EGU.L Regulatory News (EGU)

13 Aug 2009 07:00



MANAGEMENT'S DISCUSSION AND ANALYSIS

FOR THE THREE- AND SIX-MONTH PERIODS ENDED 30 JUNE 2009

The following discussion and analysis, prepared as at 13 August 2009, 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 unaudited consolidated financial statements for the three- and six-month periods ended 30 June 2009 and 2008 and accompanying notes (the "Consolidated Financial Statements").

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

Overview

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

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

Romania - European Goldfields owns 80% of the Certej gold/silver project in Romania. In July 2008, the National Agency of Mineral Resources approved the technical feasibility study in support of its permit application and issued a new mining permit for the Certej project.

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: changes in the price of gold, base metals or certain other commodities (such as fuel and electricity) and currencies; uncertainty of mineral reserves, mineral resources, grades and recovery estimates; uncertainty of future production, capital expenditures and other costs; currency fluctuations; financing and additional capital requirements; the successful and timely permitting of the Company's Skouries, Olympias and Certej projects; legislative, political, social or economic developments in the jurisdictions in which the Company carries on business; operating or technical difficulties in connection with mining or development activities; the speculative nature of gold and base metals exploration and development, including the risks of diminishing quantities or grades of mineral reserves; the risks normally involved in the exploration, development and mining business; and risks associated with internal control over financial reporting. 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 OF OPERATIONS

The Company's results of operations for the three-and six-month periods ended 30 June 2009 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.

Stratoni operations (Greece)

Infrastructure and development 

Internal development is virtually complete for the year. The last development of major infrastructure at the mine, the Upper Adit, is awaiting the completion of the fan and sump installations. This is due during August, prior to holing through the remaining three metres. The adit will thus become fully operational in the very near future. The completion of this project means that the Company has now effectively built a new mine at Stratoni.

Production

Hellas Gold completed six shipments in Q2 2009 (Q2 2008 - 8), four shipments of zinc and two of lead/silver. Hellas Gold's results from its operations at Stratoni for the eight most recently completed quarters are summarised in the following table:

Operational results
	2009 Q2	2009 Q1	2008 Q4	2008 Q3	2008 Q2	2008 Q1	2007 Q4	2007 Q3
Inventory (start of period)
Ore mined (wet tonnes)	4,010	1,778	6,489	1,003	2,816	-	4,868	4,603
Zinc concentrate (tonnes)	602	2,975	2,078	5,660	2,745	1,689	2,797	2
Lead/silver concentrate (tonnes)	1,393	488	1,294	1,238	2,213	49	2,042	2,150
Production
Ore mined (wet tonnes)	60,023	56,892	70,468	69,847	73,137	58,208	50,643	56,075
Ore milled (tonnes)	60,287	52,984	73,320	63,040	73,280	53,675	53,813	54,499
- Average grade: Zinc (%)	8.87	7.85	8.80	8.82	10.37	9.37	9.00	8.42
Lead (%)	5.56	6.42	6.54	6.40	6.21	5.35	8.12	7.55
Silver (g/t)	141	166	167	160	155	134	206	186
Zinc concentrate (tonnes)	9,989	7,932	12,106	10,451	14,139	9,427	9,082	8,506
- Containing: Zinc (tonnes)	4,971	3,827	5,914	5,132	7,004	4,644	4,425	4,194
Lead concentrate (tonnes)	4,484	4,667	6,750	5,531	6,443	4,035	6,012	5,586
- Containing: Lead (tonnes)	3,060	3,129	4,434	3,726	4,201	2,653	4,021	3,781
Silver (oz)	230,106	240,366	336,336	280,305	316,354	207,215	316,837	297,059
Sales
Zinc concentrate (tonnes)	10,646	10,306	11,210	14,033	11,224	8,371	10,191	5,710
- Containing payable: Zinc (tonnes)*	4,427	4,152	4,591	5,818	4,633	3,454	4,209	2,364
Lead concentrate (tonnes)	3,771	3,762	7,556	5,475	7,418	1,872	8,004	5,694
- Containing payable: Lead (tonnes)*	2,448	2,347	4,775	3,495	4,628	1,188	5,082	3,759
Silver (oz)*	183,452	183,504	363,205	263,464	355,298	95,582	399,272	297,321
Cash operating cost per tonne milled ($)	144	156	145	164	161	164	175	144
Cash operating cost per tonne milled (€)	106	119	109	109	103	110	121	105
Inventory (end of period)
Ore mined (wet tonnes)	2,293	4,010	1,778	6,489	1,003	2,816	-	4,868
Zinc concentrate (tonnes)	-	602	2,975	2,078	5,660	2,745	1,689	2,797
Lead/silver concentrate (tonnes)	2,106	1,393	488	1,294	1,238	2,213	49	2,042

 

* Net of smelter payable deductions

 

 

Mining production year to date, is under budget due to poor geotechnical conditions as the convergence of the main Stratoni and footwall faults bounding the orebody have affected mining in the upper levels of the mine. As a result, this has disrupted the cycle of mining levels with two levels that are due to come into production suffering delays due to access issues. The mine has therefore suffered from both a reduced number of faces being available than anticipated and a greater dependence on lower grade areas than originally scheduled. 

Mine management is confident that the introduction of new infrastructure and the deployment of uprated shotcrete equipment will soon ameliorate the poor conditions in the upper levels. Plans have been redrawn and a revision is in progress that emphasises production from higher grade, lower levels in Q3 and from both upper and lower areas, including the large dimension stopes on the new 124 Level in Q4, to recoup metal production. 

Process plant performance 

The circuit to improve the quality of the lead concentrate is in the final design stage and installation is planned for Q4. Zinc and lead metal recoveries are being maintained on budget at a consistent 92% and silver at 87%. The plant continues to run efficiently and planned maintenance was carried out on schedule, providing high equipment availabilities.

