European Minerals Corporation
TSX : EPM
AIM : EUM

European Minerals Corporation

May 16, 2006 02:03 ET

European Minerals Announces First Quarter 2006 Results

LONDON, ENGLAND--(CCNMatthews - May 16, 2006) -

Not for Distribution to U.S. Newswire Services or for Distribution in the United States

European Minerals Corporation ("EMC or the "Company") - (TSX:EPM)(AIM:EUM) - a gold-copper exploration and development company, today reports its results for the three months ended March 31, 2006. All amounts are expressed in US dollars unless otherwise indicated.

HIGHLIGHTS

Financial

- As at March 31, 2006, the Company had assets of $192.7 million, including non-restricted cash of $55.6 million.

- No operating revenues during quarter 1 of 2006 as the Company continued to focus its efforts on the development of the Varvarinskoye gold and copper mine.

- Consolidated loss for the 3 months ended March 31, 2006 was $703,000. The loss included expenditures of $774,000 offset by interest income of $71,000. This compares with expenditures of $713,000 offset by interest income of $26,000, over the same period in 2005.

- Capital expenditures on the development of the Varvarinskoye project (the "Project"), including equipment purchases and construction on the project's processing facility amounted to approximately $20.5million.

- Approximately Cdn$75.9 million (approximately $64.8 million) of net proceeds raised by way of an equity financing (the "Financing").

Operational

- Pre-stripping of overburden using the JSC Varvarinskoye mining fleet continues on schedule and within budget. Virtually all the mining equipment necessary for the Project to operate at its design capacity is on site or in transit to site from the manufacturer's factories.

- Civil engineering and concrete works were carried out in the process plant area. Stockpiling of clay mined from the overburden at central pit which will be utilised in the construction of the tailings dam walls also continued. Construction of the tailings dam remains on programme.

- SENET CC continued finalising the project design work and mobilized engineers to supervise the construction at site.

- Construction of the 61km power line from Lisakovska to the mine was started and is expected to be completed on schedule in late 2006.

- Continued augmentation of Kazak and expatriate management team. Approximately 140 employees working on the Project.

MANAGEMENT'S DISCUSSION AND ANALYSIS

A full Management's Discussion and Analysis document ("MD&A") is available on SEDAR at www.sedar.com. The document can also be obtained on application to the Company.

The following has been extracted from the MD&A.

FINANCIAL REVIEW

Since the Company's most recently completed financial year, the Company has not generated any operating revenues and therefore losses have continued to incur throughout the Company's first quarter.

Three months ended March 31, 2006 Compared to Three months ended March 31, 2005

The Company's only source of income during the period was from interest on bank deposits which amounted to $71,000 compared to $26,000 over the same period in 2005.

The consolidated net loss for the 3-month period in 2006 amounted to $703,000 ($0.00 per share) compared to $687,000 ($0.01 per share) during the first quarter of 2005. The consolidated net loss was comprised primarily of legal and professional fees of $0.2 million (2005 - $0.1 million), project costs written off of $0.1 million (2005 - $0.1 million), stock-based compensation of $0.3 million (2005 - $0.1 million) and administrative expenses of $0.3 million (2005 - $0.2 million).

LIQUIDITY AND CAPITAL RESOURCES

In management's view, the most meaningful information concerning the Company relates to its current liquidity and solvency since it is not currently generating any income from its mineral projects.

The Company raises capital for its operations through the issuance of its common shares, proceeds received from the exercise of options and share purchase warrants and the issuance of debt. Although the Company has been successful in the past in raising capital, there can be no assurance that any funding required by the Company in the future will be made available to it and, if such funding is available, that it will be offered on reasonable terms or that the Company will be able to secure such funding through third-party financing or joint ventures. Furthermore, there is no assurance that the Company will be able to secure new mineral properties or projects or that they can be secured on competitive terms.

As noted in the Company's annual MD&A, it has not been possible for the Company's subsidiary, JSC Varvarinskoye ("JSCV"), to make a drawdown under the debt facility (the "Debt Facility") the Company entered into in the amount of $75.4 million with Investec Bank (UK) Limited, Investec Bank Limited and Nedbank Limited (the "Lenders") to fund the debt portion of the construction of the Project, as a result of the termination of the lump sum turnkey contract that it had entered into with MDM Ferroman (Pty) Ltd., the Project's contractor. The Company continues with ongoing discussions with its Lenders regarding the Debt Facility and has recently received a further extension until August 1, 2006 to complete the first drawdown under the Debt Facility, a condition precedent of which is the replacement of the contractor.

On March 21, 2006, the Company completed the Financing which consisted of approximately 67 million units at Cdn$1.05 ($0.90) each, raising gross proceeds of approximately $60 million. Pursuant to the exercise of the over-allotment option granted to the agents in connection with the 2006 Offering, on March 24, 2006, the Company issued an additional 10.05 million units at Cdn$1.05 ($0.90) each, raising further gross proceeds of approximately $9 million. Each unit is comprised of one common share and one-half of one common share purchase warrant. Each whole common share purchase warrant entitles the holder to purchase one common share until March 21, 2011 at a price of Cdn$1.55 per share. Proceeds from the sales of the units have been allocated between share capital and share purchase warrants. Issue costs totaled $4.6 million and have been recorded as a reduction to the value of share capital and share purchase warrants.

