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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| European Gold | LSE:EGU | London | Ordinary Share | CA2987741006 | COM SHS NPV |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 807.50 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From Jun 2019 to Jun 2024
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.
Hot Features
Premium
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
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