Stratoni rehabilitation

The development of the Stratoni process plant was completed in 2006; the two filter presses in September 2008; the underground mine this year with the upper adit linked to the decline by the main ramp and all main infrastructure in place (pumping and ventilation).The water treatment plant is currently being commissioned. The capital costs to bring Stratoni Mine to this state were: 

US$M

Mine 30.2

Process Plant 4.4

Filter Presses 2.6

Water Treatment Plant 3.1

Total 40.3

Social and community

The Company is sponsoring the "Mademohoria Summer Festival", which takes part in the four villages closest to its operations: Stratoni, Stratoniki, Stagira, and Olympias. Hellas Gold has sponsored a public concert and other cultural events in each one of these villages. 

Olympias project (Greece)

Sale of gold concentrates up by 83% over H1 2008

The Olympias project benefits from an existing stockpile of gold-bearing pyrite concentrates which represented, at 1st January 2009, a reserve of approximately 101,000 tonnes grading 23.5 g/t gold (containing approximately 75,000 oz of gold), in addition to tailings containing 238,000 oz of gold and substantial underground reserves of gold, lead, zinc and silver. Excavation of the concentrate for shipment has indicated that the depth of stockpile base was underestimated in several areas by historical surveys and therefore additional concentrate tonnage exists compared to the declared reserve.

Hellas Gold completed 28 shipments of Olympias concentrates in Q2 2009 (Q2 2008 - 11). This translates into 32,134 tonnes of pyrite concentrates sold. Hellas Gold's results from its operation at Olympias for the eight most recently completed quarters are summarised in the following table:

 

Sale of Gold-Bearing Concentrates from Existing Stockpile
	2009 Q2	2009 Q1	2008 Q4	2008 Q3	2008 Q2	2008 Q1	2007 Q4	2007 Q3
Sales
Gold concentrate (dmt)	32,134	26,832	18,566	12,710	22,479	9,778	21,385	28,393

The economic slowdown in the Balkans has led to a reduction in the number of containers arriving at the port of Thessaloniki but the Company has successfully sourced sufficient containers by close co-operation with a number of shipping companies and other counterparties.

In addition to the stockpile of gold concentrates, Hellas Gold plans to process 2.4Mt of stockpiled tailings arising from the previous operations at Olympias. This will produce approximately 350,000 tonnes of concentrates (containing 238,000 oz of gold) and the refurbishment of the underground mining operations is scheduled to be phased with the exhaustion of the tailings at Olympias, the underground producing more gold bearing pyrite concentrates for sale to existing and new off-take purchasers. 

Submission of EIS for re-treatment of tailings 

Mine schedules, plant refurbishment plans and cost studies for the second phase of the Olympias project are approaching completion. In Q2 2008 the company submitted an Environmental Impact Study ("EIS") to allow the early processing of existing tailings, which will produce additional gold concentrate and allow the rehabilitation of a significant area of the Olympias valley. The Company has worked closely with the Ministry of Environment and anticipates approval of the EIS in the near future. It is planned that this re-processing will commence in parallel with refurbishment of the plant lines for run of mine production and the necessary underground development to recommence production in Phase Two. The Company has now evaluated offers for the detailed design phase from Greek engineering companies, and is expecting to award contracts in the near future.

Underground rehabilitation

A detailed study to outline the rehabilitation work and associated costs is to be started in the third Quarter and completed during the fourth Quarter. The study will adhere to standard, proven mining practice and technology.

Skouries

ENOIA delivers Basic Design package to schedule

ENOIA has produced and submitted the Basic Design package including an initial draft of an updated budget cost estimate for the process plant for Skouries to Hellas Gold for consideration. The overall Basic Design package managed and co-ordinated by ENOIA is now complete, comprising the ENOIA and Outotec elements; the mine and roads design by Omicron Kappa; the architectural element from KION and the civil structures and works by MHXME. ENOIA has also completed a few early factory acceptance tests on control equipment.

Outotec commences Detailed Design package

Outotec has commenced the Detailed Engineering of instrumentation and control systems for the flotation plant. Further detailed engineering and additional equipment orders will be placed as soon as the required authorisations are forthcoming. Fabrication of the long lead items is well advanced and deliveries continue to Greece.

Detailed plant and dam site geotechnical investigation

Detailed engineering and the ordering of the remaining important long lead-time items will be initiated during Q3, along with the required geotechnical drilling for the plant and dams detailing design. The latter will in turn enable ENOIA to commence the detailed process plant design.

Hellas Gold is now working on all the above studies with a view to producing a post feasibility engineering study for the Skouries project later in 2009.

 

 Permitting process - Skouries and Olympias

Further to site visits and other analysis by specialists from the Ministry of Culture, the Central Archaeological Council of Greece has approved the preliminary environmental impact study ("PEIS") and this has been documented by a Ministerial letter. This is the final inter-ministerial document required for the granting of the PEIS and this has allowed the Ministry of Environment and Public Works ("MEPW") to start to finalise the PEIS approval process. The Company is working closely with MEPW and anticipates that final approval will be delivered shortly. 

The separate Environmental Impact Study ("EIS") application in respect of the early processing of existing tailings, which will produce additional gold concentrate and allow the rehabilitation of a significant area of the Olympias valley, is also due to move to its final stage of approval once public consultation has been completed.

The Company continues to receive the active support of the Greek Ministry of Development for its Business Plan and the PEIS. The Business Plan focuses on a phased approach to the development of the Skouries gold-copper porphyry deposit and the Olympias gold-lead-zinc-silver deposit. The principal revenue stream in the early phases will be through the sale of concentrates. The Company's current plan is to develop Olympias in two phases. The Company will refurbish the underground mine in the early stage and in the final phase will construct a new gold processing facility in the brownfield Stratoni area. Skouries will initially be mined as a low strip open pit operation, followed by highly productive underground mining.

Approval of the PEIS by the MEPW will be expressed as a Project Pre-Approval from the Greek State with an invitation to the Company to submit its final EIS to allow public consultation. On approval of the EIS, the environmental permits for Skouries and Olympias will be issued.

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

Exploration in Greece

Airborne geophysical surveys have revealed four new zones of conductive rocks with electromagnetic ("EM") signatures typical for massive sulphides such as the known mineralisation at Stratoni, Olympias and Piavitsa. The new zones are distinct from any known mineralisation and represent some 20 kilometres of potential strike. Each anomalous area will now be investigated in the field with mapping, geochemistry and possibly follow-up ground geophysics in order to define future drill targets. 