Subsequent to March 31, 2006, 2,726,050 Agent Compensation Units (Note 8(e)) were exercised raising proceeds of $2,044,538 and causing the issuance of 2,726,050 common shares and 1,363,025 share purchase warrants with each warrant exercisable into 1 common share for Cdn$1.20 each until September 21, 2007.

In addition to the completion of the Financing, a total of 100,000, 50,000 and 452,000 common shares were issued on the exercise of stock options, warrants and agent compensation units, respectively, raising aggregate proceeds of $378,000. Each agent compensation unit allowed the holder to acquire one common share and one-half of one common share purchase warrant at a cost of Cdn$0.75 until October 11, 2006, with each whole share purchase warrant exercisable at Cdn $1.20 until April 11, 2010.

Working Capital

As a result of closing on the Financing, the Company's working capital amounted to approximately $65.3 million as at March 31, 2006, compared to approximately $32.6 million as at December 31, 2005, a 100% increase. Management expects that working capital requirements to the end of 2006 will amount to approximately $80 million, comprised of capital expenditures of $75 million related to building the mine and $5 million for overhead and administrative costs. The Company expects that its 2006 expenditures will be met adequately with existing funds together with drawdowns under the Debt Facility.

As at March 31, 2006, the book value of resource assets, plant, machinery and equipment amounted to approximately $81.5 million (December 31, 2005 - $57.7 million) and relates to expenditures on the Project and the Company's net investment in its residual oil interests. The net increase over the previous quarter is due to development expenditures of $10.0 million on the Project together with machinery and equipment purchases of $2.4 million, construction costs for the processing plant of $12 million offset by a reduction of $0.6 million the Company received as deferred consideration in connection with the sale of its oil interests in 1999.

The Company currently estimates its overhead expenditures to be approximately $5 million for 2006. As a result of a review completed by SENET CC to reassess the design and cost of construction of the Varvarinskoye process plant and associated infrastructure, the capital expenditures to place the Project into production are, as previously announced, $145 million (including the purchase of the mining fleet), with approximately $75 million estimated to be spent in 2006. The funds required for these expenditures are available from funds previously raised, the 2006 Offering and the Debt Facility (if drawn down) and the Financing.

OVERVIEW OF OPERATIONS

Varvarinskoye Project

During the first quarter of 2006, the Company focussed all its efforts on the development and construction of the Project. Pre-stripping of overburden using the JSC Varvarinskoye mining fleet continues on schedule and within budget. Almost all the mining equipment necessary for the project is on site or in transit to site from the manufacturer's factories. The Company is confident that sufficient ore will be stockpiled to commence commissioning of the process plant in April 2007.

Civil engineering and concrete works were carried out in the process plant area. Stockpiling of clay mined from the overburden at Central Pit which will be utilised in the construction of the tailings dam walls also continued and construction of the dam will recommence when the weather improves sufficiently to allow compaction of the clay to the required specification. Construction of the tailings dam remains on programme. On completion of the dewatering ring main around the periphery of Central pit, dewatering of the overburden commenced. Via the main the water is channelled to the reservoir constructed to contain about 2 million cubic metres of water.

Construction of the 60km power line from Lisakovska to the mine was started and is expected to be completed on schedule in late 2006. The step down transformers ordered from Ukraine have been delivered and are expected to be ready for installation by July 2006.

The company continues to augment its Kazak and expatriate management team also recruiting additional operators as more of its equipment is placed into service. Currently the Company has approximately 140 employees working on the Project.

Documentation filed on SEDAR may be accessed on www.sedar.com.



Management's Discussion and Analysis

Of the Financial Condition and Results of Operations

For the First Quarter
and Three Months Ended March 31, 2006
(in US dollars)


DIRECTORS, MANAGEMENT & CORPORATE INFORMATION
---------------------------------------------

ANTHONY J. WILLIAMS, Chairman and Director

WILLIAM G. KENNEDY, President, Chief Executive Officer and Director

DR. BARRY D. RAYMENT, Director

MERFYN ROBERTS, Director

GRAHAM A. POTTS, Vice President Administration and Corporate Secretary

STEPHEN M. GLEDHILL, Chief Financial Officer

PRINCIPAL OFFICE
22 Grosvenor Square
London W1K 6LF
England
Telephone: +44 (0) 20 7529 7508
Facsimile: +44 (0) 20 7491 2244

REGISTERED OFFICE
Craigmuir Chambers
P.O. Box 71
Road Town, Tortola
British Virgin Islands

AUDITORS
PricewaterhouseCoopers LLP
Chartered Accountants
250 Howe Street, Suite 700
Vancouver, British Columbia V6C 3S7
Canada

TRANSFER AGENT AND REGISTRAR
Computershare Trust Company of Canada
100 University Avenue
Toronto Ontario M5J 2Y1
Canada

STOCK EXCHANGES
Toronto Stock Exchange
Alternative Investment Market of the London Stock Exchange

TRADING SYMBOLS
TSX: EPM (stock is quoted in Canadian Dollars)
AIM: EUM (stock is quoted in Pounds Sterling)

WEBSITE
www.europeanminerals.com

E-MAIL
enquiries@europeanminerals.com


This discussion and analysis ("MD&A") has been prepared based on information available to European Minerals Corporation ("EMC" or the "Company") as at May 12, 2006. This MD&A should be read in conjunction with the Company's consolidated financial statements and the related notes for the three months ended March 31, 2006 and in conjunction with the MD&A for the year ended December 31, 2005. The Company's consolidated financial statements and the related notes have been prepared in accordance with Canadian generally accepted accounting principles. All dollar amounts referred to in this MD&A are expressed in United States dollars, unless otherwise indicated.

MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING AND CONTROLS

The Consolidated Financial Statements of the Company for the three months ended March 31, 2006 have been prepared by management in accordance with Canadian generally accepted accounting principles and have been approved by the Company's board of directors (the "Board"). The integrity and objectivity of these Consolidated Financial Statements are the responsibility of management. In addition, management is responsible for ensuring that the information contained in this MD&A is consistent, where appropriate, with the information contained in the Consolidated Financial Statements.

In support of this responsibility, the Company's management maintains a system of internal accounting and administrative controls to provide reasonable assurance that the financial information is relevant, reliable and accurate and that the Company's assets are appropriately accounted for and adequately safeguarded. When alternative accounting methods exist, management has chosen those methods it deems most appropriate in the circumstances. The Consolidated Financial Statements may contain certain amounts based on estimates and judgements. Management has determined such amounts on a reasonable basis to ensure that the Consolidated Financial Statements are presented fairly in all material respects.

The Board is responsible for ensuring that management fulfils its responsibilities for financial reporting and internal control. The Board carries out this responsibility principally through its audit committee. The audit committee is appointed by the Board and has several financial experts who are not involved in the Company's daily operations. The audit committee meets periodically with management and the external auditor to discuss internal controls over the financial reporting process, auditing matters and financial reporting issues, to satisfy itself that each party is properly discharging its responsibilities and to review the Consolidated Financial Statements with the external auditors.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management, including the Company's Chief Executive Officer and Chief Financial Officer, on a timely basis so that appropriate decisions can be made regarding public disclosure. As at the end of the period covered by this MD&A, management of the Company, with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures as required by Canadian securities laws. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of the end of the period covered by this MD&A, the disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the Company's annual filings and interim filings (as such terms are defined under Multilateral Instrument 52-109- Certification of Disclosure in Issuers' Annual and Interim Filings of the Canadian Securities Administrators) and other reports filed or submitted under Canadian securities laws is recorded, processed, summarized and reported within the time periods specified by those laws and that material information is accumulated and communicated to management of the Company, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

OVERALL PERFORMANCE

As at March 31, 2006, the Company had assets of $192.7 million and a net equity position of $157.4 million. This compares with assets of $106.4 million and a net equity position of $92.6 million as at December 31, 2005 and assets of $17.3 million and a net equity position of $16.1 million as at March 31, 2005.

During the first quarter of 2006, assets increased by $86.3 million from $106.4 million at the previous year end, with the Company's unrestricted cash position increasing by $46.1 million to $55.6 million together with an increase in its restricted cash position of $5.5 million. Resource assets, machinery & equipment, buildings and assets under construction increased by $20.5 million to $80.3 million and deferred financing costs of grew by $2.3 million to $7.6 million. Increases of $12.5 million to receivables and other advances account for the remaining asset increases. On January 13, 2006, the final sales proceeds of $1.1 million were received by Lisburne Holdings Limited ("Lisburne"), a 55%-owned subsidiary of the Company, of which the Company's share was $605,000 leaving the Company with a remaining net investment in oil and gas residual interest of approximately $1.9 million.

EMC's cash flows for the period were comprised of its investing activities of $25.4 million (2005 - $0.2 million), offset by cash flow provided from operations of $8.5 million (2005 - $0.2 million) and by its financing activities of $62.9 million (2005 - $(0.8) million). Cash flow used for investment activities was supplemented with the net receipt of $0.6 million (2005 - $0.6 million) representing the final portion of the sales proceeds received in connection with the sale by Lisburne of the Tasbulat Oil Corporation in 1999, as at March 31, 2006.

For the three months ended March 31, 2006, the Company continued to post losses. Net loss for the period was $703,000. The loss included expenditures totaling $511,000, stock-based compensation of $263,000 offset by interest income of $71,000. This compares to a net loss of $687,000 and expenditures totalling $583,000, stock-based compensation expense of $130,000, offset by interest income of $26,000, for 2005.

OVERVIEW OF OPERATIONS

During the first quarter of 2006, the Company focussed all its efforts on the development and construction of the Project. Pre-stripping of overburden using the JSC Varvarinskoye mining fleet continues on schedule and within budget. Almost all the mining equipment necessary to operate the Project at its design capacity is on site or in transit to site from the manufacturer's factories. The Company is confident that sufficient ore will be stockpiled to commence commissioning of the process plant in April 2007.

Civil engineering and concrete works were carried out in the process plant area. Stockpiling of clay mined from the overburden at Central Pit which will be utilised in the construction of the tailings dam walls also continued and construction of the dam will recommence when the weather improves sufficiently to allow compaction of the clay to the required specification. Construction of the tailings dam remains on programme. On completion of the dewatering ring main around the periphery of Central pit, dewatering of the overburden commenced. Via the main the water is channelled to the reservoir constructed to contain about 2 million cubic metres of water.

Construction of the 61km power line from Lisakovska to the mine was started and is expected to be completed on schedule in late 2006. The step down transformers ordered from Ukraine have been delivered and are expected to be ready for installation by July 2006.

The company continues to augment its Kazak and expatriate management team also recruiting additional operators as more of its equipment is placed into service. Currently the Company has approximately 140 employees working on the Project.

