TIDMEGU
RNS Number : 8273R
European Goldfields Ltd
10 November 2011
Management's Discussion and Analysis
For the period ended 30 September 2011
The following discussion and analysis, prepared as at 10
November 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 consolidated financial
statements for the periods ended 30 September 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 September 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
The Company is pleased to report that the prevailing economic
and political uncertainty has not impacted either the Stratoni
operation or the progress of Skouries and Olympias. With a full
financing package arranged the Company remains on track for first
gold production in Q2 2012.
Skouries - During the quarter a formal Invitation to Bid has
been issued for the processing plant construction package and key
conditions of the contracts agreed, with responses expected to be
received by mid-November. The earthworks and civil tender
documentation and scope of work have been compiled and the contract
prepared. The invitations to established vendors for the remaining
process equipment packages have been prepared and are being issued
to ensure delivery times are within the project schedule. The
recruitment process for key owner's team personnel continues to
advance.
Olympias - Refurbishment continues at site and the adit has now
been repaired to over 1,650m: the old timber support has been
replaced with shotcrete and the adit has been enlarged to
accommodate larger vehicles. Sandblasting of the mill steel
structures is complete and refurbishment of the existing conveyor
belts will commence shortly. The earthworks and civils are also
complete, and the buildings are being finished in preparation for
plant commissioning and production of gold concentrate in 2012. A
full review of existing cement silos was carried out with
replacements and repairs done as necessary. Improved guarding and
infrastructure has been put in place facilitating easier and safer
access to site. All outstanding equipment required for the
re-commissioning of the flotation plant has been ordered with the
last deliveries scheduled to take place in Q1 2012 with start-up
occurring in Q2 2012.
Detailed plans for the development of underground infrastructure
are being put in place to enable underground work to commence
swiftly once contracts have been agreed in early 2012. This
includes an additional decline to facilitate haulage and improve
ventilation, pumping and electrical distribution whilst affording
the opportunity to decommission the shaft for hoisting
purposes.
A programme of testwork which will lead to a Feasibility Study
of the Flash Smelter to improve the gold payability has been
initiated with Outotec. One of the deliverables of this programme
will be enhanced accuracy of the capital and operating costs of the
smelter.
Sale of Gold-Bearing Concentrates (100% basis)
=========================================================================================
2011 2011 2011 2010 2010 2010 2010 2009
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
======================== ====== ====== ====== ====== ====== ====== ====== =======
Sales
Gold concentrate (dmt) Nil Nil Nil Nil Nil Nil Nil 34,182
======================== ====== ====== ====== ====== ====== ====== ====== =======
Stratoni operations - 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 2011 2010 2010 2010 2010 2009
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
============================================= ======== ======== ======== ======== ======== ======== ======== ==========
Inventory (start 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
Production
Ore mined (wet tonnes) 57,414 59,150 50,282 53,474 54,093 64,813 63,294 57,247
Ore milled (tonnes) 58,635 58,049 44,873 60,356 59,938 60,663 47,701 63,345
- Average grade: Zinc (%) 10.22 9.52 9.43 10.00 9.28 8.91 9.90 8.64
Lead (%) 6.39 5.70 6.00 5.81 6.00 5.58 6.24 5.40
Silver
(g/t) 167 146 142 152 157 145 159 140
Zinc concentrate
(tonnes) 10,998 10,310 8,052 11,339 10,298 10,103 8,852 10,572
Zinc
- Containing: (tonnes) 5,514 5,109 3,920 5,577 5,123 4,942 4,334 5,080
Lead concentrate
(tonnes) 4,739 4,277 3,300 4,526 4,630 4,479 4,040 4,684
Lead
- Containing: (tonnes) 3,448 3,055 2,317 3,238 3,307 3,092 2,727 3,143
Silver
(oz) 263,661 224,837 171,048 245,511 249,717 233,760 203,914 236,621
Sales
Zinc concentrate
(tonnes) 13,939 5,584 8,337 12,965 8,818 10,279 8,830 8,338
