TIDMEGU
RNS Number : 2595M
European Goldfields Ltd
12 August 2011
Management's Discussion and Analysis
For the period ended 30 June 2011
The following discussion and analysis, prepared as at 12 August
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 periods ended 30 June 2011 and 2010 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 for operations
The Company's results of operations for the three-month period
ended 30 June 2011 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
Greek EIS approval - The Greek Government announced after the
quarter end that the Joint Ministerial Decision had been delivered
thereby formally approving the Environmental Impact Study ("EIS")
submitted by the Company's 95%-owned subsidiary, Hellas Gold SA,
for the development of the Company's Greek assets. This completes
the official approval process for the EIS.
Skouries -A comprehensive bidding document for the Skouries
project construction is ready for issue to major contractors. This
contract would cover the civil engineering aspects of the project
and include the plant construction and site infrastructure such as
power supply, internal and external access roads and the
construction of the tailings starter embankment. With the
assistance of our Greek partners, the recruitment process for key
owner's team personnel is well advanced. On the ground, planned
detailed geotechnical work is due to commence in Q3.
Olympias - Major progress has been made on the plant
refurbishment including completing building repairs, a new plant
roof, renewal of the motor control centre, installation of process
mixing and holding tanks and rehabilitation of all access and
internal roads. Orders have been placed for the apron feeder and
the filter press, being the two longest lead items in the
renovation of the Olympias concentrator plant, and the project is
on schedule to produce gold concentrate from existing tailings in
Q2 2012.
Refurbishment of the current mine access decline is also
progressing with more than 50% completed. Proposals for the
engineering studies that will define the detail of the remaining
underground mine refurbishment are currently in preparation. This
will help to ensure that underground production commences, as
planned, directly after the processing of existing tailings is
complete in 2015, as defined in the Company's phased development
plan for the Olympias project.
Sale of Gold-Bearing Concentrates (100% basis)
===============================================================================
2011 2011 2010 2010 2010 2010 2009 2009
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
============= ====== ====== ====== ====== ====== ====== ======= =======
Sales
Gold
concentrate
(dmt) Nil Nil Nil Nil Nil Nil 34,182 21,734
============= ====== ====== ====== ====== ====== ====== ======= =======
Stratoni operations - The Company's 95% owned subsidiary Hellas
Gold mined a total of 59,150 wet tonnes in Q2 2011 (Q2 2010 -
64,813) and completed 4 shipments for the period (2010 - 9). 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)
===================================================================================================================
2011 2011 2010 2010 2010 2010 2009 2009
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
=================================== ======== ======== ======== ======== ======== ======== ======== ========
Inventory (start
of period)
Ore mined (wet
tonnes) 3,826 24 9,074 16,392 14,089 1 8,097 2,293
Zinc concentrate
(tonnes) 2,232 2,517 4,143 2,663 2,839 2,817 583 25
Lead/silver concentrate
(tonnes) 1,387 1,740 2,841 902 1,105 824 857 2,090
Production
Ore mined (wet
tonnes) 59,150 50,282 53,474 54,093 64,813 63,294 57,247 57,235
Ore milled (tonnes) 58,049 44,873 60,356 59,938 60,663 47,701 63,345 50,167
- Average grade:
Zinc (%) 9.52 9.43 10.00 9.28 8.91 9.90 8.64 9.10
Lead (%) 5.70 6.00 5.81 6.00 5.58 6.24 5.40 5.18
Silver
(g/t) 146 142 152 157 145 159 140 133
Zinc concentrate
(tonnes) 10,310 8,052 11,339 10,298 10,103 8,852 10,572 8,495
- Containing:
Zinc (tonnes) 5,109 3,920 5,577 5,123 4,942 4,334 5,080 4,248
Lead concentrate
(tonnes) 4,277 3,300 4,526 4,630 4,479 4,040 4,684 3,503
- Containing:
Lead (tonnes) 3,055 2,317 3,238 3,307 3,092 2,727 3,143 2,376
Silver (oz) 224,837 171,048 245,511 249,717 233,760 203,914 236,621 177,650
Sales
Zinc concentrate
(tonnes) 5,584 8,337 12,965 8,818 10,279 8,830 8,338 7,937
- Containing payable:
Zinc (tonnes)* 2,311 3,392 5,378 3,672 4,159 3,633 3,380 3,325
Lead concentrate
(tonnes) 3,751 3,653 5,627 2,691 4,682 3,759 4,717 4,736
- Containing payable:
Lead (tonnes)* 2,500 2,512 3,819 1,798 3,071 2,385 3,030 3,042
Silver
(oz)* 184,299 188,304 290,961 135,361 232,212 178,184 227,661 228,574
Cash operating
cost per tonne
milled ($) 167 183 155 153 141 151 173 165
Cash operating
cost per tonne
milled (EUR) 115 134 114 119 110 110 117 116
Inventory (end
of period)
Ore mined (wet
tonnes) 3,006 3,826 24 9,074 16,392 14,089 1 8,097
Zinc concentrate
(tonnes) 6,958 2,232 2,517 4,143 2,663 2,839 2,817 583
Lead/silver concentrate
(tonnes) 1,913 1,387 1,740 2,841 902 1,105 824 857
=================================== ======== ======== ======== ======== ======== ======== ======== ========
* Net of smelter payable deductions
Production at Stratoni - In Q2 2011, production from the
underground mine was up on Q1 2011 as a result of revised planning,
ameliorating the geotechnical issues experienced during the last
quarter. There was a significant accrued stockpile ready for
shipment at the end of the quarter due to the timing of shipments,
the first of which was made in early Q3 2011.
Romania
Certej project - During the quarter significant progress was
made in the EIS approval process. Local public consultation was
satisfactorily completed during the quarter in accordance with both
Romanian and EU requirements. Final cross border consultation with
both Serbia and Hungary is now underway and is expected to be
completed in accordance with international agreements, by the early
part of Q4. The EIS approval process is expected to conclude soon
afterwards.
The Company's Certej project team is well established with a
project manager already in place. Pre-qualification of equipment
suppliers is complete and bid documents have been prepared. Bidding
documents for the project construction have also been drawn up and
pre-qualification of contractors is well advanced. Project
management software has also been installed and training to allow
its implementation is underway.