Public financing

On March 21, 2006, the Company completed a public offering (the "2006 Offering") that consisted of approximately 67 million units at Cdn$1.05 ($0.90) each, raising gross proceeds of approximately $60.4 million. Pursuant to the exercise of the over-allotment option granted to the Canaccord Capital (the "Agent") in connection with the 2006 Offering, on March 24, 2006, the Company issued an additional 10.05 million units at Cdn$1.05 ($0.90) each, raising further gross proceeds of approximately $9 million. Each unit is comprised of one common share and one-half of one common share purchase warrant. Each whole common share purchase warrant entitles the holder to purchase one common share until March 21, 2011 at a price of Cdn$1.55 per share. Proceeds from the sales of the units have been allocated between share capital and share purchase warrants. Issue costs totalling $4.6 million and have been recorded as a reduction to the value of share capital and share purchase warrants.

Subsequent to March 31, 2006, 2,726,050 agent compensation units (Note 8(e)) were exercised raising proceeds of $2,044,538 and causing the issuance of 2,726,050 common shares and 1,363,025 share purchase warrants with each warrant exercisable into 1 common share for Cdn$1.20 each until September 21, 2007.

RESULTS OF OPERATIONS

Since the Company's most recently completed financial year, the Company has not generated any operating revenues and therefore losses have continued to incur throughout the Company's first quarter. In November 2004, the Company completed a Bankable Feasibility Study and commenced pre-stripping of the Project's deposit and is currently building the Project's processing plant. As such, the Company is considered to be in the development stage.

Three months ended March 31, 2006 compared to three months ended March 31, 2005

The Company's only source of income during the period was from interest on bank deposits which amounted to $71,000 compared to $26,000 over the same period in 2005.

The consolidated net loss for the 3-month period in 2006 amounted to $703,000 ($0.00 per share) compared to $687,000 ($0.01 per share) during the first quarter of 2005. The consolidated net loss was comprised primarily of legal and professional fees of $205,000 (2005 - $112,000), project costs written off of $53,000 (2005 - $100,000), stock-based compensation of $263,000 (2005 - $130,000) and administrative expenses of $291,000 (2005 - $232,000).

SUMMARY OF QUARTERLY RESULTS

The following summary of the Company's quarterly results has been prepared in accordance with Canadian GAAP.



-----------------------------------------------------------------------
Unaudited 2006 2005 2005 2005
-----------------------------------------------------------------------
1st Quarter 4th Quarter 3rd Quarter 2nd Quarter
$'000s $'000s $'000s $'000s
-----------------------------------------------------------------------
(as restated)
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Total Revenues 71 400 478 291
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Net loss before
discontinued
operations and
extraordinary items 703 1,079 460 2,401
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Net loss for the period 703 1,079 460 2,401
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-----------------------------------------------------------------------
Basic and diluted
loss per share $Nil $0.01 $Nil $0.01
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Total assets 192,678 106,353 97,215 97,825
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Total long-term debt - - - -
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Shareholders' equity 157,394 92,554 92,118 92,216
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Cash dividends
declared per share - - - -
-----------------------------------------------------------------------


-----------------------------------------------------------------------
Unaudited 2005 2004 2004 2004
1st Quarter 4th Quarter 3rd Quarter 2nd Quarter
$'000s $'000s $'000s $'000s
-----------------------------------------------------------------------

Total Revenues 26 27 33 36

Net loss before
discontinued
operations and
extraordinary items 687 760 649 500
-----------------------------------------------------------------------

Net loss for year 687 760 649 500
-----------------------------------------------------------------------

Basic and diluted
loss per share $0.01 $0.01 $0.01 $0.01
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Total assets 17,340 17,217 17,010 17,550

Total long-term debt - - - -

Shareholders' equity 16,111 16,668 16,648 17,297

Cash dividends
declared per share - - - -

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First quarter 2006 vs. fourth quarter 2005

The increase in the Shareholders' equity over the previous quarter is a result of the closing of the 2006 Offering.

Fourth quarter 2005 vs. third quarter 2005

The increase in the net loss is attributable to decreased interest income of $80,000 together with increased administration costs of $294,000 and development expenditures on projects not related to the Varvarinskoye project of $320,000.

Second quarter 2005 vs. first quarter 2005

The unusual increase in the net loss is largely attributable to foreign exchange losses as a result of the Company completing a financing in Canadian dollars and subsequently converting the funds to US dollars. As a further result of the completion of the financing, the Shareholders' equity has also increased.

LIQUIDITY AND CAPITAL RESOURCES

In management's view, the most meaningful information concerning the Company relates to its current liquidity and solvency since it is not currently generating any income from its mineral projects.

The Company raises capital for its operations through the issuance of securities of the Company, proceeds received from the exercise of options and share purchase warrants and the issuance of debt. Although the Company has been successful in the past in raising finance, there can be no assurance that any funding required by the Company in the future will be made available to it and, if such funding is available, that it will be offered on reasonable terms or that the Company will be able to secure such funding through third party financing or joint ventures. Furthermore there is no assurance that the Company will be able to secure new mineral properties or projects or that they can be secured on competitive terms.

As noted in the Company's annual MD&A, it has not been possible for the Company's subsidiary, JSC Varvarinskoye ("JSCV"), to make a drawdown under the debt facility (the "Debt Facility") the Company entered into in the amount of $75.4 million with Investec Bank (UK) Limited, Investec Bank Limited and Nedbank Limited (the "Lenders") to fund the debt portion of the construction of the Project, as a result of the termination of the lump sum turnkey contract that it had entered into with MDM Ferroman (Pty) Ltd., the Project's contractor. The Company continues with ongoing discussions with its Lenders regarding the Debt Facility and has recently received a further extension until August 1, 2006 to complete the first drawdown under the Debt Facility, a condition precedent of which is the replacement of the contractor.

