive mining
operations at Stratoni continue to demonstrate European Goldfields'
permitting and environmental capabilities and commitment to high
levels of social responsibility. The Company's 95% owned subsidiary
Hellas Gold mined a total of 235,674 wet tonnes in 2010 (2009 -
231,397) and completed 35 shipments for the year (2009 - 26).
Hellas Gold's results from its operations at Stratoni for the eight
most recently completed quarters are summarised in the following
table:
Operational results (100% basis)
---------------------------------------------------------------------------------------------------------------------
2010 2010 2010 2010 2009 2009 2009 2009
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
------------------------------------- -------- -------- -------- -------- -------- -------- -------- --------
Inventory (start of
period)
Ore mined (wet tonnes) 9,074 16,392 14,089 1 8,097 2,293 4,010 1,778
Zinc concentrate (tonnes) 4,143 2,663 2,839 2,817 583 25 621 2,975
Lead/silver concentrate
(tonnes) 2,841 902 1,105 824 857 2,090 1,393 488
Production
Ore mined (wet tonnes) 53,474 54,093 64,813 63,294 57,247 57,235 60,023 56,892
Ore milled (tonnes) 60,356 59,938 60,663 47,701 63,345 50,167 60,287 52,984
- Average grade: Zinc
(%) 10.00 9.28 8.91 9.90 8.64 9.10 8.87 7.85
Lead (%) 5.81 6.00 5.58 6.24 5.40 5.18 5.56 6.42
Silver
(g/t) 152 157 145 159 140 133 141 166
Zinc concentrate (tonnes) 11,339 10,298 10,103 8,852 10,572 8,495 9,975 7,932
- Containing: Zinc
(tonnes) 5,577 5,123 4,942 4,334 5,080 4,248 4,971 3,827
Lead concentrate (tonnes) 4,526 4,630 4,479 4,040 4,684 3,503 4,483 4,667
- Containing: Lead
(tonnes) 3,238 3,307 3,092 2,727 3,143 2,376 3,060 3,129
Silver (oz) 245,511 249,717 233,760 203,914 236,621 177,650 230,106 240,366
Sales
Zinc concentrate (tonnes) 12,965 8,818 10,279 8,830 8,338 7,937 10,571 10,286
- Containing payable:
Zinc (tonnes)* 5,378 3,672 4,159 3,633 3,380 3,325 4,427 4,144
Lead concentrate (tonnes) 5,627 2,691 4,682 3,759 4,717 4,736 3,786 3,762
- Containing payable:
Lead (tonnes)* 3,819 1,798 3,071 2,385 3,030 3,042 2,448 2,347
Silver
(oz)* 290,961 135,361 232,212 178,184 227,661 228,574 183,452 183,504
Cash operating cost
per tonne milled ($) 155 153 141 151 173 165 144 156
Cash operating cost
per tonne milled (EUR) 114 119 110 110 117 116 106 119
Inventory (end of period)
Ore mined (wet tonnes) 24 9,074 16,392 14,089 1 8,097 2,293 4,010
Zinc concentrate (tonnes) 2517 4,143 2,663 2,839 2,817 583 25 621
Lead/silver concentrate
(tonnes) 1,740 2,841 902 1,105 824 857 2,090 1,393
* Net of smelter payable deductions
Production from the underground mine was higher than scheduled
for 2010. The processing plant continued to perform well in terms
of throughput, recovery and concentrate quality. In financial
terms, the Stratoni operation had its best performance in Q4 2010
since 2007, generating earnings before interest, taxation,
depreciation and amortisation ("EBITDA") of $5.92 million in the
quarter, and $13.0 million for the year.
ROMANIA SUMMARY
Public consultation underway - Following submission of the EIS
for the Company's Certej Project in Romania the final public
consultation will take place in April and will be conducted in
accordance with EU Directives and Conventions and Romanian Law.
Upon the satisfactory conclusion of this final public consultation
process, the environmental authorities will re-convene the
Technical Analysis Committee to confirm the decision regarding the
issuance of the environmental permit.
The final public consultation follows confirmation from the
Romanian Authorities that the EIS complies with all Romanian
legislation, both from a technical and legal perspective. Notably
the Company recently received approval from CONSIB (the National
Committee for Large Embankments), a specialist committee
constituted under the Ministry of Environment, for the design of
the Tailings Management Facilities for the Certej project.
Certej Implementation Strategy Underway - The Certej Project
team has finalised the procurement and implementation strategy for
the process plant, which divides the flow sheet into three discrete
sections: Minerals Processing, Albion oxidation and gold recovery.
Invitations to bid have been prepared on this basis for the
provision of the equipment and specialist engineering services.
Major international equipment companies have already been engaged
in a pre-qualification exercise and have confirmed their intention
to bid on this basis. As part of their technical due diligence for
the project lenders, SRK have reviewed the Company's implementation
strategy and is satisfied with its progress to date.
It is also planned that the civil engineering and earth moving
works will be awarded to a single contractor to cover the initial
construction of the tailings facilities and the preparation of the
plant, dump and stockpile areas. Corresponding engineering design
work is effectively complete by Cepromin for the Technical Project
report, which is a key requirement under Romanian legislation in
order to obtain the Construction Permit. Pre-qualification
documentation is being prepared to allow early engagement with
suitable contracting groups.
Final geotechnical site investigation including drilling and
associated engineering studies for the process plant, tailings
management facilities and open pits have been completed by the
Company in cooperation with Golder Associates UK.
As part of the ongoing preparation for site establishment and
mobilisation activities, the project team has identified the
critical path items to establish site access. These will be
prioritised as soon as site preparation can commence.
Project Finance - During 2010, the Company significantly
advanced the credit committed US$135 million financing package to
part fund the development costs of the Certej gold-silver Project
in Romania, through legal documentation and technical,
environmental and social due diligence. The structure of the
financing package consists of an eight year US$120 million secured
limited recourse debt facility and a US$15 million secured
equipment lease facility. The commitments are on the basis of
detailed term sheets which have been agreed with the Company and a
Technical, Environmental and Social Audit of the Project conducted
by SRK Consulting on behalf of the banks. The terms of the facility
include no hedging that limits upside exposure of shareholders to
gold prices.
GROUP EXPLORATION UPDATE
The Board of Directors has approved a group-wide, results driven
exploration budget of US$15 million for 2011.
Greece - Work has focused on the Piavitsa prospect, which
historic drilling has shown to be an Olympias look-alike target
with high grade polymetallic mineralisation in massive sulphides.
New sampling of previously drilled core has confirmed that the
previously identified high grade massive sulphide mineralisation
occurs within a lower grade halo. Further drilling is planned in
2011 with the objective of delineating a preliminary resource on
this target. Soil geochemical samples have also been taken and
these have confirmed extensions to the known Piavitsa
mineralisation, indicated by conductive units which were revealed
by an airborne geophysical survey. The extension targets will also
be drill tested in 2011.
Romania - Four exploration boreholes were drilled to test
potential gold mineralisation that is close to, but currently
outside, the planned Certej open pit footprint. Significant assay
results include 17m grading 3.40 g/t gold and 3.76 g/t silver west
of the open pit and 16m grading 2.24 g/t gold and 2.94 g/t silver
northwest of the pit. Further drilling and trenching is planned in
early 2011.
A new exploration survey located 12km northwest of Certej,
within the vicinity of an historic gold mining area, has identified
a number of significant anomalies, supported by ground geophysics
soil geochemistry and mapping. The anomalies potentially represent
previously undiscovered extensions to zones of gold mineralisation.
Preparations are currently being made to drill the most significant
anomalies in 2011.
Turkey - Exploration has focused on three targets: the Salinbas
Gold Zone, the Ardala copper-gold porphyry within the Ariana joint
venture and the Derinkoy gold target in the Aldridge Minerals joint
venture. Regional sampling aimed at selecting other targets for
licence applications has also continued across the Pontide region.
Results from the trenching and initial drilling programme in Turkey
have been highly encouraging and continued drilling is expected to
yield further results in the coming months.
SUMMARY OF FINANCIAL RESULTS
Stratoni operations
The Stratoni mine's financial results for the eight most
recently completed quarters are summarised in the following
table:
Financial performance (100% basis)
----------------------------------------------------------------------------------------
(in thousands
of US 2010 2010 2010 2010 2009 2009 2009 2009
dollars) Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
--------------- ------- ------ ------- ------- ------- ------- -------- --------
Sales 18,217 9,204 12,017 11,134 13,656 11,500 9,472 4,935
EBITDA 5,921 1,766 2,290 3,018 2,601 1,315 305 (3,025)
Gross profit 3,499 336 320 1,378 1,196 (449) (1,561) (4,345)
Capital
expenditure 483 1,417 1,336 287 2,053 596 2,793 4,214
Depreciation
and
depletion 2,422 1,430 1,970 1,640 1,405 1,764 1,866 1,320
Base metal prices had a relatively stable trend throughout 2010
with both lead and zinc maintaining price levels above $2,000 per
tonne apart from a short period in the middle of the year. This
translated into increased base metal revenues across the year
compared to 2009 and allowed the Stratoni operation to maintain
improved EBITDA through the year, ending the year in Q4 2010 with
the best quarterly EBITDA performance since 2007.
Reconciliation of Stratoni revenues - 2010
----------------------------------------------------------------------------
(in thousands of US
dollars unless stated
otherwise) Zinc Lead Silver Total
-------------------------------- --------- -------- ---------- ---------
Payable metal 16,843t 11,073t 836,718oz n/a
Realised price $2,150t $2,147t $8.27oz n/a
Payable metal revenue 36,206 23,769 6,916 66,891
TC/RCs (12,020) (2,725) (724) (15,469)
Transport recoveries/(charges) 137 8 - 145
--------- -------- ---------- ---------
Net revenue 24,323 21,052 6,192 51,567
Prior period revenue
adjustments (264) (543) (188) (995)
Total revenue 24,059 20,509 6,004 50,572
--------- -------- ---------- ---------
Reconciliation of Stratoni revenues - 2009
----------------------------------------------------------------------------
(in thousands of US
dollars unless stated
otherwise) Zinc Lead Silver Total
-------------------------------- --------- -------- ---------- ---------
Payable metal 15,276t 10,867t 823,191oz n/a
Realised price $1,656t $1,890t $8.06oz n/a
Payable metal revenue 25,294 20,542 6,632 52,468
TC/RCs (10,085) (2,771) (631) (13,487)
Transport recoveries/(charges) 181 (140) - 41
--------- -------- ---------- ---------
Net revenue 15,390 17,631 6,001 39,022
Prior period revenue
adjustments 171 402 (32) 541
--------- -------- ---------- ---------
Total revenue 15,561 18,033 5,969 39,563
--------- -------- ---------- ---------
For the full year 2010, total revenues from base metal
concentrate sales increased 28% compared to 2009 as a result of
higher payable metal sales volumes, along with higher average zinc
and lead prices being realised. Payable zinc and lead in
concentrate sales increased 10% and 2% respectively, as a result of
higher mine production and improved grades in 2010 compared to
2009. Realised zinc prices were $2,150 per tonne for 2010, an
increase of 30%, whilst realized lead prices were $2,147 for the
same period, an increase of 14% compared to 2009. Net smelter
returns ("NSRs") in zinc increased with lead NSRs staying at
similar levels in 2010 compared to 2009.
