Part 2 - Q2 MD & A

RNS Number:7017B
European Goldfields Ltd
08 August 2007



Immediate Release                                                  8 August 2007


                          European Goldfields Limited

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
            FOR THE THREE- AND SIX-MONTH PERIODS ENDED 30 JUNE 2007


The following discussion and analysis, prepared as at 8 August 2007, is intended
to assist in the understanding and assessment of the trends and significant
changes in the results of operations and financial conditions of European
Goldfields Limited (the "Company"). Historical results may not indicate future
performance. Forward-looking statements are subject to a variety of factors that
could cause actual results to differ materially from those contemplated by these
statements. The following discussion and analysis should be read in conjunction
with the Company's unaudited consolidated financial statements for the three-
and six-month periods ended 30 June 2007 and 2006 and accompanying notes (the
"Consolidated Financial Statements").

Additional information relating to the Company, including the Company's Annual
Information Form, is available on the Canadian System for Electronic Document
Analysis and Retrieval (SEDAR) at www.sedar.com.
Except as otherwise noted, all dollar amounts in the following discussion and
analysis and the Consolidated Financial Statements are stated in United States
dollars.


Overview

The Company, a company incorporated under the Yukon Business Corporations Act,
is a resource company involved in the acquisition, exploration and development
of mineral properties in Greece, Romania and the Balkans.

The Company's Common Shares are listed on the AIM Market of London Stock
Exchange plc and on the Toronto Stock Exchange (TSX) under the symbol "EGU".

Greece - The Company holds a 95% interest in Hellas Gold S.A ("Hellas Gold").
Hellas Gold owns three major gold and base metal deposits in Northern Greece.
The deposits are the polymetallic operation at Stratoni, the Olympias project
which contain gold, zinc, lead and silver, and the Skouries copper/gold porphyry
project. Hellas Gold commenced production at Stratoni in September 2005 and
commenced selling an existing stockpile of gold concentrates from Olympias in
July 2006. Hellas Gold is applying for permits to develop the Skouries and
Olympias projects.

Romania - The Company owns 80% of the Certej gold/silver project in Romania. The
Company submitted in March 2007 a technical feasibility study to the Romanian
government in support of a permit application to develop the project.


Results of operations

The Company's results of operations for the three- and six-month periods ended
30 June 2007 were comprised primarily of activities related to the results of
operations of the Company's 95%-owned subsidiary Hellas Gold in Greece and the
Company's exploration and development program in Romania. The following table
summarises operational results at Stratoni.

                                                                                   
                                 Stratoni Mine (Greece)
--------------------     --------  --------   -------   -------   -------   --------
                          Q2 2007   Q1 2007   Q4 2006   Q3 2006   Q2 2006    Q1 2006
--------------------     --------  --------   -------   -------   -------   --------
Inventory (start of
period)
Ore mined (wet
tonnes)                       843     2,499     3,617    12,326     1,155     10,963
Zinc concentrate
(tonnes)                    3,524        37     1,199     1,562     1,034         95
Lead/silver
concentrate
(tonnes)                    1,846       214     1,345       674       308      1,268

Production
Ore mined (wet
tonnes)                    53,088    55,069    47,321    49,652    47,966     31,752

Ore milled
(tonnes)                   48,179    55,258    47,038    56,769    35,810     40,333
- Average grade:
Zinc (%)                    11.57     11.39     10.73     10.54      9.45       8.89
Lead (%)                     9.14      7.38      6.56      5.78      5.83       7.28
Silver (g/t)               232.40    179.56    161.73    142.29    146.09     183.45

Zinc concentrate
(tonnes)                   10,485    11,731     9,263    10,768     6,041      6,222
- Containing:
Zinc (tonnes)               5,170     5,760     4,619     5,468     3,098      3,229

Lead concentrate
(tonnes)                    5,955     5,406     3,993     4,368     2,703      3,662
- Containing:
Lead (tonnes)               4,109     3,744     2,818     2,997     1,881      2,667
Silver (oz)               328,879   288,023   216,586   227,817   141,809    207,496