During the three months ended March 31, 2006:

In addition to the completion of the 2006 Offering (see Overview of Operations - Public financing of this MD&A), a total of 100,000, 50,000 and 452,000 common shares were issued on the exercise of stock options, warrants and agent compensation units, respectively, raising aggregate proceeds of $378,000. Each agent compensation unit allowed the holder to acquire one common share and one-half of one common share purchase warrant at a cost of Cdn$0.75 until October 11, 2006, with each whole share purchase warrant exercisable at Cdn $1.20 until April 11, 2010.

In the first quarter of 2006, the Company entered into an agency agreement with the Agent. Under the terms of the agency agreement, the Agent was granted 3,852,500 compensation units ("Agent Options") upon the completion of the 2006 Offering. Each Agent Option entitles the holder to purchase one unit (an "Agent Unit") for Cdn$1.05 until September 21, 2007. Each Agent Unit consists of one common share and one-half of one common share purchase warrant (each whole common share purchase warrant, an "Agent Unit Warrant"). Each Agent Unit Warrant entitles the holder thereof to acquire one common share until March 21, 2011, at a price of Cdn$1.55. The Agent Options were valued using the Black-Scholes pricing model and have been applied as share issue costs.

Working Capital:

As a result of closing on the 2006 Offering, the Company's working capital amounted to approximately $65.3 million as at March 31, 2006, compared to approximately $32.6 million as at December 31, 2005, a 100% increase. Management expects that working capital requirements to the end of 2006 will amount to approximately $80 million, comprised of capital expenditures of $75 million related to building the mine and $5 million for overhead and administrative costs. The Company expects that its 2006 expenditures will be met adequately with existing funds together with drawdowns under the Debt Facility.

As at March 31, 2006, the book value of resource assets, plant, machinery and equipment amounted to approximately $81.5 million (December 31, 2005 - $57.7 million) and relates to expenditures on the Project and the Company's net investment in its residual oil interests. The net increase over the previous quarter is due to development expenditures of $10.0 million on the Project together with machinery and equipment purchases of $2.4 million, construction costs for the processing plant of $12 million offset by a reduction of $0.6 million the Company received as deferred consideration in connection with the sale of its oil interests in 1999.

The Company currently estimates its overhead expenditures to be approximately $5 million for 2006. As a result of a review completed by SENET CC to reassess the design and cost of construction of the Varvarinskoye process plant and associated infrastructure, the capital expenditures to place the Project into production are now estimated at $145 million (including the purchase of the mining fleet), with approximately $75 million estimated to be spent in 2006. The funds required for these expenditures are available from funds previously raised, the 2006 Offering and the Debt Facility (if drawn down) and the 2006 Offering.

TRANSACTIONS WITH RELATED PARTIES

During the first quarter of 2006 (first quarter of 2005), the Company entered into the following transactions involving related parties:

Dragon Management International Services Limited ("DIS") charged the Company a total of $21,000 (2005 - $58,000) in respect of the provision of office facilities, general office overheads and re-charged costs incurred on behalf of the Company. The provision of office facilities operates on a monthly basis. A. J. Williams, Chairman and a director of the Company, beneficially owns DIS.

Dragon Capital Holdings Limited ("DCH") charged the Company a total of $42,000 (2005 - $29,000) in respect of the provision of the services of A. J. Williams to act as Chairman. A. J. Williams, also a director of the Company, beneficially owns DCH. The term of this agreement is ongoing and may be terminated by the Company upon payment to DCH of a lump sum amount equal to 300% of the annual fee. DCH may terminate the agreement upon not less than three month's written notice to the Company.

Mining Assets Corp ("MAC") charged the Company a total of $16,000 (2005 - $16,000) in respect of the provision of the consulting services and related expenses of B. D. Rayment. B. D. Rayment, a director of the Company, beneficially owns MAC. The services of MAC are provided to the Company on an ad-hoc basis.

Sutton International Management Services Limited ("SIMS") charged the Company a total of $65,000 (2005 - $59,000) in respect of the provision of geological, mining, management and administration services as well as the services of W. G. Kennedy to act as President and Chief Executive Officer of the Company. W. G. Kennedy, also a director of the Company, beneficially owns SIMS. The term of this agreement is ongoing and may be terminated by the Company upon payment to SIMS of a lump sum amount equal to 300% of the annual fee. SIMS may terminate the agreement upon providing the Company not less than three months written notice.

Endeavour Financial Corp ("EFC") charged the Company a total of $30,000 (2005 - $Nil) in respect of the provision of consulting services and related expenses. A. J. Williams, Chairman and a director of the Company, is a director and shareholder of EFC. The term on this agreement is ongoing and may be terminated by either the Company or EFC upon giving thirty day's written notice to the other.

Keshill Consulting Associates Inc. ("KCA") charged the Company a total of $27,000 (2005 - $39,000) in respect of the provision of consulting services as well as the services of S. Gledhill to act as Chief Financial Officer of the Company. S. Gledhill beneficially owns KCA. The term of this agreement is ongoing and may be terminated by either KCA or the Company on 30 days written notice to the other.

CRITICAL ACCOUNTING ESTIMATES

Use of Estimates

The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amount of expenses during the reporting period. Actual results could differ from those estimates.