Reconciliation of Stratoni revenues - Q4 2010
--------------------------------------------------------------------------
(in thousands of US
dollars unless stated
otherwise) Zinc Lead Silver Total
-------------------------------- -------- -------- ---------- --------
Payable metal 5,378t 3,819t 290,961oz n/a
Realised price $2,282t $2,404t $8.32oz n/a
Payable metal revenue 12,270 9,179 2,421 23,870
TC/RCs (4,011) (1,080) (233) (5,324)
Transport recoveries/(charges) 30 - - 30
-------- -------- ---------- --------
Net revenue 8,289 8,099 2,188 18,576
Prior quarter revenue
adjustments 63 (340) (82) (359)
-------- -------- ---------- --------
Total revenue 8,352 7,759 2,106 18,217
-------- -------- ---------- --------
Reconciliation of Stratoni revenues - Q4 2009
--------------------------------------------------------------------------
(in thousands of US
dollars unless stated
otherwise) Zinc Lead Silver Total
-------------------------------- -------- -------- ---------- --------
Payable metal 3,380t 3,030t 227,661oz n/a
Realised price $2,291t $2,380t $8.25oz n/a
Payable metal revenue 7,745 7,211 1,879 16,835
TC/RCs (2,389) (810) (210) (3,409)
Transport recoveries/(charges) 19 - - 19
-------- -------- ---------- --------
Net revenue 5,375 6,401 1,669 13,445
Prior quarter revenue
adjustments 228 (2) (15) 211
-------- -------- ---------- --------
Total revenue 5,603 6,399 1,654 13,656
-------- -------- ---------- --------
Total quarterly base metal revenues from concentrate sales
increased year on year by 33% as a result of higher concentrate and
payable metal sales volumes enhanced by sales from concentrate
inventories. Thus, payable zinc increased 59%, payable lead and
silver both increased 26% and 28% in Q4 2010 compared to the
comparative quarter in the prior year. Realised prices in Q4 2010
for zinc were $2,282 per tonne, down 0.4%, and for lead $2,404 per
tonne, up 1% compared to Q4 2009. Prior quarter revenue adjustments
yielded a small negative impact for Q4 2010, reflecting routine
final adjustments on concentrate sales from the end of Q3 2010.
Olympias project
Hellas Gold completed the final shipments of Olympias gold
bearing concentrates from the surface concentrate stockpile in
2009, thereby depleting the surface concentrate stockpile reserve.
Therefore, no sales were made in 2010, compared to positive
revenues of $23.15 million in 2009. The amounts shown in 2010
reflect final pricing adjustments from certain historic
shipments.
Financial performance (100% basis)
------------------------------------------------------------------------------
(in thousands of 2010 2010 2010 2010 2009 2009 2009 2009
US dollars) Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
----------------- ----- ----- ----- ------ ------ ------ ------ ------
Sales 30 Nil (48) (699) 5,073 5,537 6,732 5,807
Gross profit 30 Nil (48) (699) 4,067 4,012 4,747 4,003
Depreciation and
depletion Nil Nil Nil Nil 196 124 184 153
Consolidated results
The Company's statements of profit and loss for the eight most
recently completed quarters are summarised in the following
table:
Financial performance
------------------------------------------------------------------------------------------------------
(in thousands of US 2010 2010 2010 2010 2009 2009 2009 2009
dollars, except per Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
share amounts) $ $ $ $ $ $ $ $
-------------------- --------- -------- --------- -------- -------- -------- -------- --------
Statement of Profit
and Loss
Sales 18,247 9,204 11,969 10,435 18,729 17,037 16,204 10,742
Cost of sales 14,718 8,868 11,697 9,756 13,466 13,474 13,018 11,084
Gross profit 3,529 336 272 679 5,263 3,563 3,186 (342)
Interest income 144 65 35 62 (163) 147 133 508
Foreign exchange
gain/(loss) (1,460) 6,930 (10,354) 1,563 88 (501) 1,719 (2,882)
Hedge contract
profit - 183 394 - 373 1,030 1,801 2,417
Share of
profit/(loss)
in associate (20) (9) 39 - (3) (187) 18 60
Expenses 15,688 10,251 10,941 8,128 11,251 5,384 4,204 3,740
Profit/(loss)
before income
taxes (13,495) (2,746) (20,555) (5,824) (5,693) (1,332) 2,653 (3,979)
Income taxes (3,086) 960 1,941 (438) (991) (1,847) (1,078) 540
Profit/(loss)
after income
taxes (16,581) (1,786) (18,614) (6,262) (6,684) (3,179) 1,575 (3,439)
Non-controlling
interest 31 141 341 (77) (159) 56 (136) 183
Profit/(loss) for
the period (16,550) (1,645) (18,273) (6,339) (6,843) (3,123) 1,439 (3,256)
Earnings/(loss) per
share (0.09) (0.01) (0.10) (0.03) (0.04) (0.02) 0.01 (0.02)
Selected financial information
The Company's financial results for the years ended 31 December
2010, 2009 and 2008, and the three-month periods ended 31 December
2010 and 2009 are summarised in the following table:
Three-months ended
Years ended 31 December 31 December
-------------------- ---------------------------------- --------------------
(in thousands of US
dollars, except per 2010 2009 2008 2010 2009
share amounts) $ $ $ $ $
---------- ----------- ---------- --------
Statement of Profit
and Loss
Sales 49,855 62,712 60,044 18,246 18,729
Cost of sales 45,039 51,042 54,397 14,718 13,466
Gross profit 4,816 11,670 5,647 3,529 5,263
Interest Income 306 625 5,729 144 (163)
Foreign exchange
gain/(loss) (3,321) (1,576) (6,406) (1,460) 88
Hedge contract
profit 577 5,621 4,918 - 373
Share of
profit/(loss)
in associate 10 (112) (105) (20) (3)
Expenses 45,008 24,579 21,382 15,688 11,251
Profit/(loss)
before income
taxes (42,620) (8,351) (11,599) (13,495) (5,693)
Income taxes (623) (3,376) 16,639 (3,086) (991)
Profit/(loss)
after income
taxes (43,243) (11,727) 5,040 (16,581) (6,684)
Non-controlling
interest 436 (56) 479 31 (159)
Profit/(loss)for
the period
attributable (42,807) (11,783) 5,519 (16,550) (6,843)
Earnings/(loss) per
share (0.23) (0.07) 0.03 (0.09) (0.04)
Balance sheet (end
of period)
Working capital 79,635 146,799 192,675 79,635 146,799
Total assets 718,813 744,100 766,095 718,813 744,100
Non current
liabilities 149,918 147,463 155,727 149,918 147,463
Statement of cash
flows
Deferred
exploration and
development
costs -
Romania 5,377 5,478 6,096 1,131 1,310
Plant and
equipment -
Greece 27,534 37,153 26,181 17,631 4,101
Deferred
development
costs - Greece 3,426 2,096 2,489 1,463 745
For the year ended 31 December 2010, gross profit has decreased
and net loss before tax has increased over the same period in 2009
primarily because 2010 did not benefit from any shipments of
Olympias gold bearing concentrates. While, the Stratoni mine's
revenue performance improved as described above, this was not
enough to offset the fall in gold revenues. The Company's 2010 lead
hedging programme expired at the end of December 2010 and generated
income of $0.58 million during the year. This has been replaced by
a new lead and zinc hedging programme for 2011. Working capital
declined as the Company continued its capital expenditure
programmes at its operating mine and development projects, but the
Company's balance sheet remains strong.
The Company recorded a loss before taxes of $42.62 million for
the year ended 31 December 2010, compared to a loss before taxes of
$8.35 million for the same period of 2009. The Company recorded a
net loss (after taxes and non-controlling interest) of $42.81
million ($0.23 loss per share) for the year ended 31 December 2010,
compared to a net loss of $11.78 million ($0.07 loss per share) for
the same period of 2009. This twelve month performance was impacted
by the lack of Olympias gold concentrate sales, lower hedge income,
lower interest rates and income tax credits, higher foreign
exchange losses and other operating costs, offset by strong
Stratoni concentrate sales and higher average realised metal
prices, as described below.
The Company recorded a loss before taxes of $13.50 million for
the three-month period ended 31 December 2010, compared to a loss
before taxes of $5.69 million for the same period of 2009. The
Company recorded a net loss (after taxes and non-controlling
interest) of $16.55 million ($0.09 loss per share) for the
three-month period ended 31 December 2010, compared to a net loss
of $6.84 million ($0.04 loss per share) for the same period of
2009. For the three month performance, improved base metal sales
could not replace lost gold concentrate sales, which combined with
higher other expenses and foreign exchange losses, lower hedging
and interest income, to result in lower levels of gross profits and
higher pre-tax losses.
In more detail, the following factors have contributed to the
above:
-- Most importantly, with the pyrite stockpile fully depleted,
the Company's gold concentrate business has been suspended until
the retreatment of the tailings dump at Olympias can begin. The
sale of gold concentrates has been a more significant profit driver
for the Company than the base metals business for the past two
years. Therefore, in the three and twelve-month periods ended 31
December 2010, Hellas Gold sold a total of Nil tonnes of gold
bearing pyrite concentrates from Olympias, compared to 34,182
tonnes and 114,882 tonnes respectively in the three and twelve
months to 31 December 2009.
-- A positive market for base metal prices in the three-month
period ended 31 December 2010 meant that lead and zinc priceswere
both higher than lead and zinc price levels during Q4 2009. In the
three-month period ended 31 December 2010, zinc averaged $2,333 per
tonne and lead $2,406 per tonne compared to $2,241 per tonne and
$2,313 per tonne respectively for the same period in 2009. The
Stratoni mine was operating at slightly lower mining levels in the
fourth quarter of 2010 than in the same period of 2009, with mine
production decreasing 7%, and mill processing decreasing 5%
respectively. However, both ROM and concentrate stockpile
utilisations allowed payable metal sales in 2010 to increase,
yielding payable zinc of 5,378 tonnes, a 59% increase over the same
period in 2009, and payable lead of 3,819 tonnes, an increase of
26%. Following these changes in realized prices and sales volumes,
revenues from payable zinc in Q4 2010 increased 49% compared to Q4
2009, and revenues from payable lead increased 21% over the same
period.
-- A different market for base metal prices was seen during the
year ended December 2010 compared to the same period in 2009: lead
and zinc metal prices traded above $2,000 per tonne for the bulk of
2010, only dipping down below that level around June and July 2010.
However, 2009 represented a recovery period in both metals from a
low base, with substantial gains being realised during that year.
Thus, in the year ended December 2010, zinc averaged $2,185 per
tonne and lead $2,171 per tonne compared to $1,689 per tonne and
$1,743 per tonne respectively for the same period in 2009. The
Stratoni mine was operating at slightly higher mining levels in
2010 than in the same period of 2009, with mine production
increasing 2%, although mill processing only increased 1%. However,
improved grades meant that tonnes of payable zinc sold in 2010
increased 10% compared to the same period 2009, and tonnes of
payable lead increase of 2% over the same period. This price trend
was a positive key driver for payable base
metal revenues, but overall revenues decreased 21% because of
the lack of gold concentrate sales in 2010 compared to the same
period in 2009.