Group Exploration Update
Piavitsa, Greece - The Piavitsa massive sulphide
gold-polymetallic target occurs within two kilometres of the
Stratoni mine underground workings and is hosted by the same
structure. An 8km strike length of electromagnetic conductors was
identified by a geophysical survey and historic drilling along 2km
of this has shown mineralisation very similar in style and tenor to
that at Olympias. The remaining 6km of the anomaly has displayed
anomalous gold in soils and resource definition drilling is
planned, aiming at maiden resource estimation by Q1 2012.
Fisoka, Greece - Fisoka comprises three porphyry centres, the
most northerly of which was drill tested in the past, a chalcocite
blanket of copper mineralisation was defined but with no gold
present. However, geophysical and geochemical surveys combined with
detailed mapping indicate the un-tested central and southern
porphyries carry gold as well as copper mineralisation. Drill
testing of these previously unrecognised central and southern
Fisoka porphyry targets is planned to define maiden resources in
2012.
Tsikara, Greece - The intrusives at Tsikara represent newly
identified targets and the company has defined several plausible
porphyry centres within the overall volcanic complex that underlies
the area. Follow up mapping and litho-geological sampling has
confirmed the presence of porphyry style veining and alteration
with anomalous copper and gold values. Drilling will be aimed at
defining maiden resources in 2012.
Romania - Work in 2009 and 2010 identified numerous porphyry and
epithermal targets along the Certej volcanic belt and further work
is planned pending acceptance of licence applications. In addition,
drilling of satellites to the Certej deposit within existing
licences continues with additional open-pittable resources expected
to be defined during 2012.
Corporate Activity
Appointment of Chief Operating Officer - The Company was pleased
to announce the appointment of David Cather C.Eng, MIMMM as Senior
Vice President and Chief Operating Officer.
Mr. Cather graduated from the Royal School of Mines, Imperial
College London in 1981 with a first class degree in mining
engineering. Over a career spanning more than 25 years, Mr. Cather
has gained extensive senior level project development experience
and management skills in both open pit and underground
operations.
His early career with De Beers gave him extensive underground
mining and mine development experience. His expertise and
experience developed further during 10 years in a senior management
role at Redland Aggregates Ltd, after which, as Development
Director of Miller Mining, Mr. Cather spearheaded the development
of a portfolio of open-cast coal mines. Mr. Cather spent the next 9
years with Anglo American where, as Technical Director of Anglo
American's Industrial Minerals Division, he was responsible for
Tarmac Group (construction materials in 13 countries), Cleveland
Potash (fertiliser operations in the UK) and Copebras Brazil. Since
2006, Mr. Cather has acted as a retained mining consultant to
Grafton Resources, a London based natural resources fund with major
investments in gold projects in Russia, India and the Philippines,
Brazilian iron ore and a Bulgarian water project.
London Main Market Evaluation Initiated - The Company has
initiated an evaluation of a potential upgrade of the current AIM
listing to the Main Market of the London Stock Exchange. In that
regard, the Company announced the appointment of Goldman Sachs
International to assist with this evaluation which includes a
review of the Company's corporate structure with a view to
facilitating better access to, and servicing of, the UK and
international capital markets and a potential re-domiciliation of
the Company. Lazard & Co., Limited are also providing financial
advice in connection with this evaluation.
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 2011 2011 2010 2010 2010 2010 2009 2009
dollars) Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
=============== ======= ======= ======= ====== ======= ======= ======= =======
Sales 11,109 13,531 18,217 9,204 12,017 11,134 13,656 11,500
EBITDA 3,755 4,233 5,921 1,766 2,290 3,018 2,601 1,315
Gross profit 2,847 2,793 3,763 522 736 1,595 1,196 (449)
Capital
expenditure 141 336 483 1,417 1,336 287 2,053 596
Depreciation
and
depletion 908 1,440 2,158 1,244 1,554 1,423 1,405 1,764
=============== ======= ======= ======= ====== ======= ======= ======= =======
Total quarterly revenues from concentrate sales decreased year
on year, driven mainly by lower payable metal but strongly offset
by higher realized prices: payable zinc decreased 44% and payable
lead and silver decreased 19% and 21% respectively compared to the
prior year quarter; realised prices for zinc were $2,221 per tonne,
up 8%, and for lead $2,569 per tonne, up 41% compared to Q2 2010.
Base metal prices had been trading in a relatively stable pattern
in 2011, although the recent financial turmoil has created weakness
in base metal prices since the end of Q2 2011. This has echoed the
sharp sell off in base metals in Q2 2010, which had reversed by the
end of the 2010 calendar year. Overall the lower payable metal
outweighed higher realised prices, leading to a decrease of 8% in
payable base metal revenues.
Reconciliation of Stratoni revenues - Q2 2011
==============================================================================
(in thousands of US dollars
unless stated otherwise) Zinc Lead Silver Total
================================== ========= ========= ========== ========
Payable metal 2,311t 2,500t 184,299oz n/a
Realised price $2,221/t $2,569/t $8.41/oz n/a
Payable metal revenue 5,132 6,423 1,550 13,105
TC/RCs (1,143) (851) (147) (2,141)
Transport recoveries/(charges) - - - -
================================== ========= ========= ========== ========
Net revenue 3,989 5,572 1,403 10,964
Prior quarter revenue adjustments 230 (89) 4 145
================================== ========= ========= ========== ========
Total revenue 4,219 5,483 1,407 11,109
================================== ========= ========= ========== ========
Reconciliation of Stratoni revenues - Q2 2010
==============================================================================
(in thousands of US dollars
unless stated otherwise) Zinc Lead Silver Total
================================== ========= ========= ========== ========
Payable metal 4,159t 3,071t 232,212oz n/a
Realised price $2,057/t $1,822/t $8.30/oz n/a
Payable metal revenue 8,555 5,595 1,928 16,078
TC/RCs (2,838) (610) (222) (3,670)
Transport recoveries/(charges) 46 - - 46
================================== ========= ========= ========== ========
Net revenue 5,763 4,985 1,706 12,454
Prior quarter revenue adjustments (289) (79) (69) (437)
================================== ========= ========= ========== ========
Total revenue 5,474 4,906 1,637 12,017
================================== ========= ========= ========== ========
Olympias project
Hellas Gold completed the final shipments of Olympias gold
bearing concentrates from the surface concentrate stockpile in 2009
and therefore no sales were made in 2010 and Q2 2011. The amounts
shown in 2010 reflect final pricing adjustments from certain
historic shipments.