Carrying Value of Resource Assets

In preparing mineral reserve estimates, information is based partly on statistical inferences drawn from drilling and other data, which may prove to be unreliable. Future production estimates could vary materially from current estimates due to differences in actual mineralisation, compared to mineralisation estimated by sampling, variations in the grade of mineral reserves, as well as other factors that are beyond the control of the Company, for example, increases in mining, processing and reclamation costs and decreases in the market value of the end product. Significant estimates include assessments of the potential impairment of the carrying value of resource assets. Actual results could differ from those estimates.

Other factors for consideration with regard to the carrying value of the Company's Resource Assets may be found in the Company's 2005 Annual MD&A, such factors having not changed for the first quarter of 2006.

RISK FACTORS

The operations of the Company are speculative due to the high-risk nature of its business, which is the acquisition, financing, exploration and development of mining properties. The risks below are not the only ones facing the Company. Additional risks not currently known to the Company, or that the Company currently deems trivial, may also impair the Company's operations. If any of the following risks actually occur, the Company's business, financial condition and operating results could be adversely affected.

Risk factors regarding resources, reserves, production, the Debt Facility, use of financial derivatives and currency risks have been detailed in the Company's 2005 Annual MD&A. Such risks have not changed during the first quarter of 2006.

FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS

Fair values

At March 31, 2006 and 2005, the carrying values of cash and cash equivalents, accounts receivable and accounts payable and accrued liabilities reflected in the balance sheet approximate their fair values due to the short-term nature of those instruments.

Derivative financial instruments

As a condition of the Debt Facility, the Company has agreed to implement a gold hedging facility (the "Hedging Facility") for the period of the Debt Facility. On December 6, 2005, EMC implemented the Hedging Facility by entering into monthly US dollar flat forward gold sales (the "Varvarinskoye Hedge") over the 8 year term of the Debt Facility. The Company has sold 443,000 ounces of gold and has locked in a guaranteed price of $574.25 per ounce for the entire period. The Varvarinskoye Hedge is un-margined with deliveries of gold into the hedge scheduled to commence in the first quarter of 2007. The hedge represents approximately 50% of the production during the term of the Debt Facility, but only approximately 19% of the current proven and probable reserves of the gold calculated at $375/oz. Approximately 80% of the gold produced at the Project will be as dore at the mine site.

The Company has designated its Varvarinskoye Hedges as "normal sales contracts". Normal sales contracts include those contracts whose obligations will be met by physical delivery of a company's production and do not require the marking-to-market of the Hedging Facility at each reporting date. As a result, any gains or losses on these forward contracts are being recognised in gold revenue at the earlier of when the related designated production is sold or the contract is closed out not at each reporting period. Based on the March 31, 2006, London Precious Metals index closing spot price for gold ($584/oz), the value of the Company's hedge book as at March 31, 2006 is $32.7 million.

OTHER INFORMATION

Additional Information:

Additional information relating to the Company, including the Company's annual information form, may be accessed through SEDAR on the Internet at www.sedar.com.

Disclosure of Outstanding Share Data

The following table sets forth information concerning the outstanding securities of the Company as at May 12, 2006:



---------------------------------------------------------------------

Common shares of no par value ("Shares") Number in issue
---------------------------------------------------------------------

Shares 277,023,149

Share purchase options(1) 12,640,000

Share purchase warrants(1) 120,148,012

Agent compensation options(2) 7,006,473
---------------------------------------------------------------------


(1) Each share purchase warrant and share purchase option entitles the holder thereof to purchase one Share.

(2) Each agent compensation option entitles the holder to purchase one Share and receive one-half of one Share purchase warrant (each whole Share purchase warrant entitling the holder to purchase one Share).

EMC is authorised to issue 100 billion Shares.

Cautionary Note Regarding Forward-looking Information

This document contains or refers to forward-looking information. Such forward-looking information includes, among other things, statements regarding targets, estimates and/or assumptions in respect of future production, mine development costs, unit costs, capital costs, timing of commencement of operations, potential litigation and future economic, market and other conditions, and is based on current expectations that involve a number of business risks and uncertainties. Factors that could cause actual results to differ materially from any forward looking statement include, but are not limited to: the grade and recovery of ore which is mined varying from estimates; capital and operating costs varying significantly from estimates; inflation; changes in exchange rates; fluctuations in commodity prices; delays in the development of the Varvarinskoye Project caused by unavailability of equipment, labour or supplies, climatic conditions or otherwise; termination or revision of the Debt Facility; failure to raise additional funds required to finance the completion of the Varvarinskoye Project; uncertainty of outcome of any litigation and other factors. Forward-looking statements are subject to significant risks and uncertainties and other factors that could cause actual results to differ materially from expected results. Readers should not place undue reliance on forward-looking statements. These forward-looking statements are made as of the date hereof and we assume no responsibility to update them or revise them to reflect new events or circumstances, except as required by law.



Consolidated
Financial Statements
(Unaudited)

First Quarter and Three Months ended March 31, 2006
(In thousands of U.S. dollars)


EUROPEAN MINERALS CORPORATION
22 GROSVENOR SQUARE, LONDON W1K 6LF
ENGLAND
Tel: +44 (0) 20 7529 7508
Fax: +44 (0) 20 7491 2244


NOTICE OF NO AUDITOR REVIEW OF INTERIM FINANCIAL STATEMENTS

Under National Instrument 51-102, Part 4, subsection 4.3(3)(a), if an auditor has not performed a review of the interim financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor.

The accompanying unaudited interim financial statements of the Company have been prepared by and are the responsibility of the Company's management.