-- Cost of sales of $45.04 million in 2010 and $14.72 million in
Q4 2010, compared to $51.04 million and $13.47 million,
respectively, for the same periods of 2009, included $7.46 million
in depreciation and depletion expenses in 2010 and $2.42 million in
Q4 2010, compared to $7.01 million for the same period of 2009 and
$1.60 million in Q4 2009. In 2010, Stratoni costs of production
fell by $1.90 million driven mainly by lower US dollar unit
operating costs, and concentrate transport costs were $5.07 million
lower, resulting primarily from the lack of gold concentrate sales
in 2010; amortization and depreciation were $0.45 million higher in
2010 and decreases to inventory increased costs of sales by $0.51
million. For the quarter ended 31 December 2010 compared to the
same period in 2009, the trends were: $1.60 million decrease in
cost of production driven mainly by lower production cost, $0.73
million lower transport costs, $0.82 million higher amortization
and depreciation, and a lower transfer of cost to inventory of
$2.76 million. A detailed reconciliation of cost of sales to cash
unit production costs in Euros is included in the section Non GAAP
Performance Measures below.
-- As a result, the Company recorded a gross profit of $4.82
million in 2010 and $3.53 million in Q4 2010, on revenues of $49.86
million and $18.25 million, respectively, compared to a gross
profit of $11.67 million in 2009 and $5.26 million in Q4 2009 on
revenues of $62.71 and $18.73 million, respectively, for the same
periods of 2009.
-- The Company's corporate administrative and overhead expenses
have increased from $7.30 million in 2009 and $4.09 million in Q4
2009 to $15.31 million and $5.91 million, respectively, for the
same periods in 2010. This increase reflects the corporate
build-out in preparation for the Company's projects, and includes
bonus payments for the whole of 2010, along with higher employer
taxes resulting from equity based compensation, and consulting and
legal fees relating to the permitting processes in Greece and
Romania and general corporate developments.
-- The Company recorded a non-cash share-based compensation
expense of $15.91 million in 2010 and $7.58 million in Q4 2010,
compared to $6.53 million and $4.20 million, respectively, for the
same periods of 2009. During 2010, the Company's share price
increased significantly, with share price gains in excess of 100%
experienced in the second half of the year. This strong share price
resulted in the accelerated vesting of certain performance related
equity based compensation, and a commensurate increase in the value
of the deferred phantom unit ("DPU") liability. Thus the increased
2010 charges compared to 2009 relate mainly to this strong share
price appreciation. Share-based compensation relates to options,
restricted share units ("RSUs") and DPUs. Both RSUs and DPUs are
valued by direct reference to the Company's share price, without
the need for estimates to calculate the fair value of these
instruments. RSUs are valued using the share price upon issuance,
whilst DPUs are revalued to the Company's closing share price at
the end of each reporting period. Options are valued using option
valuation methodologies which require estimates to determine fair
value. 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 $3.32 million
in 2010 and a foreign exchange loss of $1.46 million in Q4 2010,
compared to a foreign exchange loss of $1.58 million in 2009 and a
foreign exchange gain of $0.88 million in Q4 2009. These exchange
differences arise as a result of changes in the US dollar values of
Euro cash and cash equivalents held by the Company, as well as
Hellas Gold's monetary assets or liabilities. Since Hellas Gold has
large monetary asset positions, a strengthening US dollar tends to
generate foreign exchange losses as the net Euro denominated assets
are revalued downwards in US dollar terms; the reverse is true as
US dollar weakens. In addition, as the Euro started to weaken at
the beginning of 2010, the Company began a strategy of moving its
cash holdings from the US dollar into the Euro, particularly with
regards to its equity contribution for the Certej project
financing. The Company now holds approximately EUR30 million
compared to 2009 when all cash was held in US dollars.
-- Hellas Gold's administrative and overhead expenses amounted
to $8.29 million in 2010 and $0.60 million in Q4 2010 compared to
$5.40 million and $0.74 million, respectively, for the same periods
of 2009, primarily as a result of once-off costs relating to the
reparation of installations and dwellings, which were damaged due
to an extreme rainfall event during the first nine months of the
2010. An insurance claim has been made and may allow these costs to
be recovered at a later date.
-- Hellas Gold incurred an expense of $3.56 million in 2010 and
$0.67 million in Q4 2010, compared to $3.39 million and $0.84
million, respectively, for the same periods of 2009, for ongoing
water pumping and treatment at its non-operating mines of Olympias
and Madem Lakkos backfilling, in accordance with Hellas Gold's
programme of environmental management.
-- The Company recorded an income taxes charge of $0.62 million
in 2010 and $3.09 million charge in Q4 2010, compared to a charge
of $3.38 million and a credit of $0.99 million, respectively, for
the same periods of 2009. The majority of the movements relate to
the write off of the future tax asset raised on the Company's
subsidiary Hellas Gold's losses.
-- The Company recorded a credit of $0.44 million in 2010 and a
credit of $0.03 million in Q4 2010 relating to the non-controlling
shareholder's interest in Hellas Gold's profit (after tax),
compared to a credit of $0.06 million and a charge of $0.16 million
respectively, for the same periods of 2009.
Financial instruments
Hedging commitments - The Company enters into financial
transactions in the normal course of business and in line with
Board guidelines for the purpose of hedging and managing its
expected exposure to commodity prices. There are a number of
financial institutions which offer metal hedging services and the
Company deals with highly rated banks and institutions who have
demonstrated long term commitment to the mining industry. The
Company has one counterparty in respect of its lead and zinc hedge
contracts noted below. Market conditions and prices would affect
the fair value of these hedge contracts and in certain market
conditions, where the fair value of the hedge contract is positive
to the Company and the counterparty were unable to honour its
obligations under the hedge contract, the Company would be exposed
to the value of the hedge, being the difference between the hedged
price and the then current market price on the date of the
settlement. The hedges below are treated as cash flow hedges in
accordance with CICA 3865: Hedges.
Lead and Zinc hedging contracts- As at 31 December 2010, the
Company had entered into hedging arrangements as illustrated below
which, for the amount of production shown, protect the Company from
decreasing prices below the floor price and limit participation in
increasing prices above the cap price. The period of the hedge is
from 1 January 2011 until 31 December 2011 and is cash settled on a
monthly basis between the monthly average of the relevant commodity
price and the cap and floor price, as applicable. As at 31 December
2010, these contracts had a fair value of ($970) (2009 - ($1,064)),
determined by a 3rd party valuation using the appropriate
Black-Scholes options valuation model, based on the then prevailing
market prices including lead and zinc prices, interest rates and
market volatility.
Period January 2011 - December 2011 Lead Zinc
------ ------
Total Volume (tonnes) 6,000 7,800
Monthly Volume (tonnes) 500 650
Floor Price ($/tonne) 2,000 2,000
Cap Price ($/tonne) 2,900 2,800
During the year ended 31 December 2010, the Company recorded
income relating to its hedging program of $577 (2009 - $5,621).
Given the current maturity profile of the hedge, market
expectations and parameters, we expect that the fair value of the
existing hedge contracts ($970) will be released to net income
within the next 12 months.
Related parties
Aktor S.A ("Aktor") Greece's largest construction Company owns
5% of Hellas Gold the Company's 95% owned subsidiary. Aktor is a
100% subsidiary of Ellaktor S.A., which owns 19.3% of the Company's
issued share capital. Aktor, which is deemed a related party,
contracts management, technical and engineering services to Hellas
Gold.
During the year ended 31 December 2010, Hellas Gold incurred
costs of $36,213 (2009 - $33,566) which have been recognised as
cost of sales in the statements of profit and loss and capitalised
to property, plant and equipment, for services received from Aktor.
As at 31 December 2010, Hellas Gold had accounts payable of $3,866
(2009 - $3,881) to Aktor. These expenditures were contracted in the
normal course of operations and are recorded at the exchange amount
agreed by the parties. The terms of the payable is 30 days (2009 -
30 days).
During the period ended 31 December 2010, the Company loaned
three of its directors a total of $95 (GBP61), (2009 - Nil) in
relation to employee withholding taxes paid by the Company on
behalf of the directors. These loans, which were taken out in the
context of the Company's long term incentive plan to increase
directors' equity investment in the Company, are interest free and
repayable by mutual agreement.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet and cash flows for the eight most
recently completed quarters are summarised in the following
table:
(in thousands of US 2010 2010 2010 2010 2009 2009 2009 2009
dollars, except per Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
share amounts) $ $ $ $ $ $ $ $
-------------------- --------- -------- --------- --------- --------- --------- --------- ---------
Balance sheet (end
of period)
Cash 57,122 82,768 84,978 101,836 113,642 124,112 142,728 153,995
Working capital 79,635 97,359 105,796 129,143 146,799 146,158 171,185 176,319
Total assets 718,813 734,252 724,581 737,871 744,100 749,870 753,196 757,206
Non current
liabilities 149,918 144,512 143,971 145,520 147,463 153,882 153,544 154,882
Statement of cash
flows
Cash flows from
operating
activities 3,556 (945) (4,320) (4,275) (5,214) 2,865 (7,733) (2,923)
Investing
activities (27,961) (7,329) (7,737) (4,251) (6,851) (22,793) (6,167) (10,674)
- Plant and
equipment (17,382) (3,702) (4,996) (2,513) (4,101) (20,649) (3,450) (8,953)
- Deferred
exploration
and
development
costs (3,122) (2,783) (2,741) (1,738) (2,440) (2,137) (2,600) (1,481)
- Other (7,457) (844) - - (310) (7) (117) (240)
Financing
activities - 199 113 - 1,694 - 80 558
Effect of
foreign
exchange on
cash (1,241) 5,865 (4,914) (3,280) (99) 1,312 2,553 (3,262)
Total movement
in cash (25,646) (2,210) (16,858) (11,806) (10,470) (18,616) (11,267) (16,301)
As at 31 December 2010, the Company had cash and cash
equivalents of $57.12 million, compare to $113.64 million as at 31
December 2009, and working capital of $79.64 million,compared to
$146.80 million as at 31 December 2009. The Company has sufficient
capital for its needs until all the permits to construct its new
mines are received, at which point additional capital will be
required. The Company is confident that the bank debt and capital
markets have sufficient liquidity to provide any additional capital
it may require to bring its project portfolio into production. In
this regard, the Company has progressed a financing strategy which
has used bank debt to provide development capital for its projects.
So far, a total of $435 million of bank debt has been arranged by
the Company, including a $135 million project finance facility for
its Certej project in Romania, which has underwriting commitments
from a group of banks, subject to acceptable legal documentation
and customary conditions precedent; and a group of banks has been
appointed, to arrange a $300 million debt facility for its projects
in Greece which is subject to technical, legal and environmental
due diligence. The company has no off-balance sheet
transactions.