Financial performance (100% basis)
==============================================================================
(in thousands
of US dollars
unless stated 2011 2011 2010 2010 2010 2010 2009 2009
otherwise) Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
================= ====== ====== ===== ===== ===== ====== ====== ======
Sales Nil Nil 30 Nil (48) (699) 5,073 5,537
Gross profit Nil Nil 30 Nil (48) (699) 4,067 4,012
Depreciation and
depletion Nil Nil Nil Nil Nil Nil 196 124
================= ====== ====== ===== ===== ===== ====== ====== ======
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 2011 2011 2010 2010 2010 2010 2009 2009
US dollars unless Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
stated otherwise) $ $ $ $ $ $ $ $
==================== ========= ======== ========= ======== ========= ======== ======== ========
Statement of profit
and loss
Sales 11,109 13,531 18,247 9,204 11,969 10,435 18,729 17,037
Cost of sales 8,262 10,738 14,345 8,682 11,390 9,539 13,466 13,474
Gross profit 2,847 2,793 3,902 522 579 896 5,263 3,563
Interest income 55 60 144 65 35 62 (163) 147
Foreign exchange
gain/(loss) 1,267 3,326 (1,460) 6,930 (10,354) 1,563 88 (501)
Hedge contract
profit - - 0 183 394 - 373 1,030
Discounting of
VAT and tax
recoverable 7,790 - 0 - - - - -
Share of
profit/(loss)
in associate (5) (6) (20) (9) 39 - (3) (187)
Expenses 11,611 11,106 15,754 10,319 11,014 8,207 11,251 5,384
Profit/(loss)
before income
taxes (15,237) (4,933) (13,188) (2,628) (20,321) (5,686) (5,693) (1,332)
Income taxes (141) 2,354 (1,272) 960 (445) (1,048) (991) (1,847)
Profit/(loss)
after income
taxes (15,378) (2,579) (14,460) (1,668) (20,766) (6,734) (6,684) (3,179)
Non-controlling
interest 37 9 31 141 341 (77) (159) 56
Profit/(loss) for
the period (15,341) (2,570) (14,429) (1,527) (20,425) (6,811) (6,843) (3,123)
Earnings/(loss)
per share (0.08) (0.02) (0.08) (0.01) (0.11) (0.04) (0.04) (0.02)
==================== ========= ======== ========= ======== ========= ======== ======== ========
The Company recorded a loss before taxes of $20.17 million for
the six month period ended 30 June 2011, compared to a loss before
taxes of $26.00 million for the same period of 2010. The Company
recorded a net loss (after taxes and non-controlling interest) of
$17.91 million ($0.10 loss per share) for the six month period
ended 30 June 2011, compared to a net loss of $27.24 million ($0.15
loss per share) for the same period of 2010. For the six-month
performance, improved base metal prices and higher foreign exchange
gains, offset somewhat by higher expenses, resulted in higher
levels of gross profits and lower losses pre- and post-tax.
The Company recorded a loss before taxes of $15.24 million for
the three-month period ended 30 June 2011, compared to a loss
before taxes of $20.32 million for the same period of 2010. The
Company recorded a net loss (after taxes and non-controlling
interest) of $15.34 million ($0.08 loss per share) for the
three-month period ended 30 June 2011, compared to a net loss of
$20.43 million ($0.11 loss per share) for the same period of 2010.
For the three-month performance, improved base metal prices and
higher foreign exchange gains, offset somewhat by higher expenses,
resulted in higher levels of gross profits and lower losses pre-
and post-tax.
In more detail, the following factors have contributed to the
above:
-- A stronger market for base metal prices was experienced in
the six month period ended 30 June 2011 compared to the same period
in the prior year. In the six month period ended 30 June 2011, zinc
averaged $2,344 per tonne and lead $2,554 per tonne compared to
$2,182 per tonne and $2,106 per tonne respectively for the same
period in 2010. The Stratoni mine was operating at lower levels in
the first half of 2011 than in the same period of 2010, with mine
production decreasing 15%, and mill processing decreasing 5%
respectively. Metal sales in the H1 2011 in light of the stockpile
increase, yielded payable zinc of 5,703 tonnes, a 27% decrease over
the same period in 2010, and payable lead of 5,012 tonnes, a
decrease of 8%. Following these changes in realised prices and
sales volumes, total base metal revenues increased by 6%, with
revenues from payable zinc in H1 2011 decreasing 6% compared to H1
2010, but revenues from payable lead more than offsetting this with
an increase of 24% over the same period. In addition, large levels
of concentrate inventory were ready to ship at the end of the
period.
-- This stronger market for base metal prices was more
accentuated in the three month period ended 30 June 2011. In the
three month period ended 30 June 2011, zinc averaged $2,271 per
tonne and lead $2,531 per tonne compared to $2,052 per tonne and
$1,972 per tonne respectively for the same period in 2010. The
Stratoni mine was operating at lower levels in the second quarter
of 2011 than in the same period of 2010, with mine production
decreasing 9%, and mill processing decreasing 4% respectively.
Metal sales in the Q2 2011 in light of the stockpile increase,
yielded payable zinc of 2,311 tonnes, a 44% decrease over the same
period in 2010, and payable lead of 2,500 tonnes, a decrease of
19%. Following these changes in realised prices and sales volumes,
revenues from payable zinc in Q2 2011 decreased 23% compared to Q2
2010, and revenues from payable lead increased 12% over the same
period.