The EM survey had already successfully confirmed an anomaly extending eight km of strike at the Piavitsa massive sulphide target. Two km of this strike length have massive sulphide drill intercepts which correspond exactly with the EM anomaly. A number of drill sites have good access through existing roads, which will allow some drilling to take place in the coming months. An EIS has been submitted to allow access to drill the remaining sites later in 2009.

In addition, the magnetic component of the survey has already identified a 17 km by six km belt of porphyry intrusives over which a three dimensional model has been completed defining two other major targets. Follow-up reconnaissance mapping on the ground has confirmed the presence of porphyry style mineralisation and drill sites have been selected for test drilling on approval of the submitted EIS.

  Certej project (Romania)

Basic Engineering work nearing completion

The Basic Engineering ("BE") contract for the Certej project process plant and associated infrastructure was awarded to Aker Solutions Engineering & Construction and work started in February 2009. The work is now nearing completion. The BE covers the entire process plant engineering encompassing the three main areas of mineral processing, the concentrator area, the Albion section and gold-silver doré production by CIL. Xstrata Technology, who are the owners of the Albion Process, are part of the BE team for the Albion section of the plant. 

The Romanian contractor Cepromin is also an important contributor to the work and they have recently visited Stockton, UK to review the Aker Solutions BE. As the project progresses through to detailed engineering Cepromin will ensure the submissions comply with Romanian procedures. They have started the work to generate the Technical Project Report which together with the environmental permits will be required for issuing the Construction Permit.

Permitting process continues to advance

The Certej project has already received all the technical mining approvals and permits required for the operation of mining activities: in September 2008, the Romanian National Agency for Mineral Resources ("NAMR") approved the Technical Feasibility Study ("TFS") for the project, as required under Romanian legislation, and also confirmed the official approval and registration of the project's resources and reserves. This completed all the mining approvals required for the project from NAMR and was a very significant step forward in the development of the project, as it effectively updates the mining permit and allows the TFS reserve to be mined.

The Company recently updated the Certej Environmental Impact Study ("EIS"), incorporating the improved location of the TMFs in the same water catchment area as the rest of the mine infrastructure. This was submitted to the Romanian environmental authorities in Timisoara and has been incorporated into both the EIS and Zonal Urbanisation Plan ("PUZ") processes. The PUZ process is almost complete with 16 of the 17 constituent permits required being obtained, including that relating to water, which involved cross-border consultation.

A public consultation process in respect of the environmental permit for the PUZ has also been successfully concluded: the public consultation involved four public hearings in the communities most directly affected by the Certej project. No adverse comments were raised during the public notice period, during the meetings themselves or subsequently to the authorities, and the final environmental permit is now expected to be issued. A positive final outcome of the process is expected imminently and represents a significant step forward in the environmental permitting process.

In anticipation of the approval of the PUZ, the Ministry of the Environment has invited the Company to file its EIS application which will also then be subject to the last requirement for public consultation prior to the issuance of the environmental permit. These are the final approvals required for the construction and operation of the plant, the tailings design and other related infrastructure.

Certej Independent Technical Consultant

As part of the project financing process, an internationally recognised engineering group has been appointed as Independent Technical Consultant for the Certej Project. A site visit has already been conducted and a review of the Certej Definitive Feasibility study and all its supporting documents is underway.

In addition, Digby Wells and Associates were commissioned to review the Company's environmental and social plans and studies in order to ensure compliance with the Equator Principles. This work has indicated that the project is at an appropriate level of compliance for its development stage and that future compliance will be achieved with the Company's planned programmes of work as part of the project construction and production phases. 

Exploration in Romania

In early 2009 the Company acquired two new prospecting licences for 454 square kilometres of prospective terrain covering the westward extension to the area hosting the Company's Certej deposit and the area containing the Deva Porphyry deposit. These areas are prospective for disseminated gold, porphyry mineralisation as well as the more prolific and higher-grade epithermal deposits.

Work in the quarter has been focused on the Deva Porphyry area which hosts a volcanic complex, including the historically mined Deva Porphyry pipe which produced some 20Mt at 0.8% Cu with the gold grade unrecorded. The Company has completed approximately 70% of a ground magnetic survey and finished an initial soil survey over the Deva Porphyry area. Magnetics are proving to be an excellent targeting tool in the mapping of the buried and blind porphyries and the survey has also highlighted potential alteration systems that were not previously recognised.

Early results indicate several magnetic centres in addition to the Deva Porphyry pipe with associated porphyry-style geochemical signatures of Cu-Au, with Ag, Ba, Hg, Mo, Sb and V. The largest of these exciting newly identified targets lies just 70 m to the North of the previously mined pipe. The complex has never been the subject of modern systematic exploration. The first phase of the current programme will be complete in the next two months.

Exploration in Turkey

In April 2008 the Company entered into a joint venture with Ariana Resources plc ("Ariana") with respect to mineral properties in the Eastern Pontide area of northeast Turkey.

Continued mapping and sampling has indicated further extension to the Ardala porphyry, to the southwest of the main porphyry body with lithological samples returning between 0.05 and 2.35 g/t Au and 0.05 and 3.9% Cu. Earlier work had already confirmed that porphyry mineralisation continues to the south of the previously recognised outcrops, and this additional extension increases the size potential of the porphyry system. A high-grade gold zone has also been identified at Salinbas, some three km to the southwest of the Ardala porphyry. The zone comprises a mineralised breccia which had a confirmed strike length of over 230m with a true thickness of 5 to 10 metres and recent work has shown that it extends a further 100m to the east, with grades in outcrop and float of between 0.9 and 15.25 g/t Au in the extension. Drilling and trenching are planned at both Ardala and Salinbas for the near future.

The Company continues to consolidate ground to the south of the Ardala licence and has signed a Heads of Agreement with Aldridge Minerals Inc ("Aldridge") for the joint development of Aldridge's Derinkoy properties, which cover an area of 40 square km adjacent to the Company's Ardala Licences. The properties lie within the area of interest of the Company's joint venture with Ariana (the "Pontid JV") and as such will be developed within the Pontid JV vehicle. The consolidation of this contiguous belt with known porphyry Au-Cu and epithermal Au mineralisation forms part of the Company's strategy to carry out modern, systematic exploration along this known mineralised belt. Under the agreement, European Goldfields will fund all exploration and development costs of the properties to earn ultimately up to a 90% interest in the project by completion of a Feasibility Study. A programme of mapping and sampling is planned for this field season.