Sales
Zinc concentrate
(tonnes)                   14,007     8,244    10,425    11,130     5,513      5,283
- Containing
payable: Zinc
(tonnes)*                   5,855     3,463     4,418     4,702     2,320      2,335

Lead concentrate
(tonnes)                    5,651     3,774     5,124     3,696     2,337      4,623
- Containing
payable: Lead
(tonnes)*                   3,636     2,486     3,329     2,418     1,554      3,166
Silver (oz)*              285,349   190,292   254,881   189,349   121,350    252,559

Cash operating
costs per tonne
milled ($)                    135       138       147       109       115         90

Inventory (end of period)

Ore mined (wet
tonnes)                     4,603       843     2,499     3,617    12,326      1,155
Zinc concentrate
(tonnes)                        2     3,524        37     1,199     1,562      1,034
Lead/silver
concentrate
(tonnes)                    2,150     1,846       214     1,345       674        308

Financial information
(in thousands of US
dollars)
Sales ($)                  22,866    14,215    19,439    14,226     8,274      9,083
Gross profit ($)           13,991     8,294    10,477     6,973     4,330      4,295
Capital
expenditure ($)             4,673     1,564     4,202     1,487     1,351        526
Amortisation and
depletion ($)                 837       653     1,119       796       942        456
--------------------     --------  --------   -------   -------   -------   --------
* Net of smelter payable deductions


    Sale of Gold Concentrates from Existing Stockpile at Olympias (Greece)

--------------------     --------  --------   -------   -------   -------   --------
                          Q2 2007   Q1 2007   Q4 2006   Q3 2006   Q2 2006   Q1 2006
--------------------     --------  --------   -------   -------   -------   --------

Sales
Gold concentrate
(dmt)                      12,686    17,090     3,313     6,134     1,905          -

Financial information
(in thousands of US
dollars)
Sales ($)                   2,078     2,868       431       985         -          -
Gross profit ($)              958     1,845       192       985         -          -
Amortisation and                                                               
depletion ($)                  76       120         -         -         -          -
--------------------     --------  --------   -------   -------   -------   --------

Despite a 13% fall in mill throughput, cash operating costs per tonne milled
fell in Q2 2007 to $135 (Euro100) per tonne, compared to $138 (Euro104) per tonne in
Q1 2007. In Q2 2007, direct mining costs remained at the same levels as Q1 2007,
but there was an $11/t (Euro9) reduction relating to the classification of
operating development as long-term and therefore capital in nature. Mill and
general and administrative costs increased by $5/t (Euro4) and $1/t (Euro1)
respectively as a result of lower throughput. The weakening US dollar also added
a further US$2/t to the dollar based cost per tonne.

Labour costs have increased in 2007 compared to 2006 as a result of national
labour agreements which have awarded a 7% salary increase effective 1 January
2007 and a second increase of 6% effective 1 May 2007.

The Company's financial results for the eight most recently completed quarters
are summarised in the following table:

------------------  ------    ------    ------    ------    ------    ------    ------    ------
(in thousands
of US dollars,        2007      2007      2006      2006      2006      2006      2005      2005
except per share        Q2        Q1        Q4        Q3        Q2        Q1        Q4        Q3
amounts)                 $         $         $         $         $         $         $         $
------------------  ------    ------    ------    ------    ------    ------    ------    ------
Statement of loss
and deficit
Sales               24,944    17,083    19,870    15,211     8,274     9,083     1,464         -
Cost of sales        9,995     6,944     9,201     7,253     3,944     4,788     1,367         -
Gross profit        14,949    10,139    10,669     7,958     4,330     4,295        97         -
Interest
income               1,116       453       393       485       267       300       339       272
Expenses             5,140     4,916     4,446     4,341     4,345     3,558     5,079     3,536
Profit/(loss)
before income
tax                 10,925     5,676     6,616     4,102       252     1,037    (4,643)   (3,264)
Profit/(loss)
after income
tax                  8,129     3,957     4,349     2,984      (311)      161    (4,251)   (3,729)
Non-controllin
g interest          (2,794)   (1,848)   (1,973)   (1,509)     (225)     (475)      (58)    1,003
Profit/(loss)
for the period       5,335     2,109     2,376     1,475      (536)     (314)   (4,309)   (2,726)
Earnings/(loss
) per share           0.04      0.02      0.02      0.01      0.00      0.00     (0.04)    (0.02)
Balance sheet (end
of period)
Working
capital            211,637    45,201    41,854    39,666    36,453    34,515    33,765    39,171
Total assets       729,774   325,501   311,943   294,719   292,236   274,381   266,618   295,914
Non current
liabilities        170,970    79,183    74,603    70,080    69,018    64,684    62,807    70,053
Statement of cash
flows
Deferred
exploration
and
development
costs -
Romania              1,248       696       856       598       992       848     1,081     1,067
Plant and
equipment -
Greece               4,673     1,577     4,144     1,268     1,599       568     1,298     2,506
Deferred
development
costs - Greece         520       421     2,095       462       999       478     1,510       439
------------------  ------    ------    ------    ------    ------    ------    ------    ------