-- Cost of sales of $19.00 million in the first half of 2011 and
$8.26 million in Q2 2011, compared to $20.93 million and $11.39
million respectively for the same period of 2010 and included $2.35
million in depreciation and depletion expenses in the first half of
2011 and $0.91 million Q2 2011, compared to $3.09 million for the
same period of 2010 and $1.66 million in Q2 2010. In H1 2011,
Stratoni costs of production increased by $2.13 million driven by
higher Euro unit operating costs resulting from increased operating
development and mill costs, concentrate transport costs were $0.74
million higher, amortization and depreciation were $0.63 million
lower in H1 2011. The large build of concentrate inventory
decreased costs of sales by $2.68 million H1 2011 compared to H1
2010. For the quarter ended 30 June 2011 compared to the same
period in 2010, the trends were: $1.14 million increase in cost of
production driven partly by higher Euro unit operating costs and a
stronger Euro, $0.47 million lower transport costs, $0.64 million
lower amortization and depreciation, and a higher transfer of cost
to inventory of $2.91 million quarter on quarter. A detailed
reconciliation of cost of sales to cash unit production costs in
Euros is included in the section Non IFRS Performance Measures
below.
-- As a result, the Company recorded a gross profit of $5.64
million in the first half of 2011 and $2.85 million Q2 2011 on
revenues of $24.64 million and $11.11 million, compared to a gross
profit of $1.48 million in the first half of 2010 and $0.58 million
in Q2 2010 on revenues of $22.40 and $11.97 million, respectively
for the same periods of 2010.
-- In Q2 2011, in accordance with the Company's accounting
policies it has been decided take a conservative position for
accounting purposes and re-classify Hellas Gold's recoverable VAT
and income taxes due from the Greek authorities, which has to-date
been reported as a current asset in the Company's financial
statements, as long term debtors on a net present value basis. This
assumes that these amounts can be recovered in full by offsetting
against future taxes payable upon production from the development
projects at Olympias and Skouries. An adjustment of $7.79 million
has been made through the income statement to reflect this
re-classification and discounting. This amount will be written back
as the Company reaches production in Greece or when earlier
repayment is received.
-- The Company's corporate administrative and overhead expenses
have increased from $6.23 million in the first half of 2010 and
$4.24 million in Q2 2010 to $7.00 million and $4.21 million,
respectively, for the same periods in 2011. This reflects the
higher headcount resulting from the corporate build-out during
2010, along with professional fees relating to the financing
processes and general corporate developments.
-- The Company recorded a non-cash share-based compensation
expense of $10.19 million in the first half of 2011 and $4.13
million in Q2 2011, compared to $4.76 million and $1.13 million,
respectively, for the same periods of 2010. The increase relates
mainly to option and RSU awards made under the Company's Long Term
Incentive Plan, with specific share price and milestone objectives.
Share-based compensation relates to options, restricted share units
("RSUs") and deferred phantom units ("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 gain of $4.59 million
in the first half of 2011 and a foreign exchange gain of $1.27
million in Q2 2011, compared to a foreign exchange loss of $8.79
million in the first half of 2010 and a foreign exchange loss of
$10.35 million in Q2 2010. 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, and upon daily transactions in foreign
currencies which take place during each quarter. 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, the Company now holds
approximately EUR23 million compared to EUR30 million in 2010, in
line with its strategy of holding funds in the currency of its
major capital projects.
-- Hellas Gold's administrative and overhead expenses amounted
to $2.87 million in the first half of 2011 and $1.98 million in Q2
2011 compared to $5.38 million and $4.11 million, respectively, for
the same periods of 2010, primarily as a result of the receipt of
insurance claims in Q1 2011 relating to costs incurred relating to
damage due to an extreme rainfall event in 2010, which inflated the
prior period cost.
-- Hellas Gold incurred an expense of $1.86 million in the first
half of 2010 and $0.88 million in Q2 2011, compared to $2.03
million and $1.14 million, respectively, for the same periods of
2010, 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 a income taxes charge of $2.21 million
in the first half of 2011 and a $0.14 million credit in Q2 2011,
compared to a credit of $1.49 million and $0.45 million,
respectively for the same periods of 2010. The majority of the
movement relates to the change in fair value uplift on mine
properties as well as foreign exchange movements on the Euro
denominated tax base of Hellas Gold's non monetary items.
-- The Company recorded a credit of $0.05 million in the first
half of 2011 and a credit of $0.04 million in Q2 2011 relating to
the non-controlling shareholder's interest in Hellas Gold's profit
(after tax), compared to a credit of $0.26 and $0.34,
respectitively for the same periods of 2010.
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 IAS 39.
Lead and Zinc hedging contracts - As at 30 June 2011, 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 July 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 30 June
2011, these contracts had a fair value of $(259) (2010 - $(970)),
determined by a 3rd party valuation using the appropriate
Black-Scholes options valuation model, based on the then prevailing
market prices including lead and zinc prices, interest rates and
market volatility.
Hedging commitments
=====================================================
Period July 2011 - December 2011 Lead Zinc
===================================== ====== ======
Total Volume (tonnes) 3,000 3,900
Monthly Volume (tonnes) 500 650
Floor Price ($/tonne) 2,000 2,000
Cap Price ($/tonne) 2,900 2,800
===================== ============== ====== ======
During the period ended 30 June 2011, the Company recorded
income relating to its hedging program of $Nil (2010 - $Nil).
Given the current maturity profile of the hedge, market
expectations and parameters, we expect that the fair value of the
existing hedge contracts $(259) will be released to net profit
within the next 6 months.
Related parties
The Company's consolidated financial statements incorporate the
accounts of the Company, European Goldfields Limited and its
subsidiary undertakings as disclosed in note 3 of the interim
financial statements for the period ending 30 June 2011. The
following are also considered related parties of the Company.
Greek Nurseries SA
The Company's investment in Greek Nurseries SA is held through
Hellas Gold SA who subscribed for 50% of the share capital.
Hellas Gold SA holds two out of the five Board positions and is
not involved in the operating and management decision making
process of Greek Nurseries SA. The investment is therefore
accounted for as an associate, and Greek Nurseries SA is considered
a related party of the consolidated Company.
