Q1 Financial Results Part 2

RNS Number:5877W
European Goldfields Ltd
15 May 2007




Immediate Release                                                    15 May 2007




                          European Goldfields Limited


                      MANAGEMENT'S DISCUSSION AND ANALYSIS

                 FOR THE THREE-MONTH PERIOD ENDED 31 MARCH 2007


The following discussion and analysis, prepared as at 15 May 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-month periods ended 31 March 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 65% interest in Hellas Gold S.A ("Hellas Gold").
Hellas Gold owns the three major gold and base metal deposits of Stratoni,
Skouries and Olympias in Northern Greece. 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-month period ended 31 March
2007 were comprised primarily of activities related to the results of operations
of the Company's 65%-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)
                 --------------------------------------------------
                              ---------   --------   --------   --------  --------
                                Q1 2007    Q4 2006    Q3 2006    Q2 2006   Q1 2006
----------------------------  ---------   --------   --------   --------  --------
Inventory (start of period)
Ore mined (wet tonnes)          2,499      3,617     12,326      1,155      10,963
Zinc concentrate (tonnes)          37      1,199      1,562      1,034          95
Lead/silver concentrate
(tonnes)                          214      1,345        674        308       1,268

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

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

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

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

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

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

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

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

Financial information
(in thousands of US dollars)
Sales ($)**                    17,083     19,870     15,211      8,274       9,083
Gross profit ($)**             10,139     10,669      7,958      4,330       4,295
Capital expenditure ($)         1,564      4,202      1,487      1,351         526
Amortisation and depletion
($)                               773      1,119        796        942         456
----------------------------  ---------   --------   --------   --------  --------

* Net of smelter deductions

** Includes the sale of approximately 13,778 wmt of gold concentrates from an
existing stockpile at Olympias.


Cash operating costs per tonne milled fell in Q1 2007 to $138 (Euro104) per tonne,
compared to $147 (Euro114) per tonne in Q4 2006. The $9 per tonne decrease in costs
consisted of a $22/t (Euro17/t) reduction resulting from higher tonnage throughput
at the mill, offset by cost increases at the Stratoni operation and the
strengthening of the Euro against the US dollar. Mill costs increased $5/t (Euro4/
t) as a result of higher labour and maintenance costs, and mine costs increased
by $4/t (Euro3/t) mainly as a result of a significant increase in operational
development in the quarter, to access new levels in the upper area of the mine.
The weakening US dollar also added approximately US$3/t to the dollar based cost
per tonne.

Compared to 2006, labour costs have increased 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. Under new contract arrangements
with Aktor S.A. (Hellas Gold's mining contractor), labour is now charged on an
accruals rather than a cash basis, which inflated Q1 costs compared to the full
year.


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

------------------    ------     ------     ------     ------     ------     ------     ------     ------
(in thousands
of US dollars,          2007       2006       2006       2006       2006       2005       2005       2005
except per share          Q1         Q4         Q3         Q2         Q1         Q4         Q3         Q2
amounts)
                           $          $          $          $          $          $          $          $
 ------------------   ------     ------     ------     ------     ------     ------     ------     ------
Statement of loss
and deficit
Sales                 17,083     19,870     15,211      8,274      9,083      1,464          -         57
Cost of sales          6,944      9,201      7,253      3,944      4,788      1,367          -          -
Gross profit          10,139     10,669      7,958      4,330      4,295         97          -         57
Interest income          453        393        485        267        300        339        272        326
Expenses               4,916      4,446      4,341      4,345      3,558      5,079      3,536      2,287
Profit/(loss)
before income
tax                    5,676      6,616      4,102        252      1,037     (4,643)    (3,264)    (1,904)
Profit/(loss)
after income
tax                    3,957      4,349      2,984       (311)       161     (4,251)    (3,729)      (846)
Non-controllin
g interest            (1,848)    (1,973)    (1,509)      (225)      (475)       (58)     1,003        123
Profit/(loss)
for the period         2,109      2,376      1,475       (536)      (314)    (4,309)    (2,726)      (723)
Earnings/(loss
) per share             0.02       0.02       0.01       0.00       0.00      (0.04)     (0.02)     (0.01)
Balance sheet (end
of period)
Working capital       45,201     41,854     39,666     36,453     34,515     33,765     39,171     49,544
Total assets         325,501    311,943    294,719    292,236    274,381    266,618    295,914    298,948
Non current
liabilities           79,183     74,603     70,080     69,018     64,684     62,807     70,053     71,056
Statement of cash
flows
Deferred
exploration
and
development
costs -
Romania                  696        856        598        992        848      1,081      1,067        893
Plant and
equipment -
Greece                 1,577      4,144      1,268      1,599        568      1,298      2,506      2,453
Deferred
development
costs - Greece           421      2,095        462        999        476      1,510        439        891
----------------        ------     ------     ------     ------     ------     ------     ------     ------