The breakdown of deferred exploration and development costs per mineral property
for the three- and
six-month periods ended 30 June 2007 and 2006 is as follows:


                       Six-month periods ended 30 June   Three-month periods ended 30 June
-----------------    -----------      -----------          -----------         -----------
(in thousands of            2007             2006                 2007                2006
US dollars)                $ (%)            $ (%)                $ (%)               $ (%) 
-----------------    -----------      -----------          -----------         -----------
Romanian mineral
properties
Certej               1,824 (93%)      1,635 (89%)          1,179 (94%)           863 (87%)
Cainel                   19 (1%)          20 (1%)               2 (0%)              3 (1%)
Voia                     72 (4%)         145 (8%)              47 (4%)           103 (10%)
Baita-Craciunesti        29 (2%)          40 (2%)              20 (2%)             23 (2%)
-----------------    -----------      -----------          -----------         -----------
                    1,944 (100%)     1,840 (100%)         1,248 (100%)          992 (100%)
-----------------    -----------      -----------          -----------         -----------
Greek mineral
properties
Stratoni               114 (12%)           - (-%)            114 (22%)              - (-%)
Skouries               510 (54%)        684 (46%)            291 (56%)           459 (46%)
Olympias               317 (34%)        791 (54%)            115 (22%)           540 (54%)
-----------------    -----------      -----------          -----------         -----------
                      941 (100%)     1,475 (100%)           520 (100%)          999 (100%)
-----------------    -----------      -----------          -----------         -----------
Total               2,885 (100%)     3,315 (100%)         1,768 (100%)        1,991 (100%)
-----------------    -----------      -----------          -----------         -----------


The Certej exploitation licence and the Baita-Craciunesti exploration licence
are held by the Company's
80%-owned subsidiary, Deva Gold S.A. ("Deva Gold"). Minvest S.A. (a Romanian
state owned mining company), together with three private Romanian companies,
hold the remaining 20% interest in Deva Gold and the Company holds the
pre-emptive right to acquire such 20% interest. The Company is required to fund
100% of all costs related to the exploration and development of these
properties. As a result, the Company is entitled to the refund of such costs
(plus interest) out of future cash flows generated by Deva Gold, prior to any
dividends being distributed to shareholders. The Voia and Cainel exploration
licences are held by the Company's wholly-owned subsidiary, European Goldfields
Deva SRL.

The Company recorded a profit (before tax) of $16.60 million for the six-month
period ended 30 June 2007, compared to a profit (before tax) of $1.29 million
for the same period of 2006. The Company recorded a net profit (after tax and
non-controlling interest) of $7.44 million ($0.06 per share) for the six-month
period ended 30 June 2007, compared to a net loss of $0.85 million ($0.01 per
share) for the same period of 2006.

The Company recorded a profit (before tax) of $10.93 million for the three-month
period ended 30 June 2007, compared to a profit (before tax) of $0.25 million
for the same period of 2006. The Company recorded a net profit (after tax and
non-controlling interest) of $5.34 million ($0.04 per share) for the three-month
period ended 30 June 2007, compared to a net loss of $0.54 million ($0.00 per
share) for the same period of 2006.