The decrease in cash and cash equivalents as at 31 December
2010, compared to the balances as at 31 December 2009, resulted
primarily from capital expenditure Greece $27.53 million, changes
in operating cash flow before net changes in non-cash working
capital $17.30 million, purchase of land $8.30 million, deferred
exploration and development costs in Romania $5.38 million, the
effect of foreign currency translation on cash $3.57 million,
deferred exploration and development costs in Greece $3.43 million,
deferred exploration costs in Turkey $1.58 million, capital
equipment expenditure $1.06 million, and offset by proceeds from
exercise of share options $0.31 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 Less than After 5
obligations Total 1 year 2 - 3 years 4 - 5 years years
-------------------- ------ ---------- ------------ ------------ --------
Operating lease
(London office) 1,075 253 654 168 -
Operating lease
(Athens
office) 852 142 284 284 142
Operating lease
(Certej land) 3,070 155 310 310 2,295
Outotec OT -
Processing
Plant 457 457 - - -
Total contractual
obligations 5,454 1,007 1,248 762 2,437
-------------------- ------ ---------- ------------ ------------ --------
The Company's contractual obligation with Outotec relates to the
contract to supply the large technology services for its Skouries
project Under this agreement, Outotec will oversee the installation
of the key equipment items in the Skouries concentrator plant, and
provide process guarantees which cover both plant throughput and
recovery rates.
In 2011, the Company's expectations of capital expenditure are
ultimately dependent upon the timing of the receipt of its final
permits for its projects in both Greece and Romania. The Company
expects to spend a total of $97 million in capital expenditures to
fund the development of its project portfolio. This amount
comprises $2 million at its existing operation at Stratoni to
upgrade the mill and mining equipment, $23 million at Olympias to
refurbish the mine and process plant, and $51 million at Skouries
as the Company expects to finalise engineering studies and commence
construction activities. At Certej, the Company expects to spend
$21 million to finalise engineering studies and commence
construction activities. In addition to its capital expenditure
programme, the Company expects to spend $15 million in exploration
over the wider licence areas in Greece, Romania and Turkey, $11
million on Hellas Gold administrative and overhead and water
treatment expenses, financing costs of $16 million and $18 million
on corporate administrative and overhead expenses. The Company
expects to fund all costs outside the major development capital
from existing cash balances and operating cash flow generated from
its Hellas Gold operations.
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: 183,690,818
Common share options: 6,315,331
Restricted share units: 1,832,830
Less: issued to JOE plan (500,000)
Common shares (fully-diluted): 191,338,979
Preferred shares: Nil
-------------------------------- ------------
NON GAAP PERFORMANCE MEASURES
The Company uses certain performance measures in its analysis.
Some of these performance measures have no meaning within Canadian
GAAP and, therefore, amounts presented may not be comparable to
similar data presented by other mining companies. The data is
intended to provide additional information and should not be
considered in isolation or as a substitute for measures of
performance prepared in accordance with Canadian GAAP.
Cash operating cost per tonne milled is a Non-GAAP measure which
the Company uses as a key performance indicator, which reflects the
fact that it is a key performance measure that Stratoni mine
management uses to monitor operating performance. The Stratoni ore
body produces three saleable products, being zinc lead and silver.
Using a measure which focuses on actual cost of the production
process rather than a measurement of cost per product eliminates
distortions resulting from grade mined or realised metal prices,
and provides a real indication of cost management compared to
tonnage processed. Management uses these statistics to assess how
well the Company's producing mine is performing compared to plan
and to assess overall efficiency and effectiveness of the mining
operation.
The Company provides this cash cost information as it is a key
performance indicator required by users of the Company's financial
information in order to assess the Company's profit potential and
performance relative to its peers. The cash cost figure represents
the total of all cash costs directly attributable to the related
mining and processing operations without the deduction of any
credits in respect of by-product sales. Cash cost is not a GAAP
measure and, although it is calculated according to accepted
industry practice, the Company's disclosed cash costs may not be
directly comparable to other base metal producers. Cash operating
cost per tonne milled is a measure denominated in Euros, and
therefore, when stated in US dollars, will be affected by changes
in the Euro - US dollar exchange rate.
The following table reconciles cash operating cost per tonne to
cost of sales as disclosed in our income statement for the most
recent 8 quarters:
2010 2010 2010 2010 2009 2009 2009 2009
(in thousands of US Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
dollars) $ $ $ $ $ $ $ $
------------------------ ------- -------- ------- ------- ------- ------- ------- --------
Milled production (dmt) 60,356 59,938 60,663 47,701 63,345 50,167 60,287 52,984
Cash operating cost
per tonne milled (EUR) 114 119 110 110 117 116 106 119
------- -------- ------- ------- ------- ------- ------- --------
Cash operating cost
per tonne milled ($) 155 153 141 151 173 165 144 156
------- -------- ------- ------- ------- ------- ------- --------
Cash cost of production 9,347 9,181 8,553 7,221 10,948 8,288 8,687 8,278
Movement in concentrate
inventory 1,845 (2,692) 157 (109) (916) 1,080 (175) (1,300)
Cash cost of sales
- Stratoni 11,192 6,489 8,710 7,112 10,032 9,368 8,512 6,978
Amortisation and
depletion 2,422 1,430 1,970 1,640 1,601 1,888 2,050 1,473
Concentrate transport
costs 1,104 840 1,126 1,004 1,833 2,218 2,666 2,423
Inventory (109
write-down/adjustments - 109 ) - - - (210) 210
Cost of sales 14,718 8,868 11,697 9,756 13,466 13,474 13,018 11,084
======= ======== ======= ======= ======= ======= ======= ========
Earnings before interest, tax, depreciation and amortisation
("EBITDA") is a Non-GAAP measure which the Company uses as an
indicator of cash generation. For each operation, it is calculated
as gross profit adjusted for all depreciation, depletion and
amortisation charges as presented under Canadian GAAP.
CRITICAL ACCOUNTING ESTIMATES
The consolidated financial statements have been prepared on a
going concern basis in accordance with accounting principles
generally accepted in Canada ("Canadian GAAP"), which assumes the
Company will be able to realise assets and discharge liabilities in
the normal course of business for the foreseeable future. The
consolidated financial statements do not include the adjustments
that would be necessary should the Company be unable to continue as
a going concern and reflect the following critical accounting
estimates.
Deferred exploration and development costs - Acquisition costs
of resource properties, together with direct exploration and
development costs incurred thereon, are deferred and capitalised.
Upon reaching commercial production, these capitalised costs are
transferred from exploration properties to producing properties on
the consolidated balance sheets and are amortised into operations
using the unit-of-production method over the estimated useful life
of the estimated related ore reserves.
The proven and probable reserves are determined based on a
professional evaluation using accepted international standards for
the assessment of mineral reserves. The assessment involved the
study of geological, geophysical and economic data and the reliance
on a number of financial and technical assumptions. The estimates
of the reserves may be subject to change based on new information
gained subsequent to the initial assessment. This may include
additional information available from continuing exploration,
results from the reconciliation of actual mining and plant
production data against the original reserve estimates, or the
impact of economic factors such as changes in metal prices,
exchange rates or the cost of components of production. A total of
$2,877 for the year 31 December 2010 (2009 - $3,772) and $877 Q4
2010 (2009 - $784) was charged to the income statement in relation
to depletion of mineral properties, which were subject to these
estimates. If actual reserves prove to be significantly different
from current estimates, a material change to amounts charged to
earnings could occur. A total of $492,117 (2009 - $480,995) mineral
properties, was stated on the balance sheet that are subject to
these estimates now and in the future.
Long-lived assets - All long-lived assets and intangibles held
and used by the Company are reviewed for possible impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If changes in
circumstances indicate that the carrying amount of an asset that an
entity expects to hold and use may not be recoverable, future cash
flows expected to result from the use of the asset and its
disposition must be estimated. If the undiscounted value of the
future cash flows is less than the carrying amount of the asset,
impairment is recognised based on the fair value of the assets.
Under Canadian GAAP, a fall in metal prices is one of a number of
factors in whether long-lived assets are subject to impairment. In
such circumstances, management would prepare future cash flow
forecasts to establish whether any actual impairment had occurred.
These estimates are based on future expectations, and a number of
assumptions and judgments made by management, the same as those
required for the estimation of reserves. Current metal prices do
not suggest there has been any impairment on any of the Company's
long-lived assets. If such an impairment were to occur, this could
result in a material charge to earnings. A total of $492,117 (2009
- $480,995) of mineral properties was stated on the balance sheet
that are subject to this estimation process.
Upon reaching commercial production, long-lived assets are
depreciated againstoperations using the unit-of-production method
over the estimated useful life of the estimated related ore
reserves. As stated above, the determination of reserves is
dependent upon the reliance on a number of financial and technical
assumptions, which may be subject to change. If actual reserves
prove to be significantly different from current estimates, a
material change to amounts charged to earnings could occur.
Asset retirement obligation - The fair value of the liability of
an asset retirement obligation is recorded when it is legally
incurred and the corresponding increase to the mineral property is
depreciated over the life of the mineral property. The future costs
of retirement obligations are estimated by management based upon
knowledge of the cost of these activities and a number of
assumptions and judgments are made by management in their
determination. These estimates are regularly reviewed for
reasonableness and any changes to the original cost estimate
reflected in the asset retirement obligation liability. The
liability is adjusted over time to reflect an accretion element
considered in the initial measurement at fair value and revisions
to the timing or amount of original estimates and drawdowns as
asset retirement expenditures are incurred. As at 31 December 2010,
the Company had an asset retirement obligation relating to its
Stratoni property in Greece amounting to $7,195 (31 December 2009 -
$7,068) subject to these estimates. A total of $127 for the period
to 31 December 2010 (2009 - $131) and Q4 2010 $33 (2009 - $35) was
charged to the income statement in relation to asset retirement
obligation, which were subject to these estimates. A significant
change to either the estimated future costs or to reserves could
result in a material change to amounts charged to earnings.
Equity-based compensation - The Company operates a share option
plan and an RSU plan. The Company accounts for equity-based
compensation granted under such plans using the fair value method
of accounting. Under such method, the cost of equity-based
compensation is estimated at fair value and is recognised in the
profit and loss statement as an expense, or capitalised to deferred
exploration and development costs when the compensation can be
attributed to mineral properties. The Company uses the
Black-Scholes and Parisian option pricing model to estimate fair
values of share options granted, and uses the market price of
common shares to determine fair value of RSUs granted. This cost is
recognised over the relevant vesting period for grants to
directors, officers and employees, and measured in full at the
earlier of performance completed or vesting for grants to
non-employees. Any consideration received by the Company on
exercise of share options is credited to share capital along with
the charge recognised. A total of $10,470 for the period to 31
December 2010 (2009 - $5,694) and Q4 2010 $4,019 (Q4 2009 - $4,208)
was charged to the income statement in relation to equity-based
compensation, which were subject to these estimates.
Income taxes -The Company uses the asset and liability method of
accounting for future income taxes. Under this method, current
income taxes are recognised for the estimated income taxes payable
for the current year. Future income tax assets and liabilities are
recognised for temporary differences between the tax and accounting
bases of assets and liabilities, calculated using the currently
enacted or substantively enacted tax rates anticipated to apply in
the period that the temporary differences are expected to reverse.