The breakdown of deferred exploration and development costs per mineral property
for the three-month periods ended 31 March 2007 and 2006 is as follows:

                                           Three-month periods ended 31 March
                                                   -------------------
                                                -----------            -----------
(in thousands of US dollars)                         2007                   2006
                                                          $                      $
                                                -----------            -----------
---------------
Romanian mineral properties
Certej                                             661 (95%)               772 (91%)
Cainel                                                 -(-%)                 17 (2%)
Voia                                                 10 (1%)                 42 (5%)
Baita-Craciunesti                                    25 (4%)                 17 (2%)
---------------                                  -----------             -----------
                                                   696(100%)              848 (100%)
                     ---------------             -----------             -----------
Greek mineral properties
Stratoni                                              - (-%)                  - (-%)
Skouries                                           219 (52%)               162 (34%)
Olympias                                           202 (48%)               316 (66%)
---------------                                  -----------             -----------
                                                  421 (100%)              478 (100%                          
 Total                                          1,117 (100%)            1,326 (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 $5.68 million for the three-month
period ended 31 March 2007, compared to a profit (before tax) of $1.04 million
for the same period of 2006. The Company recorded a net profit (after tax and
non-controlling interest) of $2.11 million ($0.02 per share) for the three-month
period ended 31 March 2007, compared to a net loss of $0.31 million ($0.00 per
share) for the same period of 2006. The following factors have contributed to
the Company recording a profit (before tax) in Q1 2007, compared to a loss for
the same period of 2006:


  * In Q1 2007, Hellas Gold's Stratoni mine was operating at substantially
    higher levels than in Q1 2006: mine ore production increased 73% and mill
    throughput increased 37% over the same period in 2006. This translated into
    increased concentrate tonnages sold of 122% for zinc and 17% for lead.
    In addition, in Q1 2007 Hellas Gold sold 13,778 tonnes of pyrite
    concentrates, compared to nil in the prior year. These increased activity
    levels combined with higher metal prices yielded significantly increased
    revenues and profitability for Q1 2007 compared to Q1 2006.

  * As a result, the Company recorded $10.14 million in gross profit on
    revenues of $17.08 million in Q1 2007 for the sale of concentrates by Hellas
    Gold, compared to $4.30 million in gross profit on revenues of $9.08 million
    for the same period of 2006. Cost of sales of $6.94 million compared to
    $4.79 million for the same period of 2006, reflect the higher mine activity
    levels and included $0.77 million in amortisation and depletion expenses.

  * The Company's corporate administrative and overhead expenses have
    increased slightly from $0.53 million in Q1 2006, to $0.85 million for the 
    same period 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
    $0.46 million in Q1 2007, compared to $0.67 million for the same period of
    2006. Whilst a higher number of restricted share units were outstanding in
    Q1 2007, the lower levels of charges reflect the increased level of
    development activities by corporate personnel. In Q1 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 $0.15 million in Q1
    2007. This loss resulted primarily from unrealised losses on translation of
    Sterling denominated liabilities at the period end in a weakening United
    States dollar environment. In contrast, the Company realised a foreign
    exchange gain of $0.02 million in Q1 2006.

  * In Q1 2007, Hellas Gold's administrative and overhead expenses amounted
    to $2.21 million, compared to $0.74 million for the same period 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 Q1 2007 compared to the same period of 2006. The increase
    in costs relate to high current levels of community and local activities.
    The company is involved in several local projects including refurbishment of
    local buildings and amenities.

  * In Q1 2007, Hellas Gold incurred an expense of $1.10 million, compared
    to $0.49 million for the same period 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 Q1 2007 than in the prior period in 2006. Additional costs were also
    incurred making underground areas safe for backfilling activities.