Ellaktor SA
Ellaktor SA ("Ellaktor"), owns 19.3% of the Company's issued
share capital. Aktor SA ("Aktor") Greece's largest construction
Company and a 100% subsidiary of Ellaktor owns 5% of Hellas Gold
SA, the Company's 95% owned subsidiary.
Ellaktor is deemed a related party and contracts management,
technical and engineering services to Hellas Gold SA through its
subsidiary undertakings including Aktor.
These costs have been recognised as costs of sales or
capitalised depending on the nature of services rendered. 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 (2010 - 30 days).
Transactions with related parties
For the three-month period ended 30 June 2011 and 2010 the
following transactions were entered into with related parties and
the following amounts were outstanding as at 30 June 2011 and 31
December 2010.
Greek Nurseries SA
30 June 31 December
2011 2010
US$000 US$000
==================== ======== ============
Amounts receivable - 28
Amounts payable (2) -
(2) 28
==================== ======== ============
In the six month period ended 30 June 2011 the value of services
provided to the Company by Greek Nurseries SA was $1 (2010 Nil) and
by the Company to Greek Nurseries SA was Nil (2010 - Nil). In the
three month period ended 30 June 2011 the value of services
provided to the Company by Greek Nurseries SA was $1 (2010 Nil) and
by the Company to Greek Nurseries SA was Nil (2010 - Nil).
Ellaktor SA
3 months 6 months
ended ended
30 June 30 June
Services received: 2011 2010 2011 2010
US$000 US$000 US$000 US$000
============================ ======= ======= ======= =======
Exploration and evaluation
services - 20 - 94
Mining services 7,777 9,142 15,686 17,157
Other services 70 22 107 58
7,847 9,184 15,793 17,309
============================ ======= ======= ======= =======
30 June 31 December
2011 2010
US$000 US$000
==================== ======== ============
Amounts receivable - -
Amounts payable (8,009) (3,883)
(8,009) (3,883)
==================== ======== ============
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 dollars 2011 2011 2010 2010 2010 2010 2009 2009
unless stated Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
otherwise) $ $ $ $ $ $ $ $
================== ======== ========= ========= ======== ========= ========= ========= =========
Balance sheet
(end of period)
Cash 38,760 47,534 57,122 82,768 84,978 101,836 113,642 124,112
Working capital 31,132 66,583 75,887 97,359 102,320 125,347 146,799 146,158
Total assets 505,617 512,739 507,293 522,745 510,721 525,405 744,100 749,870
Non current
liabilities 103,471 102,876 104,549 98,846 98,501 99,292 147,463 153,882
Statement of
cash flows
Cash flows
from
operating
activities (3,438) (1,971) 3,556 (945) 1,338 (8,856) (5,214) 2,865
Investing
activities (6,338) (11,237) (27,961) (7,329) (7,737) (4,251) (6,851) (22,793)
-
Property,pl
ant and
equipment (1,355) (12,162) (24,839) (4,546) (65) (731) (4,411) (20,656)
-
Exploration
and
evaluation
and mine
development
cost (4,983) 925 (3,122) (2,783) (7,672) (3,520) (2,440) (2,137)
Financing
activities - - - 199 113 - 1,694 -
Effect of
foreign
exchange on
cash 1,002 3,620 (1,241) 5,865 (10,572) 1,301 (99) 1,312
================== ======== ========= ========= ======== ========= ========= ========= =========
Total movement
in cash (8,774) (9,588) (25,646) (2,210) (16,858) (11,806) (10,470) (18,616)
================== ======== ========= ========= ======== ========= ========= ========= =========
As at 30 June 2011, the Company had cash and cash equivalents of
$38.76 million, compared to $57.12 million as at 31 December 2010,
and working capital of $57.33 million, compared to $79.64 million
as at 31 December 2010. 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 remains 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
largely focused on bank debt to provide development capital for its
projects. The Company does not currently intend to pursue any
capital markets financing however, until market conditions
normalise. 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 30 June 2011,
compared to the balances as at 31 December 2010, resulted primarily
from the purchase of land for $9.02 million, capital expenditure in
Greece totalling $4.48 million, changes in operating cash flow
before net changes in other working capital of $4.32 million,
exploration and evaluation and mine development costs in Romania of
$2.40 million, exploration and evaluation and mine development
costs in Greece of $1.06 million, exploration and evaluation and
mine development costs in Turkey totalling $0.60 million. The
impact of these outflows was partially offset by the positive
effect of foreign currency translation on cash of $3.65
million.
The following table sets forth the Company's contractual
obligations including payments due for each of the next five years
and thereafter:
Contractual obligations
Payments due by period
=================================================
(in thousands of US Less
dollars unless stated than 2 - 4 - After
otherwise) Total 1 year 3 years 5 years 5 years
=========================== ====== ======== ========= ========= =========
Operating lease (London
office) 1,568 448 896 224 -
Operating lease
(Athens office) 812 148 295 295 74
Operating lease
(Certej land) 3,241 84 503 335 2,319
Outotec OT -
Processing Plant 495 495 - - -
=========================== ====== ======== ========= ========= =========
Total contractual
obligations 6,116 1,175 1,694 854 2,393
=========================== ====== ======== ========= ========= =========
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.
The Company expects to spend a total of $32 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, $10 million at Olympias
to refurbish the mine and process plant, and $5 million at Skouries
as the Company expects to finalise engineering studies and conclude
contract negotiations in preparation for construction activities.
At Certej, the Company expects to spend $15 million to finalise
engineering studies in preparation for construction activities. In
addition to its capital expenditure programme, the Company expects
to spend $12 million in exploration over the wider licence areas in
Greece, Romania and Turkey, $11million 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:
Number
of shares
================================ ============
Common shares: 183,840,513
Common share options: 6,445,331
Restricted share units: 1,961,164
Less: issued to JOE plan (500,000)
================================ ============
Common shares (fully-diluted): 191,747,008
================================ ============
Preferred shares: -
================================ ============
Non-IFRS performance measures
The Company uses certain performance measures in its analysis.
Some of these performance measures have no meaning within IFRS 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 IFRS.