Zinc
- Containing payable: (tonnes)* 5,795 2,311 3,392 5,378 3,672 4,159 3,633 3,380
Lead concentrate
(tonnes) 3,744 3,751 3,653 5,627 2,691 4,682 3,759 4,717
Lead
- Containing payable: (tonnes)* 2,579 2,500 2,512 3,819 1,798 3,071 2,385 3,030
Silver
(oz)* 192,377 184,299 188,304 290,961 135,361 232,212 178,184 227,661
Cash operating cost per
tonne milled ($) 153 167 183 155 153 141 151 173
Cash operating cost per
tonne milled (EUR) 109 115 134 114 119 110 110 117
Inventory (end of period)
Ore mined (wet tonnes) 185 3,006 3,826 24 9,074 16,392 14,089 1
Zinc concentrate (tonnes) 4,017 6,958 2,232 2,517 4,143 2,663 2,839 2,817
Lead/silver concentrate
(tonnes) 2,908 1,913 1,387 1,740 2,841 902 1,105 824
============================================= ======== ======== ======== ======== ======== ======== ======== ==========
* Net of smelter payable deductions
Production at Stratoni - The concentrator plant continued to
work well during the quarter with steady operational efficiencies
achieved. Hellas Gold mined a total of 57,414 wet tonnes in Q3 2011
(Q3 2010 - 54,093) and completed 7 shipments for the period (2010 -
8). Significant stockpiles of both lead and zinc concentrates
remained accrued at the end of the quarter ready for shipment.
Romania
Certej Project -The Invitation to Bid ("ITB") for the process
plant was modified and re-issued and positive responses received.
The technical projects have been completed ready for submission
when required by the Romanian authorities.
The Company has completed the cross-border public consultations
with Serbia and Hungary as required by international agreements.
Deva Gold management team were present to address all queries
relating to the development and operation of the project. With this
complete, the Technical Analysis Committee ("TAC") and the
environmental authorities are due to reconvene during Q4 in
anticipation of final environmental endorsement for the project by
year end.
Group Exploration Update
Piavitsa - In preparation for imminent mobilisation of drill
rigs at Piavitsa, new drill core logging and storage areas have
been prepared and a new sample preparation laboratory is in place.
The team has conducted soil and lithological sampling over the
entire Piavitsa extensions and the area has been re-mapped with all
information captured and modelled in GIS.
Tsikara - The Company has identified new targets and several
potential porphyry centres over the volcanic complex. Systematic
mapping of the porphyry target areas has further indicated the
presence of mineralisation including gold in grab samples of around
1.5 g/t.
Romania - Mapping, lithological sampling and trenching of
potential extensions to known mineralisation has been completed in
preparation for drill testing anticipated in 2012.
Turkey - Drilling at Salinbas has confirmed the presence of
high-sulphidation epithermal gold mineralisation. The drill
programme is almost complete, results of which will be announced
before year end.
Corporate Activity
Financing - On 1 October, the quarter the Company announced
Heads of Terms with Qatar Holding LLC ("Qatar Holding") for the
provision of a US$600 million 7 year Senior Secured Loan Facility.
The Company also proposes to offer unsecured Loan Notes for US$150
million to be made available to certain existing shareholders on
the same economic terms as the Facility. This US$750 million debt
package will provide all the required capital for the Company's
current project development, with additional funding for
exploration. In addition, the Company will issue 50.5 million
warrants pro-rata to Qatar Holding and the subscribers to the Loan
Notes. The financing package is subject to shareholder approval and
the Company will be distributing the Proxy Circular and Proxy Form
to shareholders shortly, with the meeting scheduled to take place
in December. The Company is also pleased to welcome Qatar Holding
as a major shareholder in the Company further to their recent
acquisition of 18,202,687 Common Shares.
Management - The Company recently announced that the Executive
Chairman and President, Martyn Konig has taken a medical leave of
absence as he recovers from a sudden illness. The Board is
delighted to report that he is already making excellent progress in
his recovery and looks forward to his return to the Company in the
near future. Mr. Fred Vinton has been appointed as acting
Non-Executive Chairman with effect from 9 November 2011.