In addition, the Company received a further three licences adjacent to Derinkoy and Ardala. The Pontid JV now has 14 licences totalling some 210 square km not including the Derinkoy licences.

  SUMMARY OF FINANCIAL RESULTS

Stratoni mine

Base metal prices recovered significantly in Q2 2009 compared to Q1 2009, during which the Company experienced what it believes to be the low point in the current commodity cycle, The increased base metal revenues in the current quarter has allowed the Stratoni operation to generate positive earnings before interest, depreciation and amortization ("EBITDA") to contribute towards capital expenditure and other operating costs. The Stratoni mine's financial results for the eight most recently completed quarters are summarised in the following table:

 

Financial performance
(in thousands of US dollars)	2009 Q2	2009 Q1	2008 Q4	2008 Q3 Q3	2008 Q2	2008 Q1	2007 Q4	2007 Q3
Sales	9,472	4,935	8,465	13,250	13,000	10,097	18,483	16,634
EBITDA	305	(3,025)	(5,233)	1,742	1,017	4,057	8,147	9,681
Gross profit	(1,561)	(4,345)	(7,060)	171	(198)	3,060	6,147	8,425
Capital expenditure	2,793	4,214	3,543	2,496	2,086	3,111	3,779	12,142
Amortisation and depletion	1,866	1,320	1,827	1,571	1,215	997	2,000	1,256

Total revenues from concentrate sales fell year on year as a result of lower quantities sold (primarily in lead) and lower prices realised. Payable lead and silver in concentrate sales fell by 47% and 50% respectively compared to the prior year quarter, reflecting the combination of lower tonnage mined and lower processed lead and silver grades. In contrast, payable zinc in concentrate sales only declined 5%, as a result of an increase in zinc concentrate inventory in Q2 2008. Realised prices for zinc were $1,509 per tonne, 23% down on Q2 2008, and $1,697 per tonne for lead, a reduction of 23% compared to Q2 2008. The combination of the change in sales volumes and prices compared to the prior led to a fall of 44% in payable metal revenues.

Reconciliation of Stratoni revenues - Q2 2009
(in thousands of US dollars unless stated otherwise)		Zinc			Lead				Silver				Total
Payable metal		4,427t			2,448t				183,452oz				n/a
Realised price		$1,509/t			$1,697/t				$8.16/oz				n/a
Payable metal revenue		6,680			4,155				1,496				12,331
TC/RCs		(2,441)			(385)				(165)				(2,991)
Transport recoveries/(charges)			205			0				0			205
Net revenue			4,444			3,770				1,331			9,545
Prior quarter adjustments			(40)			(28)				(5)			(73)
Total revenue			4,404			3,742				1,326			9,472

Reconciliation of Stratoni revenues - Q2 2008
(in thousands of US dollars unless stated otherwise)		Zinc						Lead					Silver							Total
Payable metal		4,633t						4,628t					355,298oz							n/a
Realised price		$1,954/t						$2,203t					$7.46/oz							n/a
Payable metal revenue		9,054						10,197					2,652							21,903
TC/RCs		(3,228)						(3,281)					0							(6,509)
Transport recoveries/(charges)				0						131					0							131
Net revenue			5,826							7,047					2,652							15,525
Prior quarter adjustments			(372)							(2,159)					6							(2,525)
Total revenue			5,454							4,888					2,658							13,000

During Q2 2009, Hellas Gold concluded negotiations with three major international trading groups to sell the entire production from the Stratoni mine for 2009. All sales during the quarter were made under these newly negotiated offtake arrangements which resulted in a fall in treatment charges, and prior quarter provisional invoices were finalized in Q2 2009 without material differences on metal prices, yielding a very small prior quarter revenue adjustment. Therefore, after lower treatment charges, transport and prior quarter adjustments are taken into consideration, net revenues only fell 27%. 

However, both zinc and lead prices showed a sharp recovery from Q1 2009, allowing Stratoni to report positive EBITDA in the current quarter.

Olympias

Hellas Gold completed 28 shipments of Olympias concentrates in Q2 2009 representing 32,134 tonnes of pyrite concentrates sold, an increase of 43% over the prior year period (22,479 tonnes - Q2 2008). With a continued strong gold price, this represented a record performance for gold concentrate sales, both in terms of tonnages and revenues.

 

 

Financial performance
(in thousands of US dollars)	2009 Q2	2009 Q1	2008 Q4	2008 Q3	2008 Q2	2008 Q1	2007 Q4	2007 Q3
Sales	6,732	5,807	4,309	2,851	5,461	2,611	4,232	5,029
Gross profit	4,747	4,003	2,995	1,222	3,668	1,789	1,279	2,848
Amortisation and depletion	184	153	106	72	129	56	(134)	265

In dollar terms, revenues from sales of gold concentrates totalled $6.7 million in Q2 2009, an increase of 23% over the same period in 2008 ($5.5 million).

Consolidated results

Revenues recovered well in Q2 compared to Q1 2009 as a result of strong gold sales and improved base metal prices, and profit for the period doubled compared to Q2 2008. Year on year, the trends of lower base metal prices and foreign exchange movements have dominated the consolidated results, driving gross profit performance for both the six and three month periods ending 30 June 2009 lower than the prior year. Stratoni production remained behind budget but all significant capital expenditures have now been completed at the mine, securing its future operational capacity. Olympias gold concentrate sales continued to perform very robustly partially offsetting base metal price weakness. The Company's lead hedging programme will remain in place until the end of 2009 and generated income of $1.8 million for the quarter. Working capital declined as the Company continued its capital expenditure programmes at its operating mine and development projects, but the Company's balance sheet remains strong. 