The following factors have contributed to the above:

  * In the first half of 2007, Hellas Gold's Stratoni mine was operating at
    substantially higher levels than in the same period of 2006. Mine ore
    production increased 34% and mill throughput increased 36% in the first half
    of 2007 over the same period in 2006. This translated into increased
    concentrate tonnages sold of 81% for zinc and 78% for lead. In addition, in
    the first half of 2007, Hellas Gold sold
    29,776 tonnes of gold bearing pyrite concentrates from Olympias, compared to
    Nil in the same period of 2006. These increased activity levels combined
    with higher metal prices yielded significantly increased revenues and
    profitability for the first half of 2007 compared to the same period of
    2006.


  * As a result, the Company recorded a gross profit of $25.09 million in
    the first half of 2007 and $14.95 million in Q2 2007, on revenues of 
    $42.03 million and $24.94 million, respectively, compared to a gross profit 
    of $8.63 million in the first half of 2006 and $4.33 million in Q2 2006, 
    on revenues of $17.36 million and $8.27 million, respectively. Cost of 
    sales of $16.94 million in the first half of 2007 and $10.00 million in Q2 
    2007, compared to $8.73 million and $3.94 million, respectively, for the 
    same periods of 2006, reflect the higher mine activity levels and included 
    $1.68 million in amortisation and depletion expenses in the first half of 
    2007, compared to $1.17 million for the same period of 2006.


  * The Company's corporate administrative and overhead expenses have
    increased from $1.00 million in the first half of 2006 and $0.47 million in
    Q2 2006, to $1.73 million and $0.88 million, respectively, for the same
    periods of 2007. This reflects higher general levels of corporate activity
    compared to the prior period.


  * The Company recorded a non-cash equity-based compensation expense of
    $0.91 million in the first half of 2007 and $0.45 million in Q2 2007,
    compared to $1.43 million and $0.76 million, respectively, for the same
    periods of 2006. Whilst a higher number of restricted share units were
    outstanding in the first half of 2007, the lower levels of charges reflect
    the increased level of development activities by corporate personnel. In the
    first half of 2007, the Company continued a practice of recharging some of
    its equity-based compensation expense to its operating subsidiaries, a
    portion of which is capitalised by such subsidiaries.


  * The Company recorded a foreign exchange loss of $0.42 million in the   
    first half of 2007 and $0.27 million in Q2 2007. This loss resulted 
    primarily from unrealised losses on translation of US dollar denominated 
    balances in the books of Hellas Gold. In contrast, the Company realised a 
    foreign exchange gain of $0.22 million in the first half of 2006 and $0.20 
    million in Q2 2006.

  * Hellas Gold's administrative and overhead expenses amounted to $4.53
    million in the first half of 2007 and $2.32 million in Q2 2007, compared to
    $1.80 million and $1.06 million, respectively, for the same periods of 2006.
    Hellas Gold's administrative and overhead expenses are mostly attributable
    to operations related to the Stratoni mine and plant, and have increased
    significantly in the first half of 2007 compared to the same period of 2006
    due to continued higher levels of community and local activities. The
    Company is involved in several local projects including refurbishment of
    local buildings and amenities.


  * Hellas Gold incurred an expense of $2.18 million in the first half of
    2007 and $1.08 million in Q2 2007, compared to $1.39 million and $0.89
    million, respectively, for the same periods of 2006, for ongoing water
    pumping and treatment at its non-operating mines of Olympias and Stratoni
    (Madem Lakkos), in compliance with Hellas Gold's commitment to the
    environment under its contract with the Greek State. At Madem Lakkos, in
    particular, a significantly higher amount of backfilling of underground
    voids took place in the first half of 2007 compared to the same period of
    2006. Additional costs were also incurred making underground areas safe for
    backfilling activities.


  * Hellas Gold incurred an expense of $Nil in the first half of 2007 and
    $Nil in Q2 2007, compared to a non-recurring expense of $2.03 million and
    $1.12 million, respectively, for the same periods of 2006, for the
    maintenance of old adits and equipment at Stratoni.