Health, Safety and the Environment
The Company continues to work toward a policy of zero harm and
is actively working to improve the culture of proactively taking
responsibility for individuals' actions. In this regard, the
Company has launched a series of initiatives known on site as the
"Golden Rules" which apply to the Mavres Petres mine site and also
the Stratoni mill. The policy is actively supported both by on site
management and at senior management level and will be rolled out
across the other sites as work commences.
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 2011 2010 2010 2010 2010 2009
dollars) Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
============================ ======= ======= ======= ======= ====== ======= ======= ==============
Sales 16,015 11,109 13,531 18,217 9,204 12,017 11,134 13,656
EBITDA 6,258 3,755 4,233 5,921 1,766 2,290 3,018 2,601
Gross profit 4,803 2,847 2,793 3,763 548 627 1,595 1,196
Capital expenditure 277 141 336 483 1,417 1,336 287 2,053
Depreciation and depletion 1,455 908 1,440 2,158 1,218 1,554 1,423 1,405
============================ ======= ======= ======= ======= ====== ======= ======= ==============
Total quarterly revenues from concentrate sales increased year
on year, driven mainly by higher payable metal and realised prices:
payable zinc increased 57% and payable lead and silver increased
43% and 42% respectively compared to the prior year quarter;
realised prices for zinc were $2,163 per tonne, up 11%, and for
lead $2,073 per tonne, down 2% compared to Q3 2010. Base metal
prices had been trading in a relatively stable range until the end
of Q3 2011, when heightened fears about the global economy saw base
metal prices decline. In contrast, the end of Q3 2010 saw a sharp
recovery in base metal prices, but off a very low base. Overall,
the higher payable metal and better realised price for zinc led to
an increase of 74% in payable base metal revenues.
Reconciliation of Stratoni revenues - Q3 2011
================================================================================
(in thousands of US dollars unless Zinc Lead Silver Total
stated otherwise)
==================================== ========= ========= ========== ========
Payable metal 5,795t 2,579t 192,377oz n/a
Realised price $2,163/t $2,073/t $8.45/oz n/a
Payable metal revenue 12,537 5,345 1,626 19,508
TC/RCs (2,662) (761) (154) (3,577)
Transport recoveries/(charges) - - - -
==================================== ========= ========= ========== ========
Net revenue 9,875 4,584 1,472 15,931
Prior quarter revenue adjustments (93) 194 (17) 84
==================================== ========= ========= ========== ========
Total revenue 9,782 4,778 1,455 16,015
==================================== ========= ========= ========== ========
Reconciliation of Stratoni revenues - Q3 2010
================================================================================
(in thousands of US dollars unless Zinc Lead Silver Total
stated otherwise)
==================================== ========= ========= ========== ========
Payable metal 3,672t 1,798t 135,361oz n/a
Realised price $1,944/t $2,127/t $8.11/oz n/a
Payable metal revenue 7,137 3,824 1,098 12,059
TC/RCs (2,436) (389) (108) (2,933)
Transport recoveries/(charges) 11 - - 11
==================================== ========= ========= ========== ========
Net revenue 4,712 3,435 990 9,137
Prior quarter revenue adjustments 55 23 (11) 67
==================================== ========= ========= ========== ========
Total revenue 4,767 3,458 979 9,204
==================================== ========= ========= ========== ========
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 2011. The amounts
shown in 2010 reflect final pricing adjustments from certain
historic shipments.