The Company's statement of profit and loss for the eight most recently completed quarters are summarised in the following table:

 

 

Financial performance
(in thousands of US dollars, except per share amounts)	2009 Q2 $	2009 Q1 $	2008 Q4 $	2008 Q3 $	2008 Q2 $	2008 Q1 $	2007 Q4 $	2007 Q3 $
Statement of profit and loss
Sales	16,204	10,742	12,774	16,101	18,461	12,708	22,715	21,663
Cost of sales	13,018	11,084	16,839	14,708	14,991	7,859	15,289	10,390
Gross profit	3,186	(342)	(4,065)	1,393	3,470	4,849	7,426	11,273
Interest income	133	508	1,164	1,306	1,502	1,757	2,699	2,320
Foreign exchange gain/(loss)	1,719	(2,882)	(6,253)	(2,800)	(27)	2,674	(2,173)	6,494
Hedge contract profit	1,801	2,417	3,165	1,362	391	-	-	-
Share of profit/(loss) in equity investment	18	(26)	(3)	(66)	(36)	-	-	-
Expenses	4,204	3,740	5,253	6,054	5,058	5,017	6,385	4,819
Profit/(loss) before income tax	2,653	(3,979)	(11,245)	(4,859)	242	4,263	1,567	15,268
Income taxes	(1,078)	540	17,067	(451)	644	(621)	2,062	(2,764)
Profit/(loss) after income tax	1,575	(3,439)	5,822	(5,310)	886	3,642	3,629	12,504
Non-controlling interest	(136)	183	519	267	(74)	(233)	(29)	(348)
Profit/(loss) for the period	1,439	(3,256)	6,341	(5,043)	812	3,409	3,600	12,156
Earnings/(loss) per share	0.01	(0.02)	0.04	(0.03)	0.00	0.02	0.02	0.07

The Company recorded a loss (before tax) of $1.33 million for the six-month period ended 30 June 2009, compared to a profit (before tax) of $4.51 million for the same period of 2008. The Company recorded a net loss (after tax and non-controlling interest) of $1.81 million ($(0.01) per share) for the six-month period ended 30 June 2009, compared to a net profit of $4.22 million ($0.02 per share) for the same period of 2008. This six   month performance was impacted by much lower base metal prices, lower than planned operating performance at Stratoni, lower interest rates and foreign exchange losses as described below.

The Company recorded a profit (before tax) of $2.65 million for the three-month period ended 30 June 2009, compared to a profit (before tax) of $0.24 million for the same period of 2008. The Company recorded a profit for the period of $1.82 million ($0.01 per share) for the three-month period ended 30 June 2009, compared to a profit of $0.81 million ($0.00 per share) for the same period of 2008. For the three month performance, improved gold profitability almost offset the fall in the base metal profits, and gains from hedging and foreign exchange movements combined with lower other expenses resulted in a higher level of pre-tax profitability which fed down into higher profits for the period.

In more detail, the following factors have contributed to the above: 

Financial instruments

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. As with cash deposits, the Company deals with highly rated banks and in addition, those institutions who have demonstrated long term commitment to the mining sector. The Company has one counterparty relating to the remaining lead hedge contracts. If this counterparty were unable to honour its obligations under the hedge contracts, the Company would be exposed up to the entire value of the hedge stated in the accounts and would be exposed to the difference between the hedge and the then current market price at the date of the settlement of the hedged item. The hedges below are treated as cash flow hedges in accordance with CICA 3865: Hedges.

  As at 30 June 2009, the Company had entered into forward hedging arrangements over tonnes of lead, using options to provide a minimum: maximum price exposure. The hedging contracts are put/call option collar contracts with maturity dates between 02 January 2009 and 05 January 2010 where the fair value amounted to $2,976 (31 December 2008 - $10,282), established by reference to market prices for lead.

	30 June 2009 $
Lead tonnes	3,600
US dollar price ($/tonne) - Put	2,500
US dollar contract amount ($'000) - Put	9,000
US dollar price ($/tonne) - Call	3,500
US dollar contract amount ($'000) - Call	12,600

During the six and three month periods ended 30 June 2009, the Company recorded income relating to its lead hedging activities of $4,218 (2008: $391) and $1,801 (2008: $391) respectively.

Related parties

During the six and three month periods ended 30 June 2009, Hellas Gold incurred costs of $17,823 (2008 - $17,633) and $8,440 (2008 - $9,154) respectively for management, technical and engineering services received from a related party, Aktor S.A., a 5% shareholder in Hellas Gold. As at 30 June 2009, Hellas Gold had accounts payable of $7,262 (2008 - $4,152) to Aktor S.A. These expenses were contracted in the normal course of operations and are recorded at the exchange amount agreed by the parties.

  LIQUIDITY AND CAPITAL RESOURCES

The Company's balance sheet and cash flows for the eight most recently completed quarters are summarised in the following table:

(in thousands of US dollars, except per share amounts)		2009 Q2 $		2009 Q1 $		2008 Q4 $		2008 Q3 $		2008 Q2 $		2008 Q1 $		2007 Q4 $		2007 Q3 $
Balance sheet (end of period)
Cash		142,728		153,995		170,296		192,456		205,908		215,582		223,739		215,571
Working capital		171,185		176,319		192,675		208,609		216,822		225,673		226,431		224,289
Total assets		753,196		757,206		766,095		775,369		796,537		794,911		782,131		744,998
Non current liabilities		153,544		154,882		155,727		183,881		185,897		184,635		182,092		168,170
Statement of cash flows
Cash flows from operating activities		(7,733)		(2,923)		883		(6,421)		(609)		(3,832)		18,976		3,488
Investing activities		(6,167)		(10,674)		(11,672)		(5,030)		(9,271)		(9,909)		(8,447)		(23,320)
- Plant and equipment		(3,450)		(8,953)		(12,998)		(2,971)		(3,065)		(7,147)		(3,779)		(12,142)
- Deferred development costs		(2,600)		(1,481)		(2,837)		(2,007)		(1,798)		(2,372)		(3,048)		(2,149)
- Other		(117)		(240)		4,163		(52)		(4,407)		(390)		(1,620)		(9,029)
Financing activities		80		558		(10)		-		54		3,563		4,608		149
Effect of foreign exchange on cash		2,553		(3,262)		(6,229)		(2,233)		152		2,021		(7,869)		9,658
Total movement in cash		(11,267)		(16,301)		(17,028)		(13,684)		(9,674)		(8,157)		7,268		(10,025)

As at 30 June 2009, the Company had cash and cash equivalents of $142.73 million, compared to  $170.30 million as at 31 December 2008, and working capital of $171.19 million, compared to $192.68 million as at 31 December 2008. 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 is confident that the bank debt and capital markets have sufficient liquidity to provide any additional capital it may require to bring its project portfolio into production.