Future income tax inflows and outflows are subject to estimation in
terms of both timing and amount of future taxable earnings, which
are subject to assumptions on the future tax rates and
recoverability of any tax losses. Should these estimates change,
the carrying value of income tax assets or liabilities may change,
and consequently the charge or credit to the income statement. A
total charge of $571 for the period to 31 December 2010 (2009 -
$2,528 charge) and Q4 2010 a charge of $3,034 (2009 - $974 charge)
to the income statement in relation to future income taxes, which
were subject to these estimates.
SIGNIFICANT CHANGES IN ACCOUNTING POLICIES
International Financial Reporting Standards ("IFRS") - In
February 2008, the Canadian Accounting Standards Board ("AcSB")
confirmed that IFRS will replace Canadian GAAP for publicly listed
companies, for interim and annual financial statements relating to
fiscal years beginning on or after 1 January 2011, including
comparative figures for the prior years.
The Company intends to transition to IFRS on 1 January 2011, and
will file its first interim financials under IFRS for the quarter
ended 31 March 2011. The IFRS compliant financial statements will
include opening balance sheet and equity reconciliations for the
quarter as well as reconciliations as at the 1 January 2010
transition date. The Company has identified four phases to its
conversion process:
-- Design and planning
-- Detailed assessment and quantification of differences under
IFRS
-- Implementation
-- Post implementation.
Design and planning
During the design and planning phase, the Company focused on
ensuring that the correct skills were available and on the longer
term planning to ensure the smooth transition to IFRS. This
commenced in Q2 2008, when the Company established a project
management team which included members of the finance function at
the subsidiary level, who were already experienced in the
preparation of IFRS accounts. Other team members were provided with
IFRS training. In addition, the Company's finance function already
had some IFRS experience from reporting under IFRS on a quarterly
basis for its major shareholder. This reporting process included
accounting adjustments for all material differences between IFRS
and Canadian GAAP, with the exception of IFRS 1. During Q3 2008,
the Company also undertook a preliminary IFRS diagnostic report
which included an initial assessment of key accounting areas where
IFRS differs to Canadian GAAP and which could possibly have a
significant impact on the financial statements. The report also
outlined the key systems and processes which would be affected by
the conversion process, namely internal control over financial
reporting as well as disclosure controls and procedures. Concluding
the planning and design phase, the Company also established a
preliminary timeline for key milestones and deliverables to be
reported to the audit committee on an ongoing basis.
A detailed assessment and quantification of differences under
IFRS took place during Q1 2009 and was further developed during the
rest of 2009 along with additional in-depth training to members of
the project management team as well as attendance of seminars
relating to IFRS changeover. This process was extended to the
finance departments of the group, in particular looking at the
possibilities of converting local accounts and reporting to IFRS.
The project team also identified and made an initial assessment of
the various elections the Company is required to make with regards
to IFRS 1 in Q3 2009 which was presented to the Company's auditors
at the time.
During Q4 2009, the Company changed its group auditors to Ernst
& Young LLP ("E&Y"), and a new IFRS implementation plan was
drawn up. This new plan was designed to allow the Company to
finalise its required elections under IFRS 1 after the 2009 audit
under Canadian GAAP had been completed. In addition, E&Y would
perform its own independent work to confirm the Company's
assessment process.
During Q1 2010, the Company continued with its plan in order to
meet the objective of establishing opening IFRS balances as at 1
January 2010, which would act as the opening position for the 2010
comparatives to the 2011 financial year for which IFRS
reporting.
During Q2, the Company undertook in a roll forward and an impact
assessment based on what had been carried out by the Company to
date, with the aim of ensuring that all current IFRS updates would
be included. This included the quantification of differences. The
Company further undertook in training sessions with team members
from its subsidiaries as well as meetings with its auditors to
provide updates on issues relating to the impact assessment, IFRS 1
choices and exemptions and financial statement disclosures.
During Q3, the Company finalised its IFRS impact assessment
exercise. The Company continued with its IFRS technical papers
outlining the differences between GAAPs and the various elections
to be made. The Company also updated skeleton IFRS financial
statements in preparation for the commencement of an audit of IFRS
opening balances, prior to the end of Q4 2010.
During Q4, the Company completed the majority of the technical
papers as well as the papers regarding the IFRS 1 choices and
exemptions, including additional financial statement disclosures
and commenced with the audit of the opening balance sheet. The
Company also completed the skeleton IFRS financial statements. A
special audit committee meeting was held to outline and discuss and
approve the impact of adopting IFRS and to approve the changes to
the accounting policies. The Company also continued with its
ongoing work relating to Group reporting modification as well as
IFRS implementation by subsidiaries that have elected to implement
IFRS in their jurisdictions.
The following is a summary timetable with regards to Q1
2011:
-- Completion of all IFRS work relating to IT and systems.
-- Finalisation of opening balance sheet audit.
-- Finalising the impact of all 2010 related adjustments for the
prior quarters as well as the year end.
-- Completion of the IFRS financial statements as well as
related disclosures.
The audit committee will continue to be reported to on a timely
basis on progress of the implementation process and achievement of
the timetable as set out above.
Detailed assessment of differences under IFRS
The Company's review and assessment of all accounting
differences under IFRS standards has been ongoing since Q4 2008.
This assessment has identified the following areas where there are
potential differences between IFRS and Canadian GAAP which may
affect the Company, as described below:
-- Business combinations
Date of acquisition
Under IFRS, when shares of the acquirer are issued to the seller
as payment of the purchase price, the fair value will be based on
the share price on the date that control of the subsidiary was
acquired. Canadian GAAP requires the fair value to be based on the
announcement date share price.
Acquisition related costs
Under IFRS, transaction costs are fully expensed on acquisition
whereas Canadian GAAP allows certain transaction costs to be
recognised as part of the acquisition.
Minority Interest
Under IFRS, a non controlling interest may be recorded according
to its share of the fair value of assets and liabilities of the
acquired entity. Under Canadian GAAP, minority interest is recorded
at the historical carrying value of the assets and liabilities of
the acquired entity.
-- Consolidations
Under IFRS, changes in ownership in interests, after control is
obtained and which do not result in a loss of control are accounted
for as equity transactions, while under Canadian GAAP these changes
are accounted for as step acquisitions using purchase
accounting.
-- Exploration for and evaluation of mineral resources
IFRS provides a specialised statement with regards to the
extractive industry in respect of the exploration for and
evaluation of mineral resources. The standard require the separate
identification of and accounting for pre-exploration, exploration
and evaluation and development expenditure and for those to be
classified as either tangible or intangible assets according to
their nature. Canadian GAAP does not have a single accounting
standard for exploration and evaluation activities and there is no
requirement either to separately identify and account for
pre-exploration, exploration and evaluation and development
expenditure, or to separate between tangible and intangible
assets.
-- Property, plant and equipment
Under IFRS, where a component of property, plant and equipment
has a significant cost in relation to the cost of the item as a
whole, it must be separately depreciated. This policy applies in
Canadian GAAP but in practice a higher threshold of materiality is
applied.
-- Foreign currency translation
Under IFRS, the functional currency concept is used to determine
the measurement of foreign currency translation. This is based on
the currency of the primary economic environment in which the
entity operates. In determining foreign currency translations,
Canadian GAAP makes use of self-sustaining and integrated
operations with a different hierarchy of indicators.
-- Impairment of definite life long-lived assets
Under IFRS, a one-step approach for both testing and measuring
impairment, in which the recoverable amount is compared to the
carrying values of the assets. Canadian GAAP requires a two-step
approach for impairment testing in which the Company must first
compare undiscounted cash flows to the carrying value and determine
whether an impairment exists. If the cash flows are below carrying
values, the Company would be required to compare the fair value to
the carrying value to determine the impairment.
-- Share-Based payments
In certain circumstances, Canadian GAAP permits that the fair
value of share-based awards with graded vesting be recognised on a
straight-line basis over the entire vesting period. Under IFRS,
each tranche of an award is considered a separate grant with
separate vesting dates and each are accounted for separately.
-- Income taxes
Under IFRS, a deferred tax asset or liability is recognised for
exchange losses or gains relating to foreign non-monetary assets
and liabilities that are re-measured into functional currency using
historical rates. There is no such requirement under Canadian
GAAP.
Detailed quantification of differences under IFRS
The Company has elected to take two IFRS 1 First-time Adoption
of International Financial Reporting Standards exemptions, which
have a material impact on the presentation of its financial
statements as set out below. Under IFRS 1 first time adopters of
IFRS have to make certain elections on the application of IFRS,
including the availability of certain exemptions.
Business Combinations
The first exemption allows the Company to choose an effective
date from which they adopt IFRS 3 (Revised) Business Combinations
(IFRS 3R). When a Company adopts IFRS 3R it must also adopt IAS 27
(Revised) Consolidated and Separate Financial Statements (IAS
27R).
The Company has chosen to adopt IFRS 3R and IAS 27R from June
2007, which means that its acquisition of a further 30% stake in
Hellas Gold in 2007 needs to be accounted for under IFRS. Under
Canadian GAAP this transaction was accounted for by recognising the
excess of the fair value of the non-controlling interest acquired,
approximately $200 million, as additional mineral property in the
balance sheet. Under IFRS, the transaction is an equity transaction
with the Company's controlling and the non-controlling interests
adjusted to reflect changes to their relative interests in Hellas
Gold. Additional mineral property is not recognised, with the
excess instead taken to equity attributable to owners of the
parent. The balance of approximately $200 million is reallocated
from mineral property to retained earnings, with a further $16
million of cumulative translation differences relating to the
additional mineral property written off. Depletion of the
additional mineral property in the period 2007-2009 is also written
back, and the deferred tax liability associated with the mineral
property balance is reduced by approximately $40 million.
The revised accounting for the 2007 acquisition of a further 30%
stake in Hellas Gold also impacts the measurement of share capital
at transition. Under Canadian GAAP, shares issued as consideration
in a business combination are valued using the average share price
for a period prior to and subsequent to the announcement of a
transaction, whereas under IFRS, shares are valued at their
acquisition date fair value. This results in an increase of
approximately $26 million to share capital at transition.
Foreign Currency Translation
The second exemption relates to a transitional provision under
IAS 21 The Effects of Changes in Foreign Exchange Rates, which
allows the Company to deem the cumulative translation reserve to be
zero at the date of transition. The transfer of cumulative
translation differences to retained earnings reduces the Company's
deficit by approximately $21 million at transition.
Income taxes
An additional GAAP difference impacts measurement of the
deferred tax asset. Under Canadian GAAP tax bases are non-monetary
and are translated into US$ using historical exchange rates,
whereas tax bases under IAS 12 Income taxes are monetary and are
translated using exchange rates ruling at each reporting date. An
adjustment of $0.6 million is required to adjust the deferred tax
asset position at transition.
RISKS AND UNCERTAINTIES
This section addresses the existing and future material risks to
the Company's business. The risks below are not the only ones that
the Company will face. Some risks are not yet known and some that
are not currently deemed material could later turn out to be
material. All of these risks may materially affect the Company, its
income, profits, earnings, assets and operations and the market
price of its securities.