Financial performance (100% basis)
=========================================================================================
(in thousands of US 2011 2011 2011 2010 2010 2010 2010 2009
dollars unless stated Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
otherwise)
============================ ====== ====== ====== ===== ===== ===== ====== ======
Sales Nil Nil Nil 30 Nil (48) (699) 5,073
Gross profit Nil Nil Nil 30 Nil (48) (699) 4,067
Depreciation and depletion Nil Nil Nil Nil Nil Nil Nil 196
============================ ====== ====== ====== ===== ===== ===== ====== ======
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
==================================================================================================================
2011 2011 2011 2010 2010 2010 2010 2009
(in thousands of US Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
dollars unless stated
otherwise)
$ $ $ $ $ $ $ $
============================== ========= ========= ======== ========= ======== ========= ======== ========
Statement of profit
and loss
Sales 16,015 11,109 13,531 18,247 9,204 11,969 10,435 18,729
Cost of sales 11,212 8,262 10,738 14,371 8,656 11,390 9,539 13,466
Gross profit 4,803 2,847 2,793 3,876 548 579 896 5,263
Interest income 57 55 60 144 65 35 62 (163)
Foreign exchange gain/(loss) (2,984) 1,267 3,326 (1,460) 6,930 (10,354) 1,563 88
Hedge contract profit - - - - 183 394 - 373
Discounting of VAT and
tax recoverable
credit/(charge) 392 (7,790) - - - - - -
Share of profit/(loss)
in associate 6 (5) (6) (20) (9) 39 - (3)
Expenses 12,059 11,611 11,106 15,755 10,318 11,014 8,207 11,251
Profit/(loss) before
income taxes (9,785) (15,237) (4,933) (13,215) (2,601) (20,321) (5,686) (5,693)
Income taxes (1,316) (141) 2,354 (275) (37) (445) (1,048) (991)
Profit/(loss) after
income taxes (11,101) (15,378) (2,579) (13,490) (2,638) (20,766) (6,734) (6,684)
Non-controlling interest 72 37 9 31 141 341 (77) (159)
Profit/(loss) for the
period (11,029) (15,341) (2,570) (13,459) (2,497) (20,425) (6,811) (6,843)
Earnings/(loss) per
share (0.06) (0.08) (0.02) (0.08) (0.01) (0.11) (0.04) (0.04)
============================== ========= ========= ======== ========= ======== ========= ======== ========
The Company recorded a loss before taxes of $29.96 million for
the nine month period ended 30 September 2011, compared to a loss
before taxes of $28.61 million for the same period in 2010. The
Company recorded a net loss (after taxes and non-controlling
interest) of $28.94 million ($0.16 loss per share) for the nine
month period ended 30 September 2011, compared to a net loss of
$29.73 million ($0.16 loss per share) for the same period of 2010.
For the nine month period, improved base metal prices resulted in a
higher gross profit, although higher expenses and the conservative
position adopted by management over Hellas Gold's recoverable VAT
and income taxes due from the Greek authorities, offset somewhat by
a foreign exchange gain, resulted in a slightly higher pre-tax
loss.
The Company recorded a loss before taxes of $9.79 million for
the three-month period ended 30 September 2011, compared to a loss
before taxes of $2.6 million for the same period of 2010. The
Company recorded a net loss (after taxes and non-controlling
interest) of $11.03 million ($0.06 loss per share) for the
three-month period ended 30 September 2011, compared to a net loss
of $2.50 million ($0.01 loss per share) for the same period of
2010. For the three-month period, improved base metal prices were
offset substantially by a foreign exchange loss of $2.98 million in
the three month period ended 30 September 2011 compared to a gain
of $6.93 million for the same period of 2010.
In more detail, the following factors have contributed to the
above:
-- A stronger market for average base metal prices was
experienced in the nine month period ended 30 September 2011
compared to the same period in the prior year. In the nine month
period ended 30 September 2011, zinc averaged $2,311 per tonne and
lead $2,518 per tonne compared to $2,134 per tonne and $2,092 per
tonne respectively for the same period in 2010. The Stratoni mine
was operating at lower levels in the period to 30 September 2011
than in the same period of 2010, with mine production decreasing
8%, and mill processing decreasing 4% respectively. Metal sales in
the nine month period to 30 September 2011 in light of the
stockpile levels, yielded payable zinc of 11,498 tonnes, a 0.3%
increase over the same period in 2010, and payable lead of 7,591
tonnes, a increase of 5%. Following these changes in realised
prices and sales volumes, total base metal revenues increased by
26%, with revenues from payable zinc in Q3 2011 increasing 28%
compared to Q3 2010 and revenues from payable lead increase of 28%
over the same period. In addition, large levels of concentrate
inventory were ready to ship at the end of the period.