The Company's independent auditor has not performed a review of these financial statements in accordance with standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity's auditor.



European Minerals Corporation
Consolidated Balance Sheets (Unaudited)
As at March 31, 2006 and December 31, 2005
(In thousands of U.S. dollars)
------------------------------------------------------------------------
------------------------------------------------------------------------

2006 2005
------------------------------------------------------------------------

ASSETS

Current assets
Cash and cash equivalents (note 2) 55,578 9,474
Restricted cash (note 3) 29,929 24,435
Advances held by contractors bank (notes 1 and 4) 4,653 4,518
Accounts receivable and prepaid expenses (note 1) 12,664 324
-------------------
102,824 38,751

Net investment in oil and gas residual
interests (note 5) 1,939 2,544
Resource assets (notes 1and 6) 53,350 47,239
Machinery and equipment (notes 1 and 7) 14,812 12,381
Buildings and assets under construction
(notes 1 and 7) 12,105 128
Deferred financing costs 7,648 5,310
-------------------
192,678 106,353
-------------------
-------------------

LIABILITIES

Current liabilities
Accounts payable and accrued liabilities (note 9) 30,157 8,621
JSC Varvarinskoye purchase consideration (note 6(b)) 2,143 2,108
-------------------
32,300 10,729
-------------------
Future income taxes (note 10(a)) 2,600 2,600
Asset retirement obligations 384 470
-------------------
2,984 3,070
-------------------
35,284 13,799
-------------------

SHAREHOLDERS' EQUITY

Share capital (note 8(a)) 164,152 120,359
Share purchase options (note 8(d)) 2,356 2,285
Share purchase warrants (note 8(c)) 47,944 28,708
Share purchase units (note 8(e)) 5,325 3,141
Contributed surplus (note 8(b)) 445 186
Deficit (62,828) (62,125)
----------------------
157,394 92,554
----------------------
192,678 106,353
----------------------
----------------------

The accompanying notes are an integral part of these consolidated
financial statements.
These consolidated financial statements have been approved by the
Company's directors.



European Minerals Corporation
Consolidated Statements of Operations and Deficit (Unaudited)
For the three months ended March 31, 2006 and March 31, 2005
(In thousands of U.S. dollars except shares and per share amounts)
------------------------------------------------------------------------
------------------------------------------------------------------------
-----------------------------------
2006 2005
---------------------

Income
Interest 71 26

---------------------

71 26

---------------------

Expenses
Investor relations 48 90
Administration 291 232
Legal and professional fees 205 112
Stock-based compensation (note 8(f)) 263 130
Foreign exchange (gain)/loss (86) 49
Resource projects 53 100

---------------------

774 713

---------------------

Net loss for the period (703) (687)

Deficit at beginning of period (62,125) (57,498)
---------------------

Deficit at end of period (62,828) (58,185)
---------------------
---------------------

Basic and diluted loss per common share $(0.00) $(0.01)

---------------------

Weighted average number of shares ('000s) 205,718 57,902

---------------------

The accompanying notes are an integral part of these consolidated
financial statements.
These consolidated financial statements have been approved by the
Company's directors.



European Minerals Corporation
Consolidated Statements of Cash Flows (Unaudited)
For the three months ended March 31, 2006 and March 31, 2005
(In thousands of U.S. dollars)
------------------------------------------------------------------------
------------------------------------------------------------------------

2006 2005
--------------------
Cash provided from (used for)

Operating activities
Net loss for the period (703) (687)

Adjustments to reconcile net loss to cash
flow from operating:
Stock-based compensation 263 130
Unrealized foreign exchange (gains) / losses 135 -
Changes in non cash working capital:
(Increase)/decrease in accounts receivable
and prepaid expenses (12,611) 27
Increase/(decrease) in accounts payable and
accrued liabilities 21,431 680
--------------------

Cash flow provided from operating activities 8,515 150
--------------------

Investing activities
Development of Varvarinskoye project (6,055) (862)
Purchase of machinery and equipment (2,431) -
Construction of plant and buildings (11,977) -
Recovery of net investment in oil and gas residual 605 640
Change in restricted cash (5,496) -
--------------------

Cash flow used for investing activities (25,354) (222)
--------------------

Financing activities
Common shares issued 69,385 -
Issuance costs (4,483) -
Proceeds from exercise of stock options 49 -
Proceeds from exercise of warrants 36 -
Proceeds from exercise of units 293 -
Deferred financing costs (2,337) (819)
--------------------
Cash flow provided from (used for) financing
activities 62,943 (819)
--------------------

(Decrease)/increase in cash and cash equivalents 46,104 (891)

Cash and cash equivalents at beginning of period 9,474 8,099

--------------------

Cash and cash equivalents at end of the period 55,578 7,208

--------------------
--------------------

Cash and Cash Equivalents comprise:
Cash balances on deposit with bank 851 7,208
High-interest deposit accounts 54,727 -
--------------------

55,578 7,208

--------------------
--------------------

The accompanying notes are an integral part of these consolidated
financial statements.
These consolidated financial statements have been approved by the
Company's directors.



European Minerals Corporation
Notes to Consolidated Financial Statements (Unaudited)
For the three months ended March 31, 2006 and March 31, 2005
(In U.S. dollars)
------------------------------------------------------------------------
------------------------------------------------------------------------


1. Summary of Significant Accounting Policies

These interim consolidated financial statements for European Minerals Corporation ("EMC" or the "Company") follow the same accounting policies and their methods of application as the 2005 audited financial statements.