The decrease in cash and cash equivalents as at 30 June 2009, compared to the balances as at  31 December 2008, resulted primarily from capital expenditure in Greece ($12.40 million), changes in working capital balances ($13.51 million), deferred exploration and development costs in Romania ($2.52 million), investment in an associate ($0.14 million), deferred development costs in Greece ($1.22 million), investment in a subsidiary ($0.12 million) and the effect of foreign currency translation on cash ($0.71 million), offset by operating cash flow ($2.85 million).

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

	Payments due by period
	(in thousands of US dollars)
Contractual obligations	Total	Less than 1 year	1 – 3 years	4 – 5 years	After 5 years
Operating lease (London office)	808	162	323	323	-
Operating lease (Athens office)	1,029	147	294	294	294
Outotec OT – Processing Plant	22,269	22,269	-	-	-
Total contractual obligations	24,106	22,578	617	617	294

The Company's contractual obligation with Outotec relates to the contract to supply the large technology and services for its Skouries project.

In 2009, the Company expects to spend a total of $54 million in capital expenditures to fund the development of its project portfolio. This amount comprises $8 million at its existing operation at Stratoni to complete the expansion of the internal underground infrastructure at Mavres Petres and upgrade the mill, $10 million at Olympias as part of the refurbishment of the mine and process plant, and $30 million at Skouries as the Company expects to continue to spend on long lead time equipment and engineering studies. At Certej, the Company expects to spend $6 million as it progresses through the final stages of environmental permitting, advances through the basic and detailed engineering phases and continues exploration around Certej. In addition to its capital expenditure programme, the Company expects to spend $3 million in exploration over the wider licence area in Greece and Turkey, $9 million on Hellas Gold administrative and overhead and water treatment expenses, and $5 million on corporate administrative and overhead expenses. The Company expects to fund all such costs 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:

Common shares: 179,887,381

Common share options: 2,891,665

Restricted share units: 972,839

Common shares (fully-diluted): 183,751,885

Preferred shares: Nil

NON GAAP PERFORMANCE MEASURES

The Company uses certain performance measures in its analysis. Some of these performance measures have no meaning within Canadian GAAP 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 Canadian GAAP.

Cash operating cost per tonne milled is a Non-GAAP 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 realized 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 GAAP 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:

(in thousands of US dollars)	2009 Q2 $	2009 Q1 $	2008 Q4 $	2008 Q3 $	2008 Q2 $	2008 Q1 $	2007 Q4 $	2007 Q3 $
Milled production (dmt)	60,287	52,984	73,320	63,040	73,280	53,675	53,813	54,499
Cash operating cost per tonne milled (€)	106	119	109	109	103	110	121	105
Cash operating cost per tonne milled ($)	144	156	145	164	161	164	175	144
Cash cost of production	8,687	8,278	10,609	10,346	11,831	8,823	9,427	7,865
Movement in concentrate inventory	(175)	(1,300)	368	893	423	(2,782)	1,827	(1,117)
Cash cost of sales - Stratoni	8,512	6,978	10,977	11,239	12,254	6,041	11,254	6,748
Amortisation and depletion	2,050	1,473	1,933	1,643	1,344	1,053	1,866	1,520
Concentrate transport costs	2,666	2,423	2,977	1,565	1,664	765	2,169	2,122
Inventory write-down/adjustments	(210)	210	952	261	(271)	-	-	-
Cost of sales	13,018	11,084	16,839	14,708	14,991	7,859	15,289	10,390

  Earnings before interest, tax, depreciation and amortization ("EBITDA") is a Non-GAAP measure which the Company uses as an indicator of the cash generation. For each operation, it is calculated as gross profit adjusted for all depreciation, depletion and amortization charges as presented under Canadian GAAP.

CRITICAL ACCOUNTING ESTIMATES

The consolidated financial statements have been prepared on a going concern basis in accordance with accounting principles generally accepted in Canada ("Canadian GAAP"), which assumes the Company will be able to realise assets and discharge liabilities in the normal course of business for the foreseeable future. The consolidated financial statements do not include the adjustments that would be necessary should the Company be unable to continue as a going concern and reflect the following critical accounting estimates.

Deferred exploration and development costs - Acquisition costs of resource properties, together with direct exploration and development costs incurred thereon, are deferred and capitalised. Upon reaching commercial production, these capitalised costs are transferred from exploration properties to producing properties on the consolidated balance sheets and are amortised into operations using the unit-of-production method over the estimated useful life of the estimated related ore reserves. If actual reserves prove to be significantly different from current estimates, a material change to amounts charged to earnings could occur.

Long-lived assets - All long-lived assets and intangibles held and used by the Company are reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If changes in circumstances indicate that the carrying amount of an asset that an entity expects to hold and use may not be recoverable, future cash flows expected to result from the use of the asset and its disposition must be estimated. If the undiscounted value of the future cash flows is less than the carrying amount of the asset, impairment is recognised based on the fair value of the assets. Current metal prices do not suggest there has been any impairment on any of the Company's long-lived assets. If such an impairment were to occur, this could result in a material charge to earnings.

Long lived assets are depreciated against operations using the unit-of-production method over the estimated useful life of the estimated related ore reserves. If actual reserves prove to be significantly different from current estimates, a material change to amounts charged to earnings could occur.