Cash operating cost per tonne milled is a Non-IFRS 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 IFRS
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:
Reconciliation of cost of sales
=========================================================================================
(in thousands
of US dollars 2011 2011 2010 2010 2010 2010 2009 2009
unless stated Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
otherwise) $ $ $ $ $ $ $ $
=============== ======== ======= ======= ======== ======= ======= ======= =======
Milled
production
(dmt) 58,049 44,873 60,356 59,938 60,663 47,701 63,345 50,167
=============== ======== ======= ======= ======== ======= ======= ======= =======
Cash operating
cost per
tonne milled
(EUR) 115 134 114 119 110 110 117 116
=============== ======== ======= ======= ======== ======= ======= ======= =======
Cash operating
cost per
tonne milled
($) 167 183 155 153 141 151 173 165
=============== ======== ======= ======= ======== ======= ======= ======= =======
Cash cost of
production 9,686 8,212 9,347 9,181 8,553 7,221 10,948 8,288
Movement in
concentrate
inventory (2,745) 113 1,845 (2,692) 157 (109) (916) 1,080
=============== ======== ======= ======= ======== ======= ======= ======= =======
Cash cost of
sales -
Stratoni 6,941 8,325 11,192 6,489 8,710 7,112 10,032 9,368
Amortisation
and
depletion 908 1,440 2,049 1,244 1,663 1,423 1,601 1,888
Concentrate
transport
costs 661 725 1,104 840 1,126 1,004 1,833 2,218
Inventory
write-down /
adjustments (248) 248 - 109 (109) - - -
=============== ======== ======= ======= ======== ======= ======= ======= =======
Cost of sales 8,262 10,738 14,345 8,682 11,390 9,539 13,466 13,474
=============== ======== ======= ======= ======== ======= ======= ======= =======
Earnings before interest, tax, depreciation and amortisation
("EBITDA") is a Non-IFRS 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 IFRS.
Critical accounting estimates
Estimates, risks and uncertainties - The preparation of
financial statements in conformity with IFRS requires management to
make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amount of revenues and expenses during the period.
Significant estimates and assumptions include those related to the
recoverability of deferred costs in relation to mine properties and
exploration and evaluation, decommissioning obligations,
share-based compensation, current deferred tax and VAT receivable.
While management believes that these estimates and assumptions are
reasonable, actual results could vary significantly.
Ore reserves and depletion of mine properties - In accordance
with the Company's accounting policy, once production starts mine
properties are classified as producing mines, which are stated at
cost less accumulated depletion and impairment. Producing mines are
depreciated on a unit of production basis over the economically
recoverable reserves of the mine concerned. A total of $819 for the
six month period ended 30 June 2011 (2010 - $936) and $282 for the
three month period ended 30 June 2011 (2010 - $459) was charged to
the income statement in relation to depletion of mine properties,
which were subject to these estimates. The estimation of
recoverable reserves is based on professional evaluations using
accepted international standards for the assessment of mineral
reserves. The assessment involves the study of geological,
geophysical and economic data and relies on a number of financial
and technical assumptions. The estimate of reserves may be subject
to change based on new information gained subsequent to the initial
assessment, which 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. If actual reserves prove to be significantly different
to current estimates, a material change to amounts charged to
earnings could occur. At 30 June 2011 a total of $288,128 (31
December 2010 - $282,285) of mine properties and reserves and
exploration and evaluation assets was stated on the balance sheet
that are subject to these estimates now and in the future.
Decommissioning liability - The Company records a mine
rehabilitation provision ("decommissioning liability") at fair
value when legally incurred with the corresponding increase to the
mineral property depreciated over the life of the mine. Management
assesses the calculation of the mine rehabilitation provision
annually, including the underlying assumptions and judgments
made.
The liability is adjusted over time to reflect an accretion
element. In accordance with IFRS the provision is discounted using
a discount rate that reflects risks specific to the liability, with
any change in the discount rate treated as a change in accounting
estimate. Changes to estimated future costs are recognized in the
statement of financial position by either increasing or decreasing
the rehabilitation liability and asset if the initial estimate was
recognized as part of an asset measured in accordance with IAS
16.
Any significant change to management's previous assumptions and
to the cost of rehabilitation activities or the market based
discount rate may result in future actual expenditure differing
from the amounts currently provided. These changes or a change to
the market based discount rate may result in a material change to
amounts charged to earnings. At each reporting date the provision
represents management's best estimate of the present value of the
future rehabilitation costs required.
As at 30 June 2011, the Company recorded a decommissioning
liability relating to its Stratoni property in Greece amounting to
$6,789 (31 December 2010 - $6,585) subject to these estimates. A
total of $219 for the six month period to 30 June 2011 (2010 -
$215) was charged to the income statement in relation to the
decommissioning liability and $110 for the three month period ended
30 June 2011 (2010 - $103), 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.
Share based compensation - The Company operates a share option
scheme (Share Incentive Plan), an equity participation plan ('RSU')
and a deferred phantom plan ('DPU'). Equity and cash based
compensation granted under these plans is accounted for using the
fair value method of accounting. Under this method the cost of
equity-based compensation is estimated at fair value at the grant
date and recognised in the income statement as an expense, or
capitalised to exploration and evaluation assets and mine
properties when the compensation can be attributed to those
assets.
For cash settled awards, the cost of each unit is measured
initially at fair value and expensed over the period until the
vesting date. The associated liability is revalued to fair value at
each reporting date with movements expensed in the period.
A total of $10,194 for the six month period to 30 June 2011
(2010 - $4,763) and $4,132 for the three month period ended 30 June
2011 (2010 - $1,128) was charged to the income statement in
relation to share based compensation, which were subject to these
estimates.
Current and deferred tax - Tax regimes in certain jurisdictions
can be subject to differing interpretations and are often subject
to legislative change and changes in administrative interpretation
in those jurisdictions. The interpretation by the Company and its
subsidiary undertakings of relevant tax law as applied to their
transactions and activities may not coincide with that of the
relevant tax authorities. As a result, transactions may be
challenged by tax authorities and may be assessed to additional tax
or additional transactions taxes (for example stamp duty or VAT),
which, in each case, could result in significant additional taxes,
penalties and interest. These could have a material adverse impact
on the Company's business, financial position and performance. A
total credit of $2,212 for the six month period to 30 June 2011
(2010 - charge of $1,493) was recognized in the income statement
and for the three month period ended 30 June 2011 a total charge of
$141 (2010 - charge of $445) was recognized in the income statement
which were subject to these estimates.