-- This market trend for base metal prices was broadly mirrored
in the three month period ended 30 September 2011. In the three
month period ended 30 September 2011, zinc averaged $2,247 per
tonne and lead $2,450 per tonne compared to $2,043 per tonne and
$2,065 per tonne respectively for the same period in 2010. The
Stratoni mine was operating at higher levels in the third quarter
of 2011 than in the same period of 2010, with mine production
increasing 6%, although mill processing decreased 2%. Metal
concentrate sales in Q3 2011 reflected a drawdown of zinc
concentrate stock levels and yielded payable zinc of 5,795 tonnes,
a 58% increase over the same period in 2010, and payable lead of
2,579 tonnes, an increase of 43%. In Q2 2010 stock levels of both
concentrates increased, reducing sales volumes. Following these
changes in realised prices and sales volumes, revenues from payable
zinc in Q3 2011 increased 105% compared to Q3 2010, and revenues
from payable lead increased 38% over the same period.
-- Cost of sales of $30.21 million in the first nine months of
2011 and $11.21 million in Q3 2011, compared to $29.59 million and
$8.66 million respectively for the same period in 2010, included
$3.80 million in depreciation and depletion expenses in the first
nine months of 2011 and $1.46 million during Q3 2011, compared to
$4.3 million and $1.22 million respectively for the corresponding
period in 2010. In the nine months to 30 September 2011, Stratoni
costs of production increased by $1.93 million driven by higher
Euro unit operating costs resulting from increased operating,
development and mill costs, concentrate transport costs were $1.23
million lower and amortisation and depreciation were $0.50 million
higher. The reduction in concentrate inventory increased costs of
sales during Q3 2011 compared to Q3 2010, which saw a large
reduction in concentrate inventory. For the quarter ended 30
September 2011 compared to the same period in 2010, the trends
were: $0.19 million decrease in cost of production driven partly by
lower Euro unit operating costs; $0.49 million lower transport
costs, $0.24 million higher amortisation and depreciation, and a
lower transfer of cost to inventory of $3.11 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 $10.44
million in the nine months of 2011 and $4.80 million in Q3 2011 on
revenues of $40.66 million and $16.02 million, compared to a gross
profit of $2.02 million in the first nine months of 2010 and $0.55
million in Q3 2010 on revenues of $31.61 and $9.20 million
respectively for the same periods of 2010.
-- In the nine months to 30 September 2011 Hellas Gold's
recoverable VAT and income taxes due from the Greek authorities
were re-classified 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
$7.40 million was 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. After the period end, Hellas Gold received
repayment of EUR11 million in relation to these amounts. This
reclassification will be reassessed in Q4 2011.
-- The Company's corporate administrative and overhead expenses
have increased from $9.40 million in the first nine months of 2010,
to $9.98 million in the first nine months of 2011. In Q3 alone,
corporate administrative and overhead expenses decreased year on
year from $3.17 million in 2010 to $2.98 million in 2011. The
increase in the nine month period ended 30 September 2011 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 $14.67 million in the first nine months of 2011 and
$4.48 million in Q3 2011, compared to $8.33 million and $3.56
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 $1.61 million
in the first nine months of 2011, although in Q3 alone the Company
recorded a foreign exchange loss of $2.98 million. In 2010 the
Company recorded a foreign exchange loss of $1.86 million in the
first nine months of 2010 and a foreign exchange gain of $6.93
million in Q3 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
EUR11 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 $5.73 million in the first nine months of 2011 and $2.87 million
in Q3 2011 compared to $7.70 million and $2.32 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 $3.18 million in the first
nine months of 2011 and $1.33 million in Q3 2011, compared to $2.89
million and $0.86 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 an income taxes credit of $0.90 million
in the first nine months of 2011 and a charge of $1.32 million in
Q3 2011, compared to a charge of $1.53 million and $0.04 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 $0.12 million in the first
nine months of 2011 and a credit of $0.07 million in Q3 2011
relating to the non-controlling shareholder's interest in Hellas
Gold's profit (after tax), compared to a credit of $0.41 and $0.14,
respectively 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 September 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 October 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
September 2011, these contracts had a fair value of $0.54 million
(2010 - $(0.97 million)), determined by a third party valuation
using the appropriate Black-Scholes options valuation model, based
on the then prevailing market prices including lead and zinc
prices, interest rates and market volatility.