Current Global Conditions - Global financial conditions have
been subject to increased volatility in recent years and access to
public and private financing has been negatively impacted during
this time. If such conditions persist or worsen, they may
negatively impact the ability of the Company to obtain equity or
debt financing in the future and, if obtained, on terms favourable
to the Company. There may also be a negative impact on the
Company's ability to attain funding through strategic partnerships
or joint venture arrangements which may negatively impact the
timeline for commencement of commercial production. Additionally,
global economic conditions may cause decreases in asset values that
are deemed to be other than temporary, which may result in
impairment losses. If these challenging market conditions and
volatility persist or worsen, the Company's business, results of
operations and financial condition could be adversely impacted and
the value and the price of the Company's Common Shares could be
adversely affected.
Market Price Volatility - The trading price of the Common Shares
has been and may continue to be subject to large fluctuations. The
trading price of the Common Shares may increase or decrease in
response to a number of events and factors, some of which are
directly related to the Company's success and some of which are not
directly related to the Company's success and are therefore not
within the Company's control. Such events and factors include: the
price of gold and other metals and minerals, the Company's
operating performance and the performance of competitors and other
similar companies, the public's reaction to the Company's press
releases, other public announcements and the Company's filings with
the various securities regulatory authorities, changes in earnings
estimates or recommendations by research analysts who track the
Common Shares or the shares of other companies in the mineral
resource sector, changes in general economic conditions, the number
of the Common Shares to be publicly traded after an offering, the
breadth of the public market for the Common Shares, the arrival or
departure of key personnel, acquisitions, strategic alliances or
joint ventures involving the Company or its competitors,
developments that affect the market for all mineral resource sector
shares, and the attractiveness of alternative investments.
Ownership of the Common Shares is currently concentrated and
sales of substantial amounts of Common Shares in the public market
by the Company's shareholders, or the perception that such sales
might occur, could result in a material adverse effect on the
market price of the Common Shares and could impair the Company's
ability to raise capital through the sale of additional equity or
related securities.
The effect of these and other factors on the market price of the
Common Shares on the exchanges in which the Company trades has
historically made the Company's share price volatile and suggests
that the Company's share price will continue to be volatile in the
future. A decline in the market prices of the Company's securities
could also impair the Company's ability to raise additional
capital, whether in the form of equity or debt or through other
financing arrangements.
In addition, following periods of volatility in the market price
of a company's securities, shareholders have often instituted class
action securities litigation against those companies. Such
litigation, if instituted against the Company, could result in
substantial costs and diversion of management attention and
resources and also result in significant costs being incurred by or
on behalf of the Company, any of which could significantly harm the
Company's business, results of operations, financial condition and
reputation.
Dilution - The Company may require additional monies to fund
development and exploration programs and potential acquisitions.
The Company cannot predict the size of future issuances of Common
Shares or the issuance of debt instruments or other securities
convertible into shares or the effect, if any, that future
issuances and sales of the Company's securities will have on the
market price of the Common Shares. If it raises additional funding
by issuing additional equity securities, such financing may
substantially dilute the interests of existing shareholders. Sales
of substantial amounts of Common Shares, or the availability of
such Common Shares for sale, could adversely affect the prevailing
market prices for the Company's securities.
No Dividends - The Company has never paid cash dividends on the
Common Shares. It currently intends to retain future earnings, if
any, to fund the development and growth of its business, and may
not pay any cash dividends on the Common Shares for the foreseeable
future. Furthermore, the Company may in the future become subject
to contractual restrictions on, or prohibitions against, the
payment of dividends. As a result, investors will have to rely on
capital appreciation, if any, to earn a return on their investment
in Common Shares in the foreseeable future. The payment of future
dividends, if any, will be reviewed periodically by the Company's
board of directors and will depend upon, among other things,
conditions then existing including earnings, financial condition
and capital requirements, restrictions in financing agreements,
business opportunities and conditions and such other factors deemed
by the board of directors to be relevant at the time.
Foreign Country Risk - The bulk of the Company's mineral
reserves are located in Greece and all of its historic revenues
have been derived from its current operations in Greece. The
Company is in the process of securing permits for a major
development project in Greece and also has other development and
exploration operations in Romania and Turkey. Consequently, if
there were any change in the economic, legal or political framework
in Greece, or other circumstances arising, which materially reduce
or suspend the Company's existing operations, the Company's
business, results of operations and financial condition will be
materially negatively affected.
In 2010, the Greek economy experienced a severe downturn and in
May 2010, the Greek government agreed to a stabilisation program,
jointly supported by the International Monetary Fund, the European
Central Bank and the European Union. As part of this stabilisation
program, the Greek government committed to implement austerity
measures to decrease expenses and increase revenues. It is not yet
known the extent to which the stabilisation program's fiscal
targets will be met and the immediate impact of the austerity
measures on economic, political or labour activity in Greece.
Whilst the Company believes the risk of Greece defaulting on its
debt to be remote and although the occurrence of a default may not
directly impact the Company's assets or operations in Greece, this
is an unusual position for a Eurozone state member. It is therefore
possible that events not known or expected by the Company may occur
and negatively impact the Company and its business, results of
operations and financial condition.
Any changes in regulations in Greece, Romania or Turkey, or any
political changes, are beyond the Company's control and may
adversely affect its business, results of operations and financial
condition. Development and exploration of any one or more of the
Company's mineral properties may be affected in varying degrees by
government regulations or policies with respect to restrictions on
future exploitation and production, labour, environmental
protection, price controls, royalties, export controls, foreign
exchange controls, income taxes, expropriation of property,
environmental legislation and mine and/or site safety. Lastly,
there are no restrictions on the repatriation from Greece, Romania
or Turkey of earnings to foreign entities. However, there can be no
assurance that restrictions on repatriation of earnings from
Romania, Greece or Turkey will not be imposed in the future.
Exploration and Mining Risks - The business of exploring for
minerals and mining involves a high degree of risk. Although
substantial benefits may be derived from the discovery of a major
mineralised deposit, no assurance can be given that minerals will
be discovered in sufficient quantities or having sufficient grade
to justify commercial operations. Only a small proportion of the
properties that are explored are ultimately developed into
producing operations. The economics of developing gold and other
mineral properties is affected by many factors including the cost
of operations, variations of the grade of ore mined, fluctuations
in the price of gold or other minerals produced, costs of
processing equipment and such other factors as government
regulations.
To date, the Company has identified various exploration projects
and expects to continue its exploration efforts for the foreseeable
future. Significant expenditure will be required for current and
future exploration projects and the Company may not be able to
recover such funds due to the speculative nature of exploration. In
addition, if the Company is unable to find properties that justify
commercial operations, it could have a material adverse effect on
the Company's business, reserves and resources, and results of
operations. Once mineralisation is discovered, it may take a number
of years to complete the geological surveys necessary to assess
whether production is possible and, even if production is possible,
the economic feasibility of production may change during that time.
Substantial capital expenditure is required to identify and
delineate mineral reserves through geological surveying, drilling
and sampling to determine metallurgical processes to extract the
metals from the ore and, in the case of new properties, to
construct mining and processing facilities.
Unless otherwise indicated, mineral resource and mineral reserve
figures presented herein are based upon estimates made by Company
personnel and independent geologists. These estimates are imprecise
and depend upon geological interpretation and statistical
inferences drawn from drilling and sampling analysis, which may
prove to be inaccurate, and may require adjustments or downward
revisions based upon further development or exploration work. There
can be no assurance that these estimates will be accurate, mineral
reserves, mineral resources or other mineralisation figures will be
accurate, or that this mineralisation could be mined or processed
profitably.
The mineral reserve and mineral resource estimates contained
herein have been determined and valued based on assumed future
prices, cut-off grades and operating costs that may prove to be
inaccurate. Extended declines in market prices for gold and other
metals and minerals may render portions of the Company's
mineralisation uneconomic and result in reduced reported
mineralisation. Any material reductions in estimates of mineral
reserves or resources, grades, stripping ratios, recovery rates or
of the Company's ability to extract mineral reserves or resources,
could have a material adverse effect on the Company's business,
results of operations and financial condition.
Mining involves various types of risks and hazards, including:
environmental hazards, industrial accidents, metallurgical and
other processing problems, unusual or unexpected rock formations,
structural cave-ins or slides, seismic activity, flooding, fires,
periodic interruptions due to inclement or hazardous weather
conditions, variations in grade, deposit size, density and other
geological problems, mechanical equipment performance problems,
power outages, unavailability of materials and equipment including
fuel, labour force disruptions, unanticipated or significant
changes in the costs of supplies including, but not limited to,
electricity and petroleum, and unanticipated transportation
disruptions or costs due to weather-related problems, key equipment
failures, strikes, lock-outs or other events.
These risks could result in damage to, or destruction of,
mineral properties, production facilities or other properties,
personal injury or death, loss of key employees, environmental
damage, delays in mining, increased production costs, monetary
losses and possible legal liability, any of which could have a
material adverse effect on the Company's business, results of
operations and financial condition.
Where considered practical to do so, the Company maintains
insurance against risks in the operation of its business in amounts
which it believes to be reasonable. Such insurance, however,
contains exclusions and limitations on coverage. There can be no
assurance that such insurance will continue to be available, will
be available at economically acceptable premiums or will be
adequate to cover any resulting liability. Insurance against
certain environmental risks, including potential liability for
pollution or other hazards as a result of the disposal of waste
products occurring from production, is not generally available, or
is not available on commercially reasonable terms, to the Company
or to other companies within the mining industry. The Company may
suffer a material adverse effect on its business if it incurs
losses related to any significant events that are not covered by
its insurance policies. Payment of such liabilities would reduce
funds available for acquisition of mineral prospects or development
and exploration and would have a material adverse affect on the
Company's business, results of operations and financial
condition.
Capital and Operating Cost Risks - The Company's forecasts,
feasibility studies and technical reports are based on a set of
assumptions current as at the date of completion of these forecasts
and studies. The realised operating and capital costs achieved by
the Company may differ substantially owing to factors outside the
control of the Company, including currency fluctuations, supply and
demand factors for the equipment and supplies, global commodity
prices, transport and logistics costs and competition for human
resources. Though the Company incorporates a level of contingency
in its assumptions, these may not be adequate depending on market
conditions.
The mining business is capital intensive and the development,
exploration and exploitation of mineral reserves and resources and
the acquisition of machinery and equipment require substantial
capital expenditure. The Company has a number of development
projects, as well as development plans for its existing operations,
which involve significant capital expenditure. Such capital
expenditure may include, but is not limited to, development of
existing, or in some cases construction of new, infrastructure by,
for example, building or upgrading existing roads, railroads or
seaports. In particular, the Company must continue to invest
significant capital to maintain or increase its reserves and the
amount of ore it produces. Some of the Company's development and
exploration projects may require greater investment than currently
planned.
The Company's operations may be affected by the availability and
pricing of raw materials and other essential production inputs,
including fuel, steel, power and other reagents. The price of raw
materials may be substantially affected by changes in global supply
and demand, along with weather conditions, governmental controls
and other factors. A sustained interruption in the supply of any of
these materials would require the Company to find acceptable
substitute suppliers and could require it to pay higher prices for
such materials. Any significant increase in the prices of these
materials will increase the Company's operating costs and affect
production, development and exploration considerations.