  * In Q1 2007, Hellas Gold incurred a non-recurring expense of $Nil
    million, compared to $0.90 million for the same period of 2006, for the
    maintenance of old adits and equipment at Stratoni. Any minor amounts which
    relate to rehabilitation work at the mine are charged directly to cost of
    sales.

  * The Company recorded a charge for income taxes of $1.72 million in Q1
    2007, compared to a charge of $0.88 million for the same period of 2006. The
    charge in Q1 2007 has arisen due to the Company providing for current tax
    for the first time 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 Q1 2006 had arisen due to the Company reducing
    its future tax asset relating to the losses carried forward in Hellas Gold.

  * The Company recorded a charge of $1.85 million in Q1 2007 relating to
    the non-controlling shareholder's interest in Hellas Gold's profit (after
    tax) for this period, compared to a charge of $0.48 million for the same 
    period of 2006, relating to the non-controlling shareholder's interest in 
    Hellas Gold's loss (after tax) for this period.


Comprehensive Income

The Company is reporting comprehensive income for the first time, having adopted
the new accounting standards for financial instruments which were effective for
Canadian companies on January 1, 2007. The only component for comprehensive
income was currency translation adjustments.


Liquidity and capital resources

As at 31 March 2007, the Company had cash and cash equivalents of $33.96
million, compared to $34.59 million as at 31 December 2006, and working capital
of $45.20 million, compared to $41.85 million as at 31 December 2006.

The small decrease in cash and cash equivalents as at 31 March 2007, compared to
the balances as at 31 December 2006, resulted primarily from a net increase in
accounts receivable vs. accounts payable ($2.21 million), an increase in
inventory ($2.63 million), deferred exploration and development costs in Romania
($0.70 million), capital expenditure in Greece ($1.58 million), deferred
development costs in Greece ($0.42 million) and the effects of foreign currency
translation on cash ($0.30 million), offset by operating profits ($7.25
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 of US dollars)                 Payments due by period
----------------      --------  ----------   ---------   ---------     ---------                               
Contractual                    Less than 1
obligations            Total          year 1 - 3 years 4 - 5 years After 5 years       
----------------      --------  ----------   ---------   ---------     ---------          
Operating
lease (London
office)                  840         187         373         280             -
Exploration
licence
spending
commitments
(Voia,
Romania)               1,080           -       1,080           -             -
----------------      --------  ----------   ---------   ---------     ---------
Total
contractual
obligations            1,920         187       1,453         280             -
----------------      --------  ----------   ---------   ---------     ---------


In 2007, the Company expects to spend a total of $81.31 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 $55.51 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 ore bodies 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, $5.00 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. After
the quarter end, Hellas Gold received $57.50 million from Silver Wheaton
relating to the sale of its silver stream 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:                                                      115,004,621
Common share options:                                                 3,281,999
Restricted share units:                                               1,185,000
                                                                 --------------
Common shares (fully-diluted):                                      119,471,620

Preferred shares:                                                           Nil



Adoption of new accounting ftandards

Effective 1 January 2007, the Company adopted the revised CICA Section 1506
"Accounting Changes", which requires that: a voluntary change in accounting
principles can be made if, and only if, the changes result in more reliable and
relevant information, changes in accounting policies are accompanied with
disclosures of prior period amounts and justification for the change, and for
changes in estimates, the nature and amount of the change should be disclosed.
The company has not made any voluntary change in accounting principles since the
adoption of the revised standard.


Financial Instruments - Recognition and Measurement, Section 3855

This standard prescribes when a financial asset, financial liability, or
non-financial derivative is to be recognised on the balance sheet and whether
fair value or cost-based methods are used to measure the recorded amounts. It
also specifies how financial instrument gains and losses are to be presented.

Effective 1 January 2007, the Company's cash equivalents, temporary investments
and investments in marketable securities have been classified as
available-for-sale and are recorded at fair value on the balance sheet. Fair
values are determined directly by reference to published price quotations in an
active market. Changes in the fair value of these instruments are reflected in
other comprehensive income and included in shareholders' equity on the balance
sheet.