Hedging commitments
========================================================
Period October 2011 - December 2011 Lead Zinc
======================================== ====== ======
Total Volume (tonnes) 1,500 1,950
Monthly Volume (tonnes) 500 650
Floor Price ($/tonne) 2,000 2,000
Cap Price ($/tonne) 2,900 2,800
======================= =============== ====== ======
During the nine and three month periods ended 30 September 2011,
the Company recorded income relating to its hedging program of $Nil
(2010 - $0.58 million) and $Nil (2010 - $0.18 million).
Given the current maturity profile of the hedge, market
expectations and parameters, we expect that the fair value of the
existing hedge contracts will be released to net profit within the
next 3 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 September 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
As at the balance sheet date, Ellaktor SA ("Ellaktor") owned
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. On 1 October 2011, Ellaktor disposed of 13 million
shares to Qatar Holding LLC to reduce its holding to 12.2% of the
Company's issued share capital.
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 as mine properties 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 and nine month periods ended 30 September 2011 and
2010 the following transactions were entered into with related
parties and the following amounts were outstanding as at 30
September 2011 and 31 December 2010.
Greek Nurseries SA
30 September 31 December
2011 2010
US$000 US$000
==================== ============= ============
Amounts receivable - 28
Amounts payable (2) -
(2) 28
==================== ============= ============
In the nine month period ended 30 September 2011 the value of
services provided to the Company by Greek Nurseries SA was $2 (2010
- $Nil) and by the Company to Greek Nurseries SA was $Nil (2010 -
$1). For the three month period ended 30 September 2011 the value
of services provided to the Company by Greek Nurseries SA was
$1.
Ellaktor SA
3 months ended 9 months ended
30 September 30 September
Services received: 2011 2010 2011 2010
US$000 US$000 US$000 US$000
===================================== ========= ======== ========= =========
Exploration and evaluation services - 20 - 89
Mining services 7,153 9,142 22,839 30,128
Other services 38 22 144 104
7,191 9,184 22,983 30,321
===================================== ========= ======== ========= =========
30 September 31 December
2011 2010
US$000 US$000
==================== ============= ============
Amounts receivable - -
Amounts payable (8,039) (3,883)
(8,039) (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:
2011 2011 2011 2010 2010 2010 2010 2009
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
(in thousands of US
dollars unless stated
otherwise) $ $ $ $ $ $ $ $
============================================================ ========= ======== ========= ========= ======== ========= ========= =========
Balance sheet (end
of period)
Cash 24,309 38,760 47,534 57,122 82,768 84,978 101,836 113,642
Working capital 23,141 31,132 66,583 75,887 93,159 102,320 125,347 146,799
Total assets 498,608 505,617 512,739 507,293 519,610 510,721 525,405 744,100
Non current liabilities 103,519 103,471 102,876 104,549 99,112 98,501 99,292 147,463
Statement of cash
flows
Cash flows from operating
activities (6,469) (3,438) (1,994) 3,692 (2,158) 1,338 (8,856) (5,214)
Investing activities (5,803) (6,338) (11,248) (27,961) (7,329) (7,737) (4,251) (6,851)
* Property, plant and equipment (3,491) (1,355) (9,994) (24,839) (4,546) (4,996) (2,513) (4,411)
* Exploration and evaluation and mine development cost (2,312) (4,983) (1,254) (3,122) (2,783) (2,741) (1,738) (2,440)
Financing activities - - - - 199 113 - 1,694
Effect of foreign
exchange on cash (2,179) 1,002 3,654 (1,377) 7,078 (10,572) 1,301 (99)
============================================================ ========= ======== ========= ========= ======== ========= ========= =========
Total movement in
cash (14,451) (8,774) (9,588) (25,646) (2,210) (16,858) (11,806) (10,470)
============================================================ ========= ======== ========= ========= ======== ========= ========= =========
As at 30 September 2011, the Company had cash and cash
equivalents of $24.31 million, compared to $57.12 million as at 31
December 2010, and working capital of $23.14 million, compared to
$75.89 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 has announced on 1 October 2011 a US$600
million debt facility with Qatar Holding, along with Loan Notes of
US$150 million to be placed with existing shareholders. These two
financings are subject to shareholder approval, and if approved
will provide all of the Company's financing needs. After the period
end, Hellas Gold received repayment of $14.74 (EUR10.84) million in
relation to outstanding VAT repayments.