Further, the Company relies on certain key third-party suppliers
and contractors for equipment, raw materials and services used in,
and the provision of services necessary for, the development,
construction and continuing operation of its assets. As a result,
the Company's operations at its sites are subject to a number of
risks, some of which are outside the Company's control, including
negotiating agreements with suppliers and contractors on acceptable
terms, the inability to replace a supplier or contractor and its
equipment, raw materials or services in the event that either party
terminates the agreement, interruption of operations or increased
costs in the event that a supplier or contractor ceases its
business due to insolvency or other unforeseen events and failure
of a supplier or contractor to perform under its agreement with the
Company. The occurrence of one or more of these risks could have a
material adverse effect on the Company's business, results of
operations and financial condition.
Financing Risks - Development and exploration of one or more of
the Company's properties will be dependent upon its ability to
obtain financing through joint ventures, equity or debt financing
or other means, and although the Company has been successful in the
past in obtaining financing through the sale of equity securities
and agreeing terms with banks, there can be no assurance that the
Company will be able to obtain adequate financing in the future or
that the terms of such financing will be favourable. Failure to
cover capital expenditure or obtain additional financing could
result in delay or indefinite postponement of development and
exploration of the Company's projects with the possible loss of
such properties, any of which would have a materially adverse
effect on the Company's business, results of operations and
financial condition.
The Company currently has no debt, but intends to raise debt
financing for the purpose of supporting its development projects in
Greece and Romania. The Company signed a mandate letter with a
group of financial institutions in December 2010 to arrange a
US$300 million secured term and revolving facility for Hellas Gold
and has already received credit commitments from a group of
financial institutions for a US$135 million Project Finance
facility for Deva Gold (the "Facilities"). There is no guarantee
that the Facilities will close in a timely fashion, on the terms
negotiated or at all. In the event the Facilities are not put in
place in a timely fashion or at all, certain of the Company's
planned development and operations for the Company's projects may
be delayed. Risks to closing the Facilities include among other
things, settlement of final documentation and satisfaction of
technical, legal and environmental due diligence. In addition, the
Company plans to supplement its debt financing through equity
funding.
The documentation for the Facilities is expected to include
agreements granting security over the Company's assets that may
involve restrictive covenants limiting the Company's operating
flexibility going forward. It is also expected that the Company
will be required to cross guarantee all or part of the obligations
of Hellas Gold and Deva Gold under the Facilities. If either Hellas
Gold or Deva Gold is unable or fails to pay its indebtedness or
other obligations, a creditor under such Facilities may require the
Company to pay all amounts due, which may have a material adverse
impact on the Company's profitability, cash flow and financial
condition.
Furthermore, entering into such Facilities will introduce
interest rate risk to the Company as its borrowing costs will
fluctuate depending on prevailing interest rates at the time it
accesses the Facilities, which may have an adverse effect on the
Company's future profitability.
While neither the Company's articles of incorporation nor its
by-laws limit the amount of indebtedness that the Company may
incur, the level of the Company's indebtedness from time to time
could impair its ability to obtain additional financing in the
future on a timely basis, or at all, and to take advantage of
business opportunities that may arise, thereby potentially limiting
the Company's operational flexibility and prospects.
Future Acquisitions - Part of the Company's strategy is to
increase its resources and reserves through acquisitions of
interests in further mineral properties. Risks commonly associated
with acquisitions of companies, businesses or properties include
the difficulty of integrating operations and personnel in relation
to any such business or property, problems with minority
shareholders if the transactions are structured as the acquisition
of companies, the potential disruption of the Company's own
business, the diversion of management's time and resources, and the
possibility that indemnification agreements with sellers may be
unenforceable or insufficient to cover potential liabilities and
difficulties arising out of integration. Furthermore, the value of
any business, company or property that the Company acquires or
invests in may actually be less than the amount it pays for it.
There can be no assurance that any acquisition will achieve the
results intended and any problems experienced by the Company in
connection with an acquisition as a result of one or more of these
factors or other factors could have a material adverse effect on
the Company's business, results of operations and financial
condition.
Mineral and Commodity Prices - The Company's profitability and
long-term viability depend, in large part, upon the market price of
gold, silver, copper and other metals and minerals produced from
the Company's properties. The market price of gold, silver, copper
and other metals and minerals is volatile and is impacted by
numerous factors beyond the Company's control, including:
expectations with respect to the rate of inflation, the relative
strength of the U.S. dollar and certain other currencies, interest
rates, global or regional political or economic conditions, supply
and demand for jewellery and industrial products containing metals,
costs of substitutes, changes in global or regional investment or
consumption patterns, and sales by central banks and other holders,
speculators and producers of gold, silver, copper and other metals
and minerals in response to any of the above factors.
While the Company enters into financial transactions in the
normal course of business for the purpose of hedging its base metal
production at Stratoni and managing its expected exposure to
commodity prices, these are of a limited nature and, therefore, the
Company's long term financial performance is still highly dependent
upon the market price of gold and other metals.
There can be no assurance that the market price of gold, silver,
copper and other metals and minerals will remain at current levels
or that such prices will improve. A decrease in the market price of
gold, silver, copper and other metals and minerals could adversely
affect the profitability of the Company's existing operations,
which would have a material adverse effect on the Company's
business, results of operations and financial condition. A decline
in the market price of gold, silver, copper or other metals and
minerals, may also require the Company to write-down its mineral
reserves or abandon some or all of its current development and
exploration plans, any of which would have a material adverse
effect on the Company's business, results of operations and
financial condition.
Currency Fluctuations - Gold and other metals are sold
throughout the world principally in U.S. dollars. Further, the
capital markets in which the Company expects to have access to for
financing (debt and equity), are predominantly denominated in
United States dollars. The Company's capital and operating costs
are incurred principally in Euros, with smaller exposures to the
Romanian leu and the Turkish lira. The Company does not currently
use any derivative products to manage or mitigate any foreign
exchange exposure. As a result, any significant and sustained
appreciation of the Euro or other currencies against the U.S.
dollar may materially increase the Company's costs and reduce
revenues.
Negative Operating Results and Operating Cash Flow - The Company
incurred a loss before income taxes of $42.6, $8.4 million and
$11.6 million for the years ended 31 December 2010, 2009 and 2008,
respectively. The Company had negative operating cash flow for the
twelve months ended 31 December 2008 and 2010, and may experience
periods of negative operating cash flow in the future.
The Company may continue to incur losses before income taxes and
have negative operating cash flow until its development projects
are in production or longer. Furthermore, the Company will continue
to significantly increase capital expenditure in order to ensure
its development projects are constructed. A failure to obtain a
profit or positive operating cash flows could have a material
adverse effect on the Company's financial results, production and
development and exploration projects and the market price of the
Common Shares.
Counterparty Credit Risk - The Company's credit risk is
primarily attributable to trade receivables from concentrate sales
to its offtakers and on cash balances and short term investments
with the Company's bankers. Though the Company selects its
offtakers considering their credit standing and tries to diversify
this risk by selling to a number of different offtakers, there is a
risk that the Company will not realise its trade receivables should
these offtakers not perform. While the majority of the Company's
cash and cash equivalents are on deposit with banks or money market
participants with a Standard and Poors rating of at least A, there
can be no assurance that the Company will be able to realise the
full value of these accounts in a timely manner or at all.
Mining, Development, Exploration and Other Licences - The
Company's current operations, including further mining,
development, exploration and other mining activities, require
certain licenses, concessions, leases, permits and regulatory
consents (the "Authorisations") from various levels of governmental
authorities. The Company may also be required to obtain certain
property rights to access, or use, certain of its properties in
order to proceed to development. Obtaining the necessary
governmental permits can be a complex and time-consuming process.
The duration and success of permit applications are contingent on
many factors that are outside the Company's control. There can be
no assurance that all Authorisations which the Company requires for
the conduct of mining operations will be obtainable on reasonable
terms or in a timely manner, or at all, that such terms may not be
adversely changed, that required extension will be granted, or that
the issuance of such Authorisations will not be challenged by third
parties. Delays in obtaining or a failure to obtain such
Authorisations or extension thereto, challenges to the issuance of
such Authorisations, whether successful or unsuccessful, changes to
the terms of such Authorisations, or a failure to comply with the
terms of any such Authorisations that the Company has obtained,
could have a material adverse impact on the Company's business,
results of operations financial condition and the market price of
the Common Shares.
Title Matters - While the Company has diligently investigated
title to all mineral concessions and, to the best of the Company's
knowledge, title to all of its properties are in good standing,
this should not be construed as a guarantee of title. The Company's
properties may be subject to prior unregistered agreements or
transfers that have not been recorded or detected through title
research and title may be affected by undetected defects. There can
be no assurance that title to some of the Company's properties will
not be challenged or impugned. Additionally, the land upon which
the Company holds exploration rights may not have been surveyed
and, therefore, the precise area and location of such interests may
be subject to challenge. Any defects or challenges could adversely
affect the Company's title to the affected properties, or delay or
increase the cost of development of such properties.
Environmental and Other Regulatory Requirements - The Company's
activities are subject to environmental laws, regulations and
permits promulgated by government agencies from time to time.
Environmental legislation generally provides for restrictions and
prohibitions on spills, releases or emissions of various substances
produced in association with certain mining industry operations,
such as seepage from tailings disposal areas, which would result in
environmental pollution. Environmental legislation also provides
for restrictions on the use of resources such as water. For
example, the Company may require licenses for the use of water in
its operations. The costs associated with compliance of such laws,
regulations and permits are substantial, and possible additional
future laws and regulations, changes to existing laws and
regulations or more stringent enforcement or restrictive
interpretation of current laws and regulations by governmental
authorities could cause additional expenditure to be incurred or
impose restrictions on, or suspensions of, the Company's operations
and delays in the development of its assets. For example, the
Company's regulatory permits require that it set aside certain
amounts as rehabilitation bonds to cover the cost of
decommissioning plants and general site rehabilitation.
A breach of environmental legislation, related regulatory
requirements or permit conditions may result in imposition of fines
and penalties. In addition, certain types of operations require the
submission and approval of environmental impact assessments.
Environmental legislation is evolving in a manner which means
stricter standards, and enforcement, fines and penalties for
non-compliance are more stringent. Environmental assessments of
proposed projects carry a heightened degree of responsibility for
companies and their directors, officers and employees. The cost of
compliance with changes in governmental regulations has a potential
to reduce the profitability of operations.
The Company's current development and exploration activities
require permits from various governmental authorities and such
operations are and will be governed by laws and regulations
governing prospecting, labour standards, occupational health, waste
disposal, toxic substances, land use, environmental protection,
safety and other matters. Companies engaged in development and
exploration activities generally experience increased costs and
delays as a result of the need to comply with applicable laws,
regulations and permits. There can be no assurance that all permits
which the Company may require for development and exploration will
be obtainable on reasonable terms or on a timely basis, or that
such laws and regulations would not have an adverse effect on any
project that the Company may undertake. The Company believes it is
in substantial compliance with all material laws and regulations
which currently apply to the Company's activities. However, there
may be unforeseen environmental liabilities resulting from
development, exploration and/or mining activities and these may be
costly to remedy.