Asset retirement obligation - The fair value of the liability of an asset retirement obligation is recorded when it is legally incurred and the corresponding increase to the mineral property is depreciated over the life of the mineral property. The liability is adjusted over time to reflect an accretion element considered in the initial measurement at fair value and revisions to the timing or amount of original estimates and drawdowns as asset retirement expenditures are incurred. As at 30 June 2009, the Company had an asset retirement obligation relating to its Stratoni property in Greece. A significant change to either the estimated future costs or to reserves could result in a material change to amounts charged to earnings

Equity-based compensation - The Company operates a share option plan, an RSU plan and a DPU plan. The Company accounts for equity-based compensation granted under such plans using the fair value method of accounting. Under such method, the cost of equity-based compensation is estimated at fair value and is recognised in the profit and loss statement as an expense, or capitalised to deferred exploration and development costs when the compensation can be attributed to mineral properties. The Company uses the Black-Scholes option pricing model to estimate fair values of options granted, and uses the market price of common shares to determine fair value of RSUs and DPUs issued. This cost is recognised over the relevant vesting period for grants to directors, officers and employees, and measured in full at the earlier of performance completed or vesting for grants to non-employees. Any consideration received by the Company on exercise of share options is credited to share capital.

Future taxes - The Company uses the asset and liability method of accounting for future income taxes. Under this method, current income taxes are recognised for the estimated income taxes payable for the current year. Future income tax assets and liabilities are recognised for temporary differences between the tax and accounting bases of assets and liabilities, calculated using the currently enacted or substantively enacted tax rates anticipated to apply in the period that the temporary differences are expected to reverse. Future income tax inflows and outflows are subject to estimation in terms of both timing and amount of future taxable earnings. Should these estimates change the carrying value of income tax assets or liabilities may change.

  SIGNIFICANT CHANGES IN ACCOUNTING POLICIES

International Financial Reporting Standards ("IFRS") - In 2006, the Canadian Accounting Standards Board ("AcSB") published a new strategic plan that will significantly affect financial reporting requirements for Canadian companies. The AcSB strategic plan outlines the convergence of Canadian GAAP with IFRS over an expected five year transitional period. In February 2008, the AcSB confirmed that publicly listed companies will be required to adopt IFRS for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011, and in April 2008, the AcSB issued for comment its Omnibus Exposure Draft, Adopting IFRS in Canada. Early adoption may be permitted, however it will require exemptive relief on a case by case basis from the Canadian Securities Administrators. 

The Company has begun assessing the adoption of IFRS and is in the process of completing its overall conversion plan. The plan assesses the possible benefits of early adoption, the key differences between IFRS and Canadian GAAP including disclosures as well as a timeline for implementation.

As part of the plan, the Company has appointed a team within the group finance function to assess and implement the conversion process, and key personnel have received IFRS training. The Company benefits from having members of the finance function at the subsidiary level who are already experienced in the preparation of IFRS accounts. The team has already identified the material differences between IFRS and Canadian GAAP, and the process of identifying other areas of potential differences is near completion. The Company has already been preparing a detailed reporting pack under IFRS on a quarterly basis. This IFRS pack includes accounting adjustments for all material differences between IFRS and Canadian GAAP, with the exception of IFRS 1. During 2009, the team will focus on preparation for the implementation of IFRS 1, and the increased level of IFRS disclosure compared to Canadian GAAP. 

Goodwill and intangible assets - In February 2008, the Canadian Institute of Chartered Accountants ("CICA") issued Section 3064 Goodwill and intangible assets, replacing Section 3062, Goodwill and other intangible assets. It establishes standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit-oriented enterprises. Standards concerning goodwill are unchanged from the standards included in the previous Section 3062. The Company adopted the new standards on 01 January 2009. The adoption of this new Section had no impact on the consolidated financial statements.

Credit Risk and the Fair Value of Financial Assets and Financial Liabilities (EIC 173) - In January 2009, the CICA issued EIC 173, "Credit Risk and the Fair Value of Financial Assets and Financial Liabilities". The EIC requires the Company to take into account the Company's own credit risk and the credit risk of the counterparty in determining the fair value of financial assets and financial liabilities, including derivative instruments. This EIC applies to interim and annual consolidated financial statements relating to fiscal years beginning on or after 01 January 2009. The adoption of this new accounting policy did not have any impact on the Company's consolidated financial statements.

Mining Exploration Costs (EIC 174) - In March 2009, the CICA issued EIC Abstract 174, "Mining Exploration Costs". The EIC provides guidance on the accounting and the impairment review of exploration costs. This EIC applies to interim and annual consolidated financial statements relating to fiscal years beginning on or after 01 January 2009. The adoption of this new accounting policy did not have any material impact on the Company's consolidated financial statements.

RISKS AND UNCERTAINTIES

Current Global Conditions - Current global financial conditions have been subject to increased volatility and numerous financial institutions have either gone into bankruptcy or have had to be rescued by governmental authorities. Access to public financing has been negatively impacted by both sub-prime mortgages and the liquidity crisis affecting the asset-backed commercial paper market. These factors may impact the ability of the Company to obtain equity or debt financing in the future and, if obtained, on terms favourable to the Company. If these increased levels of volatility and market turmoil continue, the Company's operations could be adversely impacted and the value and the price of the Company's Common Shares could continue to be adversely affected.

Market price volatility - The trading price of the Common Shares may 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 some of which are not 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, 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.

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.

In the past, 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, which could significantly harm the Company's profitability and reputation.

Dilution - The Company may require additional funds to fund exploration and development programs and potential acquisitions. The Company cannot predict the size of future issuances of Common Shares or the issuance of debt instruments or other securities convertible into shares or the effect, if any, that future issuances and sales of the Company's securities will have on the market price of the Common Shares. If it raises additional funding by issuing additional equity securities, such financing may substantially dilute the interests of existing shareholders. Sales of substantial amounts of Common Shares, or the availability of such Common Shares for sale, could adversely affect the prevailing market prices for the Company's securities.

No dividends - The Company has never paid cash dividends on the Common Shares. It currently intends to retain future earnings, if any, to fund the development and growth of its business, and may not pay any cash dividends on the Common Shares for the foreseeable future. Furthermore, the Company may in the future become subject to contractual restrictions on, or prohibitions against, the payment of dividends. As a result, investors will have to rely on capital appreciation, if any, to earn a return on their investment in Common Shares in the foreseeable future. The payment of future dividends, if any, will be reviewed periodically by the Company's board of directors and will depend upon, among other things, conditions then existing including earnings, financial condition and capital requirements, restrictions in financing agreements, business opportunities and conditions and other factors.