  * The Company recorded a charge for income taxes of $4.52 million in the   
    first half of 2007 and $2.80 million in Q2 2007, compared to $1.44 million
    and $0.56 million, respectively, for the same periods of 2006. The charge in
    the first half of 2007 has arisen due to the Company providing for current
    tax on Hellas Gold profits and a residual future tax liability resulting 
    from the elimination of the future tax asset based on losses carried forward 
    in Hellas Gold. The charge in the first half of 2006 had arisen due to the
    Company reducing its future tax asset relating to the reduction of losses
    carried forward in Hellas Gold.

  * The Company recorded a charge of $4.64 million in the first half of 2007
    and $2.79 million in Q2 2007 relating to the non-controlling shareholder's
    35% interest in Hellas Gold's profit (after tax) for this period, compared
    to $0.70 million and $0.23 million, respectively, for the same periods of
    2006 relating to the non-controlling shareholder's interest in Hellas Gold's
    loss (after tax) for this period. On 28 June 2007, European Goldfields
    acquired an additional 30% interest in Hellas Gold, as a result of which,
    the relative levels of this charge will reduce in future periods.

Liquidity and capital resources

As at 30 June 2007, the Company had cash and cash equivalents of $221.60
million, compared to
$34.59 million as at 31 December 2006, and working capital of $211.64 million,
compared to $41.85 million as at 31 December 2006.

The increase in cash and cash equivalents as at 30 June 2007, compared to the
balances as at
31 December 2006, resulted primarily from the net proceeds of an equity
financing ($130.06 million), deferred revenue ($57.50 million) and operating
cash flow ($18.96 million), offset by share issue costs ($7.15 million), capital
expenditure in Greece ($6.25 million), deferred exploration and development
costs in Romania
($1.95 million), an increase in inventory ($1.74 million), a net increase in
accounts receivable vs accounts payable ($1.61 million) and deferred development
costs in Greece ($0.94 million).

The following table sets forth the Company's contractual obligations including
payments due for each of the next five years and thereafter:


(in thousands                       Payments due by period
of US dollars) 
-------------- --------  ----------     ---------     ---------       ---------
Contractual       Total   Less than   1 - 3 years   4 - 5 years   After 5 years
obligations                  1 year       
-------------- --------  ----------     ---------     ---------       ---------
Operating
lease (London
office)             702         187           373           142               -
Exploration
licence
spending
commitments
(Voia,
Romania)          1,080           -         1,080             -               -
-------------- --------  ----------     ---------     ---------       ---------
Total
contractual
obligations       1,782         187         1,453           142               -
-------------- --------  ----------     ---------     ---------       ---------

In 2007, the Company expects to spend a total of $55.80 million in capital
expenditures to fund the development of its project portfolio. This amount
comprises $10.53 million at its existing operation at Stratoni, and further
amounts of $12.09 million at Olympias, in order to start the refurbishment of
the mine and concentrator plant, and $30.00 million at Skouries, as the Company
puts in orders for the long lead time equipment items and site preparation. At
Certej, the Company expects to spend a further $3.18 million as it finalises its
bankable feasibility study and increases exploration on its inferred resources
and potential satellite orebodies close to Certej. In addition to its capital
expenditure programme, the Company expects to spend $2.04 million in exploration
over the wider licence area in Greece, $12.00 million on Hellas Gold
administrative and overhead and other expenses and $3.00 million on corporate
administrative and overhead expenses. The Company expects to fund all such costs
from existing cash balances and operating cash flow generated at Stratoni.


Outstanding share data

The following represents all equity shares outstanding and the numbers of common
shares into which all securities are convertible, exercisable or exchangeable:

Common shares:                                                      178,292,645
Common share options:                                                 3,249,999
Restricted share units:                                                 790,000
Common shares (fully-diluted):                                      182,332,644

Preferred shares:                                                           Nil


Outlook

Reference is made to the Company's news release dated 8 August 2007 which
accompanies this Management's Discussion and Analysis.


Risks and uncertainties

The risks and uncertainties affecting the Company, its subsidiaries and their
business are discussed in the Company's Annual Information Form for the year
ended 31 December 2006, filed on SEDAR at www.sedar.com.




                      This information is provided by RNS
            The company news service from the London Stock Exchange

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