Amendments to current laws, regulations and permits governing
operations and activities of development and exploration companies,
or more stringent implementation thereof, could have a material
adverse impact on the Company and cause increases in expenditures
and costs, or require abandonment, or cause delays in developing
new mining properties.
Health, Safety and Community Relations - The Company's
operations are subject to various health and safety laws and
regulations that impose various duties on the Company's operations
relating to, among other things, worker safety and surrounding
communities. These laws and regulations also grant the authorities
broad powers to, among other things, close unsafe operations and
order corrective action relating to health and safety matters. The
costs associated with the compliance of such health and safety laws
and regulations may be substantial and any amendments to such laws
and regulations, or more stringent implementation thereof, could
cause additional expenditure or impose restrictions on, or
suspensions of, the Company's operations. The Company has made, and
expects to make in the future, significant expenditure to comply
with the extensive laws and regulations governing the protection of
the environment, waste disposal, worker safety, mine development
and protection of endangered and other special status species, and,
to the extent reasonably practicable, create social and economic
benefit in the surrounding communities.
As a mining business, the Company may come under pressure in the
jurisdictions in which it operates, or will operate in the future,
to demonstrate that other stakeholders (including employees,
communities surrounding operations and the countries in which they
operate) benefit and will continue to benefit from the Company's
commercial activities, and/or that the Company operates in a manner
that will minimise any potential damage or disruption to the
interests of those stakeholders. The Company currently maintains
good relations with local communities in the areas in which it
operates and has a demonstrable track record of promoting community
and social relations activities for the benefit of local
communities. However, the Company may face opposition with respect
to its current and future development and exploration projects
which could materially adversely affect the Company's business,
results of operations and financial condition.
Further, certain non-governmental organisations ("NGOs"), some
of which oppose globalisation and resource development, are often
vocal critics of the mining industry and its practices, including
the use of hazardous substances in processing activities. Adverse
publicity generated by such NGOs or others related to extractive
industries generally, or the Company's operations specifically,
could have an adverse effect on the Company's reputation and
financial condition and may impact its relationship with the
communities in which it operates. The Company seeks to mitigate
this risk by its commitment to operate in a socially responsible
manner. However, there can be no guarantee that the Company's
efforts in this respect will mitigate this potential risk.
The Company may also be held responsible for the costs of
addressing contamination at the site of current or former
activities and could be held liable for exposure to hazardous
substances. The costs associated with such responsibilities and
liabilities may be significant.
Tax Matters - The Company's tax residency is affected by a
number of factors, some of which are outside of its control,
including the application and interpretation of the relevant tax
laws and treaties. If ever the Company was assessed to be non-tax
resident in Canada, it may be liable to pay additional Canadian
taxes, including, but not limited to, capital gains tax based on
the difference between the fair market value and tax cost of its
assets at the relevant time. If such taxes were to become payable,
this could have a material adverse effect on the Company's
business, results of operations and financial condition. Further,
the income tax consequences to holders of Common Shares would be
different from those applicable if the Company were resident in
Canada.
Dependence on Management - The Company's development to date has
largely depended and in the future will continue to depend on the
efforts of key management and other key personnel. Loss of any of
these people, particularly to competitors, could have a material
adverse effect on the Company's business. Further, with respect to
the development of the Company's projects, it will become necessary
to attract both international and local personnel for this
development. The marketplace for skilled personnel is becoming more
competitive, which means the cost of hiring, training and retaining
such personnel may increase. Factors outside the Company's control,
including competition for human capital and the high-level of
technical expertise and experience required to execute this
development will affect the Company's ability to employ the
specific personnel required. The failure to retain or attract a
sufficient number of skilled personnel could have a material
adverse effect on the Company's business, results of operations and
financial condition. The Company has not taken out and does not
intend to take out key man insurance in respect of any directors,
officer or other employees.
Competition - The international mining industry is highly
competitive. The Company's ability to acquire properties and add
mineral reserves in the future will depend not only on its ability
to develop its present properties, but also on its ability to
select and acquire suitable producing properties or prospects for
mineral exploration, of which there is a limited supply. The
Company may be at a competitive disadvantage in acquiring
additional mining properties because it must compete with other
individuals and companies, many of which have greater financial
resources, operational experience and technical capabilities than
the Company. The Company may also encounter competition from other
mining companies in its efforts to hire experienced mining
professionals. Competition could adversely affect the Company's
ability to attract necessary capital funding or acquire suitable
producing properties or prospects for mineral exploration in the
future. Competition for services and equipment could cause project
costs to increase materially, resulting in delays if services or
equipment cannot be obtained in a timely manner due to inadequate
availability, and increase potential scheduling difficulties and
cost increases due to the need to coordinate the availability of
services or equipment, any of which could materially increase
project development, exploration or construction costs, result in
project delays or both.
Conflicts of Interest and Related Party Transactions - Certain
directors of the Company are, and may continue to be, involved in
the mining and mineral exploration industry through their direct
and indirect participation in corporations, partnership or joint
ventures which are potential competitors of the Company. Situations
may arise in connection with potential acquisitions in investments
where the other interests of these directors may conflict with the
interests of the Company. Directors of the Company with conflicts
of interest will be subject to and will follow the procedures set
out in applicable corporate and securities legislation,
regulations, rules and policies.
The Company has entered into, and may, in the future, enter
into, arrangements or transactions with related parties, including
Aktor and its subsidiaries, companies controlled by it or in which
it owns a controlling interest, and with entities in which the
executive and/or non-executive directors are connected, which may
be on terms that it may not be possible to achieve with other third
parties. For example, Aktor and its subsidiaries are currently
responsible for many of capital projects as well as the Company's
current mining operations. The Company is aware of its legal and
regulatory obligations with respect to related party transactions,
and the Company has procedures in place to ensure that prospective
related party transactions are properly reported and approved,
including by its Shareholders where necessary.
Legal Proceedings - The Company is currently involved with
administrative proceedings in the European Commission. If decided
adversely to the Company, these proceedings, or other legal
proceedings that could be brought against the Company in the future
which are not now known, for example, litigation based on its
business activities, environmental laws, volatility in its stock
price or failure to comply with its disclosure obligations, could
have a material adverse effect on the Company's business, results
of operations and financial condition.
Non-Canadian Assets and Management - While the Company is
incorporated under the laws of Yukon and its registered office is
located in Whitehorse, the Company also has an office in London,
England. Furthermore, its officers and directors and substantially
all of the assets of the Company are located outside Canada. It may
not be possible for holders of securities to effect service of
process within Canada upon such officers and directors who reside
outside Canada. There may be difficulty in enforcing against the
Company's assets and judgments obtained in Canadian courts
predicated upon the provisions of applicable Canadian provincial
securities legislation may not be recognised or enforceable in
jurisdictions where the Company's officers or directors reside or
where the Company's assets are located.
Depletion of Reserves - Unless replaced with new or additional
reserves, the Company's reserves will decline as gold, copper, lead
and zinc are mined from its operations. To realise future
production growth, extend the lives of its operations and ensure
the continued operation of the business, the Company must continue
to realise its existing identified reserves, convert resources into
reserves, achieve success in a certain number of its exploration
initiatives and/or acquire additional reserves and resources.
There can be no assurance that the Company's ability to find
additional reserves in the future will be adequate to support the
future production levels at those operations. If the Company is
unsuccessful in replacing existing reserves, then the Company will
not be able to extend production beyond its current reserve base
which would materially adversely affect the Company's future
business.
Labour Laws and Unions - The Company is subject to various
labour laws which impose certain costs and obligations upon the
Company. Although management believes its labour relations, with
both employees and contractors, are good, there can be no assurance
that a work slowdown, work stoppage or strike will not occur at any
of the Company's operations. There can also be no assurance that
wages or other operational costs will not rise due to changes in
labour relations or availability or union activities. Further, any
new or amended labour laws in relevant jurisdictions may increase
the Company's labour costs. Any of the above could have a material
adverse effect on the Company's business results of operations and
financial condition.
Carrying Value of Property - Based on annual impairment reviews
made by management, in the event that the long-term expectation is
that the net carrying amount of certain capitalised development and
exploration costs will not be recovered, then the carrying amount
is written down to the appropriate fair value, with the write-down
amount charged to the income statement. These write-downs could
occur if: the carrying amounts of the capitalised costs exceed the
related undiscounted net cash flows of reserves; exploration
activities have ceased; exploration results are not promising such
that exploration will not be planned for the foreseeable future; or
insufficient funding is available to complete the development and
exploration program.
Expected future cash flows are inherently uncertain, and could
materially change over time. They are significantly affected by
reserve and production estimates, together with economic factors
such as spot and forward gold prices, discount rates, currency
exchange rates, estimates of costs to produce reserves and future
capital expenditure. If any of these uncertainties occur either
alone or in combination, it could require management to recognise
an impairment, which could adversely affect the Company's business,
results of operations and financial condition.
Customers - The Company is currently under contract to sell the
base metal concentrates produced from ore extracted from its
Stratoni mine to a single off-taker. If the off-taker were
unexpectedly to reduce or discontinue its purchasing of the
Company's metals, no assurance can be given that delays or
disruptions in sales would not be experienced until such time as
alternative customers could be found, or that arrangements with
alternative customers would be entered into on terms as favourable
to the Company. There can be no guarantee that alternative
customers would be available on similar terms, or at all. Any of
the foregoing risks could have a negative impact on the Company's
results of operations.
DISCLOSURE CONTROLS & PROCEDURES AND INTERNAL CONTROL OVER
FINANCIAL REPORTING
The Executive Chairman and the Chief Financial Officer of the
Company (the "Certifying Officers") have established and maintained
in the period ended 31 December 2010 disclosure controls and
procedures ("DC&P") and internal control over financial
reporting ("IFCR") for the Company.
The Certifying Officers have caused DC&P, as defined in
National Instrument 52-109 ("NI 52-109"), to be designed under
their supervision, to provide reasonable assurance that material
information relating to the Company and its subsidiaries is made
known to the Certifying Officers by others within those entities,
as appropriate, to allow decisions regarding required disclosure
within the time periods specified by legislation, particularly
during the period in which interim and annual filings are being
prepared.
The Certifying Officers have evaluated the effectiveness of the
Company's DC&P as at 31 December 2010. Based upon that
evaluation, the Certifying Officers have concluded that the
DC&P are adequate and effective for the period ended 31
December 2010.
The Certifying Officers have caused internal control over
financial reporting, as defined in NI 52-109, to be designed under
their supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with Canadian
GAAP.
As of 31 December 2010 the Certifying Officers assessed the
effectiveness of the Company's internal control over financial
reporting. Based upon that evaluation, the Certifying Officers
concluded that the internal controls and procedures are adequate
and effective for the period ended 31 December 2010.
During the period ended 31 December 2010, there has been no
change in the Company's internal control over financial reporting
that have materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial
reporting.
The Certifying Officers believe that disclosure controls and
procedures and internal control systems can only provide reasonable
assurance, and not absolute assurance, that such objectives are
met.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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