All derivatives are to be recorded on the balance sheet at fair value.
Mark-to-market adjustments on these instruments will be included in net profit,
unless the instruments are designated as part of a cash flow hedge relationship.
In accordance with the standard's transitional provisions, the Company
recognises as separate assets and liabilities only embedded derivatives acquired
or substantively modified on or after 1 January 2003.

All other financial instruments will be recorded at cost or amortised cost,
subject to impairment reviews. The criteria for assessing on other than
temporary impairment remain unchanged. Transaction costs incurred to acquire
financial instruments are included in the underlying balance. The Company has
determined that the adoption of Section 3855 had no effect on these financial
statements.


Hedges, Section 3865

This standard is applicable when a company chooses to designate a hedging
relationship for accounting purposes. It builds on the previous AcG-13 "Hedging
Relationships" and Section 1650 "Foreign Currency Translation", by specifying
how hedge accounting is applied and what disclosures are necessary when it is
applied.The Company has determined that the adoption of Section 3865 had no
effect on these financial statements.


Comprehensive Income, Section 1530

This standard requires the presentation of a statement of comprehensive income
and its components. Comprehensive income includes both net earnings and other
comprehensive income. Other comprehensive income includes holding gains and
losses on available-for-sale investments, gains and losses on certain derivative
instruments and foreign currency gains and losses relating to self-sustaining
foreign operations, all of which are not included in the calculation of net
earnings until realised. This statement has been included in the consolidated
financial statements starting this period.


Outlook

Greece - In September 2005, Hellas Gold resumed production at Stratoni following
the award by the Greek State of all necessary environmental and mining permits.
Production of ore reached over 175,000 tonnes in 2006, and is expected to
steadily increase to 400,000 tonnes per annum by year five.

In January 2006, Hellas Gold submitted a business plan to the Greek State for
the joint development of its major gold and base metal projects of Skouries and
Olympias. This submission represents a significant milestone in obtaining the
permits for these projects.

The business plan focuses on a phased approach to the development of the
projects with emphasis on achieving full production at the Skouries gold-copper
porphyry deposit as soon as possible, and the phasing of the Olympias
gold-lead-zinc-silver deposit. This approach minimises financial risk by the
phased injection of capital. The principal revenue stream in the early phases
will be through the sale of concentrates.

In March 2006, Hellas Gold received an official response from the Greek Ministry
of Development (the "Ministry") on the business plan. The response states that
the Ministry is in agreement with the principles stated in the business plan,
and that the Ministry considers the business plan to be in the best interests of
the Greek economy. This response was received by Hellas Gold within the
timeframe provided for in its contract with the Greek State.

In March 2006, Hellas Gold submitted a preliminary environmental impact study
(PEIS) to the Greek State, on which comments are expected shortly. Hellas Gold
is currently finalising a full environmental impact study (EIS) addressing any
comments made on the PEIS. On approval of the EIS, the environmental permits for
Skouries and Olympias are expected to be issued.

Hellas Gold will then submit to the Greek government a final technical report on
the Skouries and Olympias projects, which will restate the principles of the
business plan and take into account any conditions detailed in the environmental
permit. The mining permits are expected to be issued on approval of the
technical report by the Greek government.

Hellas Gold also holds 317 km(2) of highly prospective exploration licences in
northern Greece. Recent work by the Company has highlighted a total of twenty
exploration targets, including six advance targets and extensions to known
deposits, seven targets of known mineralisation for follow-up work and seven
conceptual targets. An exploration programme has been undertaken focusing on
these targets.

Romania - The Company has completed all necessary Environmental Impact
Assessments (EIA Levels I and II) for the Certej project. The Company submitted
in March 2007 a technical feasibility study to the Romanian government, in
support of a permit application to develop the project. To complete its
application, the Company plans to submit a final Environmental Impact Study to
the Romanian government in Q3 2007.

Finally, the Company continues to conduct an exploration programme in Romania
focusing on extending the life-of-mine of the Certej project and increasing the
number of conceptual and regional targets for further exploration in the South
Apuseni Mountain area.


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.


Documents sent to shareholders

Copies of the Company's Annual Report, Management's Discussion and Analysis and
Consolidated Financial Statements for the year ended 31 December 2006, and
copies of the Notice of Meeting and Management Proxy Circular for the Annual
Meeting of shareholders of the Company to be held on 21 May 2007 have been sent
to shareholders and 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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