Foreign country risk - Any changes in regulations in Greece, Romania or Turkey, or shifts in political attitudes are beyond the Company's control and may adversely affect its business. Exploration and development 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.

Currently there are no restrictions on the repatriation from Greece, Romania or Turkey of earnings to foreign entities. However, there can be no assurance that restrictions on repatriation of earnings from Romania, Greece or Turkey will not be imposed in the future.

Exploration and mining risks - The business of exploring for minerals and mining involves a high degree of risk. Only a small proportion of the properties that are explored are ultimately developed into producing mines.

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. 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.

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. There can be no assurance that: these estimates will be accurate, mineral reserves, mineral resources or other mineralisation figures will be accurate, or this mineralisation could be mined or processed profitably.

Mineralisation estimates for the Company's properties may require adjustments or downward revisions based upon further exploration or development work or actual production experience. In addition, the grade of ore ultimately mined, if any, may differ from that indicated by drilling results. There can be no assurance that minerals recovered in small scale tests will be duplicated in large scale tests under on-site conditions or in production scale.

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 silver may render portions of the Company's mineralisation uneconomic and result in reduced reported mineralisation. Any material reductions in estimates of mineralisation, or of the Company's ability to extract this mineralisation, could have a material adverse effect on the Company's results of operations or financial condition.

The grade of mineralisation ultimately mined may differ from that indicated by drilling results and such differences could be material. There can be no assurance that minerals recovered in small scale laboratory tests will be duplicated in large scale tests under on-site conditions or in production scale operations. Material changes in geological mineral resources, grades, stripping ratios or recovery rates may affect the economic viability of projects.

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, unavailability of materials and equipment including fuel, labour force disruptions, unanticipated or significant changes in the costs of supplies including, but not limited to, petroleum, and unanticipated transportation costs.

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.

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 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 exploration and development and would have a material adverse affect on the financial position of the Company.

  Financing risks - Exploration and development of one or more of the Company's properties will be dependent upon the Company's 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, 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 obtain such additional financing could result in delay or indefinite postponement of further exploration and development of the Company's projects with the possible loss of such properties.

Mineral prices - The mineral exploration and development industry in general is intensely competitive and there is no assurance that, even if commercial quantities of proven and probable mineral reserves are discovered, a profitable market may exist for the sale of the same. The Company's profitability and long-term viability depend, in large part, upon the market price of gold and other metals and minerals produced from the Company's properties. The market price of gold and other metals 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 and other metals in response to any of the above factors.

There can be no assurance that the market price of gold and other metals will remain at current levels or that such prices will improve. A decrease in the market price of gold, silver and other metals could adversely affect the profitability of the Company's existing mines, which would have a material adverse effect on the Company's financial condition and results of operations. A decline in the market price of gold, silver, or other metals, may also require the Company to write-down its mineral reserves which would have a material and adverse affect on its earnings and profitability.

Exploration, development, mining and other licences - The Company's current operations, including further exploration, development and 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. 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.

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. Title to the properties may be affected by undisclosed and undetected defects.

Environmental and other regulatory requirements - The Company's activities are subject to environmental regulations 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. A breach of such legislation 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 exploration and development 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 exploration and development 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 exploration and development 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 exploration, development and/or mining activities and these may be costly to remedy.

Amendments to current laws, regulations and permits governing operations and activities of exploration and development 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.

Tax matters - The Company believes that it is, and intends to take all necessary steps to remain, resident solely in Canada for income tax purposes. The Company's tax residency is, however, 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 were to cease to be tax resident in Canada, it would 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, financial condition and results of operations. 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. Loss of any of these people could have a material adverse effect on the Company and its business. The Company has not taken out and does not intend to take out key man insurance in respect of any directors, officer or other employees.

Joint ventures - The Company holds (and expects to hold in the future) interests in joint ventures. Joint ventures may involve special risks associated with the possibility that the joint venture partners may (i) have economic or business interests or targets that are inconsistent with ours; (ii) take action contrary to the Company's policies or objectives with respect to their investments, for instance by veto of proposals in respect of joint venture operations; (iii) be unable or unwilling to fulfil their obligations under the joint venture or other agreements; or (iv) experience financial or other difficulties. Any of the foregoing may have a material adverse effect on the Company's results of operations or financial condition. In addition, the termination of certain of these joint venture agreements, if not replaced on similar terms, could have a material adverse effect on the Company's results of operations or financial condition.

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. 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 exploration, development or construction costs, result in project delays or both.

Currency fluctuations - Gold and other metals are sold throughout the world principally in United States dollars. The Company's operating costs for its European projects are incurred principally in Euros. As a result, any significant and sustained appreciation of the Euro against the U.S. dollar may materially increase the Company's costs and reduce revenues. The Company does not currently use any derivative products to manage or mitigate any foreign exchange exposure.

  

Conflicts of Interest - 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.

Legal Proceedings - the Company is a party to the legal proceedings described under the heading "Legal Proceedings". If decided adversely to the Company, these legal proceedings, or others 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 financial condition or operations.

DISCLOSURE CONTROLS & PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING

The Chief Executive Officer and the Chief Financial Officer of the Company (the "Certifying Officers") have established and maintained in the period ended 30 June 2009 disclosure controls and procedures ("DC&P") and internal control over financial reporting ("IFCR") for the Company.

The Certifying Officers have caused DC&P, as defined in National Instrument 52-109 ("NI 52-109"), to be designed under their supervision, to provide reasonable assurance that material information relating to the Company and its subsidiaries is made known to the Certifying Officers by others within those entities, as appropriate, to allow decisions regarding required disclosure within the time periods specified by legislation, particularly during the period in which interim and annual filings are being prepared.

The Certifying Officers have evaluated the effectiveness of the Company's DC&P as at 30 June 2009. Based upon that evaluation, the Certifying Officers have concluded that the DC&P are adequate and effective for the period ended 30 June 2009.

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 Canadian GAAP.

As of 30 June 2009 the Certifying Officers assessed the effectiveness of the Company's internal control over financial reporting. Based upon that evaluation, the Certifying Officers concluded that the internal controls and procedures are adequate and effective for the period ended 30 June 2009.

During the period ended 30 June 2009, 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.

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