VAT receivable - Hellas Gold SA has a total of $31 million in
recoverable VAT and income taxes due from the Greek authorities,
which has to-date been reported as a current asset in the Company's
financial statements. In accordance with the Company's accounting
policies, it has been decided to take a conservative position for
accounting purposes and re-classify these amounts as long term
debtors on a net present value basis, given that these amounts can
be recovered in full by offsetting against future taxes payable
upon production from the development projects at Olympias and
Skouries. An adjustment of $7.8 million has been made through the
income statement to reflect this re-classification and discounting.
This amount will be written back as the Company reaches production
in Greece or when earlier repayment is received.
Long lived assets - All long lived assets held and used by the
Company are reviewed for possible impairment at least annually or
whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. If changes in
circumstances indicate that the carrying value of an asset that an
entity expects to hold and use may not be recoverable, future cash
flows expected to result from the continued use of the asset and
its disposition must be estimated. An asset is considered to be
impaired where its recoverable amount (being the higher of the
asset's fair value less costs to sell and its value in use) is less
than its current carrying amount. Under IFRS a significant adverse
change during the period or anticipated to take place in the near
future in the market in which the Company operates or in the market
to which an asset is dedicated can be considered an indication of
possible impairment. An example of such a change would be a fall in
metal prices. In such circumstances management use cash flow
forecasts to establish whether actual impairment has occurred.
Estimates are based on future expectations and a number of
assumptions and judgments made by management. Current metal prices
do not suggest that there has impairment of any of the Company's
non-current assets, although if such an impairment were to occur,
it could result in a material charge to earnings.
Transition to International Financial Reporting Standards
("IFRS")
The Company has transitioned to IFRS for its financial
statements commencing 1 January 2011, and these interim financials
for the quarter ended 30 June 2011 represent part of the Company's
first annual reporting period under IFRS. The financial statements
include opening balance sheet and equity reconciliations for the
quarter as well as reconciliations as at the 1 January 2010
transition date and as at 31 December 2010.
Exemptions applied 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).
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.
Impact of IFRS adoption
The following table reconciles the impact of the transition to
IFRS on the Company's 31 December 2010 balance sheet.
Effect
Canadian of transition
GAAP to IFRSs IFRSs
US$ US$ US$
'000 '000 '000
================================== ========= =============== ==========
Assets
Non-current assets
Mine properties and reserves 488,811 (217,157) 271,654
Other property, plant and
equipment 126,341 - 126,341
Exploration and evaluation
assets 3,306 7,325 10,631
Investment in associate 743 - 743
Available for sale financial
asset 1,975 - 1,975
Deferred tax asset 1,608 (1,608) -
================================== ========= =============== ==========
622,784 (211,440) 411,344
================================== ========= =============== ==========
Current assets
Cash and cash equivalents 57,122 - 57,122
Trade and other receivables 29,506 - 29,506
Inventories 5,733 (80) 5,653
Current taxation 3,668 - 3,668
================================== ========= =============== ==========
96,029 (80) 95,949
================================== ========= =============== ==========
Total assets 718,813 (211,520) 507,293
================================== ========= =============== ==========
Equity and liabilities
Capital and reserves
Attributable to equity
holders of the Company
Share capital 556,771 26,103 582,874
Contributed surplus 16,662 - 16,662
Other reserves 33,209 (36,818) (3,609)
Deficit (56,635) (155,436) (212,071)
================================== ========= =============== ==========
550,007 (166,151) 383,856
================================== ========= =============== ==========
Non-controlling interest 2,494 - 2,494
================================== ========= =============== ==========
552,501 (166,151) 386,350
================================== ========= =============== ==========
Non-current liabilities
Deferred tax liabilities 90,372 (44,759) 45,613
Provisions 13,752 (610) 13,142
Deferred revenue 45,794 - 45,794
================================== ========= =============== ==========
149,918 (45,369) 104,549
================================== ========= =============== ==========
Current liabilities
Trade and other payables 11,557 - 11,557
Deferred revenue 3,867 - 3,867
Derivative financial liability 970 - 970
================================== ========= =============== ==========
16,394 - 16,394
================================== ========= =============== ==========
Total liabilities 166,312 (45,369) 120,943
================================== ========= =============== ==========
Total liabilities & shareholders
equity 718,813 (211,520) 507,293
================================== ========= =============== ==========
Business Combinations
The Company has taken the IFRS 1 Business Combinations
exemption, which allows them to choose an effective date from which
to adopt IFRS 3 (Revised) Business Combinations (IFRS 3R). IAS 27
(Revised) Consolidated and Separate Financial Statements (IAS 27R)
must also be adopted from that date. The Company has chosen to
apply IFRS respectively to all business combinations that occurred
on or after 01 June 2007.
The acquisition of a further 30% stake in Hellas Gold on 29 June
2007 has therefore been accounted for under IFRSs. Under CGAAP this
was considered a business combination, with the excess of the fair
value of the non-controlling interest acquired recognised as
additional mine properties and reserves in the balance sheet,
whereas under IFRS the transaction is an equity transaction with
the Company's controlling and non-controlling interests adjusted to
reflect changes in its relative interests in Hellas Gold. This
resulted in a reduction to the carrying value of the mine
properties and reserves (IFRS 3R adjustment), with cumulative
translation differences that were capitalised to the mine
properties and reserves under CGAAP written back and depletion that
was recognised on the additional mine properties and reserves added
back to the date of transition. The reduction in the value of mine
properties and reserves on transition resulted in a corresponding
decrease in the deferred tax liability relating to those assets. In
the year to 31 December 2010 further depletion relating to the
additional mine properties and reserves was also added back against
either cost of sales or inventory depending on its previous
allocation under CGAAP.
The following table reconciles all movements in mine properties
and reserves on conversion to IFRS and the impact on the 31
December 2010 balance sheet.