The decrease in cash and cash equivalents as at 30 September
2011, compared to the balances as at 31 December 2010, resulted
primarily from the purchase of land for $10.81 million, capital
expenditure in Greece totaling $6.07 million, changes in operating
cash flow before net changes in other working capital of $6.24
million, exploration and evaluation and mine development costs in
Romania of $3.68 million, exploration and evaluation and mine
development costs in Greece of $1.62 million, exploration and
evaluation and mine development costs in Turkey totaling $1.06
million. The impact of these outflows was partially offset by the
positive effect of foreign currency translation on cash of $2.44
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
=============================================
Less
(in thousands of US dollars than 2 - 3 4 - 5 After
unless stated otherwise) Total 1 year years years 5 years
================================= ====== ======== ======= ======= =========
Operating lease (London office) 1,417 436 872 109 -
Operating lease (Athens office) 737 140 281 281 35
Operating lease (Certej land) 2,711 39 469 313 1,890
Outotec OT - Processing Plant 462 462 - - -
================================= ====== ======== ======= ======= =========
Total contractual obligations 5,327 1,077 1,622 703 1,925
================================= ====== ======== ======= ======= =========
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 $5 million in exploration over the wider licence areas in
Greece, Romania and Turkey, $12 million on Hellas Gold
administrative and overhead and water treatment expenses, financing
costs of $15 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: 183,857,340
Common share options: 6,453,331
Restricted share units: 1,958,189
Less: issued to JOE plan (500,000)
================================ ============
Common shares (fully-diluted): 191,768,868
================================ ============
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
======================================================================================================
2011 2011 2011 2010 2010 2010 2010 2009
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
(in thousands of US $ $ $ $
dollars unless stated
otherwise) $ $ $ $
============================ ======= ======== ======= ======= ======== ======= ======= =======
Milled production (dmt) 58,635 58,049 44,873 60,356 59,938 60,663 47,701 63,345
============================ ======= ======== ======= ======= ======== ======= ======= =======
Cash operating cost
per tonne milled (EUR) 109 115 134 114 119 110 110 117
============================ ======= ======== ======= ======= ======== ======= ======= =======
Cash operating cost
per tonne milled ($) 153 167 183 155 153 141 151 173
============================ ======= ======== ======= ======= ======== ======= ======= =======
Cash cost of production 8,988 9,686 8,212 9,347 9,181 8,553 7,221 10,948
Movement in concentrate
inventory 418 (2,745) 113 1,845 (2,692) 157 (109) (916)
============================ ======= ======== ======= ======= ======== ======= ======= =======
Cash cost of sales
- Stratoni 9,406 6,941 8,325 11,192 6,489 8,710 7,112 10,032
Amortisation and depletion 1,455 908 1,440 2,075 1,218 1,663 1,423 1,601
Concentrate transport
costs 351 661 725 1,104 840 1,126 1,004 1,833
Inventory write-down
/ adjustments - (248) 248 - 109 (109) - -
============================ ======= ======== ======= ======= ======== ======= ======= =======
Cost of sales 11,212 8,262 10,738 14,371 8,656 11,390 9,539 13,466
============================ ======= ======== ======= ======= ======== ======= ======= =======
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 and 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 $1.23
million for the nine month period ended 30 September 2011 (2010 -
$1.26 million) and $0.41 million for the three month period ended
30 September 2011 (2010 - $0.33 million) 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
September 2011 a total of $291.21 million (31 December 2010 -
$282.29 million) 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 recognised in the
statement of financial position by either increasing or decreasing
the rehabilitation liability and asset if the initial estimate was
recognised 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 September 2011, the Company recorded a decommissioning
liability relating to its Stratoni property in Greece amounting to
$6.79 million (31 December 2010 - $6.59 million) subject to these
estimates. A total of $0.33 million for the nine month period to 30
September 2011 (2010 - $0.31 million) was charged to the income
statement in relation to the decommissioning liability and $0.11
million for the three month period ended 30 September 2011 (2010 -
$0.10 million), 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 unit 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 $14.67 million for the nine month period to 30
September 2011 (2010 - $8.33 million) and $4.48 million for the
three month period ended 30 September 2011 (2010 - $3.56 million)
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 $0.90 million for the nine month period to 30
September 2011 (2010 - charge of $1.53 million) was recognised in
the income statement and for the three month period ended 30
September 2011 a total charge of $1.32 million (2010 - charge of
$0.03 million) was recognised in the income statement which were
subject to these estimates.
VAT receivable and income taxes -Hellas Gold SA has a total of
$29.42 million in recoverable VAT and income taxes due from the
Greek authorities, which until Q2 2011 had been reported as a
current asset in the Company's financial statements. During Q2
2011, the Company re-classified these amounts as long term debtors
on a net present value basis. An adjustment of $7.40 million was
made through the income statement in the nine months to 30
September 2011 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. After the period
end, Hellas Gold received repayment of $14.85 (EUR11.00) million in
relation to these amounts. This reclassification will be reassesses
in Q4 2011.
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 September 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$ '000 US$ '000 US$ '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 equity and liabilities 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 (198,517)
Cumulative translation differences (15,524)
Add back of depletion 3,941
Adjustment to decommissioning liability (658)
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 $26.10
million 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 $15.52 million of
cumulative translation differences on the additional mineral
property, the transfer of remaining cumulative translation
differences to deficit reduces other components of equity by $21.29
million at transition and the Company's deficit by the same amount
at 1 January 2010, the Company's date of transition to IFRS.
Income taxes
Under CGAAP tax bases were translated into US$ 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 $7.33 million 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 $0.61
million 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 standards 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 programmes 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. The Company has agreed
to issue a total of 55 million warrants to Qatar Holding and
existing shareholders who subscribe in the issue of loan notes.
This issue of warrants is subject to shareholder approval.
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 programme,
jointly supported by the International Monetary Fund, the European
Central Bank and the European Union. As part of this stabilisation
programme, 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
programme's fiscal targets will be met and the immediate impact of
the austerity measures on economic, political or labour activity in
Greece. Given recent developments in Greece, the level of
uncertainty and unpredictability is unprecedented 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, Development 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 effect 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 has announced a US$750 million debt financing
package for its development projects in Greece and Romania. This
debt package is subject to shareholder approval and will, if
approved, supply the Company with the required capital for its
project portfolio. In the event this debt package is not put in
place in a timely fashion or is not put in place at all, certain of
the Company's planned development and operations for the Company's
projects may be delayed. Risks to closing this debt package include
among other things, settlement of final documentation and
satisfaction of technical, legal and environmental due
diligence.
The documentation for this debt package will 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 $29.96 million and $28.61
million for the nine month periods ended 30 September 2011 and 2010
respectively, and $9.79 million and $2.60 million for the three
month periods ended 30 September 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 Vice President and the Chief Financial Officer of
the Company (the "Certifying Officers") have established and
maintained in the period ended 30 September 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 September 2011. Based upon that
evaluation, the Certifying Officers have concluded that the
DC&P are adequate and effective for the period ended 30
September 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 September 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 September 2011.
During the period ended 30 September 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 judgment.
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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