Mine properties and reserves 31 December 2010
Canadian GAAP: 488,811
Transition adjustments:
IFRS 3R adjustment (198,518)
Cumulative translation differences (15,524)
Add back of depletion 3,941
Adjustment to decommissioning liability (657)
Reclassification as exploration and evaluation
assets (6,189)
Total transition adjustments at 1 January 2010 (216,947)
================================================= ==========
IFRS adjustments - year ended 31 December 2010:
Add back of depletion 1 January 2010 to 31
December 2010 (inventory) 80
Add back of depletion 1 January 2010 to 31
December 2010 (cost of sales) 1,083
Adjustment to decommissioning liability (237)
Reclassification as exploration and evaluation
assets (1,136)
================================================= ==========
Mine properties and reserves 31 December 2010
IFRS 271,654
================================================= ==========
In addition, shares issued as consideration in a business
combination under CGAAP were valued using the average share price
for a period prior to and subsequent to the announcement of the
transaction, whereas under IFRS, shares are valued at their
acquisition date fair value. This resulted in an increase of
$26,103 to share capital on transition.
Foreign Currency Translation
The Company has taken the IFRS 1 exemption relating to
cumulative translation differences, which allows them to deem the
cumulative translation reserve to be zero at the date of
transition. In addition to the write back of $15,524 of cumulative
translation differences on the additional mineral property, the
transfer of remaining cumulative translation differences to deficit
reduces other components of equity by $21,294 at transition and the
Company's deficit by the same amount at 1 January 2010, the
Company's date of transition to IFRS.
Income taxes
Under CGAAP tax bases were translated into US$ using historical
exchange rates. In accordance with IAS 12 income tax bases are
translated using exchange rates ruling at each reporting date.
There is no deferred tax asset disclosed under IFRS since
deferred tax assets are offset against the deferred tax liability
where the relevant entity has a legally enforceable right to set
off current assets against current tax liabilities and the deferred
tax assets and the deferred tax liabilities relate to income taxes
levied by the same taxation authority on either the same taxable
entity, or different taxable entities that intend either to settle
current tax liabilities and assets on a net basis.
Exploration and evaluation assets
Under Canadian GAAP (CGAAP) the Company recognised mineral
properties at the exploration stage, development stage and
production stage as deferred exploration and development costs.
Under IFRS a distinction is made between exploration and evaluation
assets, accounted for under IFRS 6 Exploration and Evaluation of
Mineral Resources, and mine properties - including mine development
assets and producing mines - which are accounted for in accordance
with IAS 16 Property, Plant and Equipment. This results in a
reclassification of $7,325 from mine properties and reserves to
exploration and evaluation assets at 31 December 2010.
Decommissioning liability
Under CGAAP a decommissioning provision was set at inception and
could only be changed if the provision was increased, with only the
increased portion discounted at the revised rate. Under IFRS the
entire provision is discounted using a rate specific to the
liability and if the rate changes the entire provision is
discounted using that rate. This results in a decrease of $610 in
the value of the decommissioning provision at 31 December 2010.
Significant changes in accounting policies
Standards issued but not yet effective
The following new accounting standards and interpretations have
been published but are not yet mandatory for the reporting period.
These standard are currently being assessed in terms of impact of
the Company's financial statements.
Financial Instruments
IFRS 7 - Disclosures, effective for accounting periods
commencing on or after 1 July 2011. The amendments require improved
disclosure in relation to transferred financial assets.
IFRS 9 - Classification and measurement, effective for
accounting periods commencing on or after 1 January 2013. This
standard will be a new standard for the financial reporting of
financial instruments that is more principles based and less
complex than IAS 39. This project is set out over 3 phases and will
address hedge accounting and impairment of financial assets.
Income Taxes
IAS 12 - Recovering of Underlying Assets, effective for
accounting periods commencing on or after 1 January 2012. This
amendment provides guidance in determining the recovery of
investment properties with regards to the deferred tax.
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 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 has been awarded its key environmental permit for its major
development projects 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. The economic
situation in Greece deteriorated again in 2011, and the ruling
PASOK party implemented a further round of austerity measures along
with a privatisation programme to raise revenues. As a result, the
EU, ECB and IMF have jointly agreed to extend further credit
packages to the Greek Government to stabilise economic activity in
Greece. 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.
The Company recognises that there are residual risks associated
with potential capital cost overruns, late delivery of planned
metal outputs and technical failures (which might only become
apparent upon start-up of a new facility) in executing construction
of complex new exploitation (mining) and processing facilities.
In order to adequately manage these risks, the Company prepares
detailed implementation plans which typically involve using
construction contracts with professionally managed main and
sub-contractors. The performance of the contracts are supervised
and overseen by the Company's "Owner's Team", with detailed risks
(e.g. unforeseen ground conditions, weather etc.) being allocated
within the contract, having taken cognisance of the cost of either
retaining it or passing it either fully or partially to the
contractor. Prior to commencing construction as much cost certainty
(through obtaining contract quotations, detailed work breakdown
schedules and Gantt style critical paths timelines) will be
prepared and mutually agreed with the contractors. Sufficient
contingency to cover both cost and time over-runs are built into
each project's implementation plans.
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 lei 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 $20.17 million and $26.00
million for the six month periods ended 30 June 2011 and 2010
respectively, and $15.24 million and $20.32 million for the three
month periods ended 30 June 2011 and 2010 respectively. The Company
had negative operating cash flow for the twelve months ended 31
December 2010 and 2009, 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,
officers 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 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 30 June 2011 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 30 June 2011. Based upon that evaluation,
the Certifying Officers have concluded that the DC&P are
adequate and effective for the period ended 30 June 2011.
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 IFRS.
As of 30 June 2011 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 30 June 2011.
During the period ended 30 June 2011, 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.
The accompanying consolidated financial statements of European
Goldfields Limited are the responsibility of management and have
been approved by the Board of Directors of the Company. The
consolidated financial statements include some amounts that are
based on management's best estimates using reasonable
judgement.
The consolidated financial statements have been prepared by
management in accordance with IFRS.
Management maintain an appropriate system of internal controls
to provide reasonable assurance that transactions are authorised,
assets safeguard and proper records are maintained.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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