Not all disclosures required by generally accepted accounting principles for annual financial statements are present, and accordingly, these interim consolidated financial statements should be read in conjunction with the Company's 2005 audited consolidated financial statements.

Certain prior year amounts have been reclassified to conform to account presentation in the current year.

2. Cash and Cash Equivalents

Cash and cash equivalent balances include cash and short-term deposits with banks or other financial institutions which may or may not be held in high interest bearing accounts that have an original maturity date of 90 days or less.

3. Restricted cash

Restricted cash is comprised of $29.9 million of funds not available for general or other purposes. Approximately $9.9 million is required as collateral for letters of credit issued by the Company to pay for the mine fleet, the majority of which has now been delivered to the project site. The remaining restricted funds of $20 million are set aside and held in accounts by the Company's lenders as required under its debt and hedging facilities, both of which are, as yet, undrawn.

4. Measurement Uncertainty

The Company previously made advances under a lump sum turnkey contract ("LSTK") totalling approximately $4.7 million intended for payment to the Company's sub-contractor at the time, MDM Ferroman (Pty) Limited ("MDM"). Subsequent to making the advances, the Company has been informed that those amounts have been withheld by MDM's bankers. The Company believes that this is an act of expropriation and has received legal advice that supports EMC's belief that such amounts will be fully recoverable. However, there can be no assurance that the Company shall be successful in any legal actions it may take to recoup such advances from MDM's bankers, nor in the MDM liquidator's ability to repay such amounts that may be awarded under such action. At March 31, 2006, the Company has recorded a receivable of approximately $4.7 million for the amount it believes is recoverable from MDM's bankers along with a reciprocal liability in accounts payable representing the liability assumed by the Company for unpaid amounts due to MDM's sub-contractors.

5. Net investment in oil and gas residual interests



------------------------------------------------------------------------
2006 2005
------------------------------------------------------------------------
$000's $000's
------------------------------------------------------------------------
Net investment in oil and gas residual interests:
------------------------------------------------------------------------
Opening balance, January 1 2,544 3,184
------------------------------------------------------------------------
Sales proceeds (605) (640)
------------------------------------------------------------------------

------------------------------------------------------------------------
1,939 2,544
------------------------------------------------------------------------
------------------------------------------------------------------------


The remaining net investment in oil and gas residual interests is expected to be recovered from the Company's share of a 1% gross overriding royalty (based on gross sales proceeds less certain sales related costs and taxes) which is payable to Lisburne Holdings Limited, a 55%-owned subsidiary of the Company from all oil sales from interests in three oil fields in Kazakhstan exceeding 2.0 million barrels of oil equivalent.

6. Resource assets

Changes in resource assets for the 3 months ended March 31, 2006 and the year ended December 31, 2005 are detailed in the following table:



------------------------------------------------------------------------
2006 2005
------------------------------------------------------------------------
$000's $000's
------------------------------------------------------------------------
Varvarinskoye project
------------------------------------------------------------------------
Opening balance, January 1 47,239 4,786
------------------------------------------------------------------------
Development expenditures 6,055 32,302
------------------------------------------------------------------------
Capitalised expenses (a) 142
------------------------------------------------------------------------
Asset retirement obligation (86) 470
------------------------------------------------------------------------
Acquisition of 14% minority interest (b) - 9,681
------------------------------------------------------------------------
Closing balance 53,350 47,239
------------------------------------------------------------------------
------------------------------------------------------------------------

(a) Capitalised expenses include interest on the discounted remaining
purchase price from (see note (b)) above of $36 and stock-based
compensation of Project personnel of $106.
(b) The discounted value of the remaining purchase price balance of
$2.25 million was $2.14 million at March 31, 2006 and has been
recorded as a liability.


7. Machinery, equipment and buildings under construction

Changes for the 3 months ended March 31, 2006 and the year ended December 31, 2005 are detailed in the following table:



------------------------------------------------------------------------
2006 2005
------------------------------------------------------------------------
$000's $000's
------------------------------------------------------------------------

------------------------------------------------------------------------
Opening balance, January 1, net 12,509 -
------------------------------------------------------------------------
Additions for the period 14,408 12,509
------------------------------------------------------------------------
Closing balance, net 26,917 12,509
------------------------------------------------------------------------
------------------------------------------------------------------------


8. Share capital

a) Authorised

The Company is authorized to issue 100,000,000,000 common shares of no par value.



Issued
------------------------------------------------------------------------
2006 2006 2005 2005
------------------------------------------------------------------------
Number of Number of
Shares Amount Shares Amount
(000's) (000's) (000's) (000's)
------------------------------------------------------------------------

As at January 1 196,645 120,359 57,902 71,499
Common shares issued for cash 77,050 69,385 138,000 55,806
Issue costs of share issuance - (2,983) - (4,156)
Value of share purchase units
issued to advisors (note 8(e)) - (2,384) - (3,431)
Value of issued warrants (note 8(c)) - (20,771) - -
Common shares issued for
consulting services - - 100 49
Exercise of warrants 50 36 - -
Exercise of stock options 100 49 75 31
Exercise of agent compensation
units 452 294 568 367
Transfer of fair value of
stock-based compensation on
exercise of stock options,
warrants and units - 167 - 194
------------------------------------------------------------------------

Balance - End of Period 274,297 164,152 196,645 120,359

------------------------------------------------------------------------
------------------------------------------------------------------------


During the period ended March 31, 2006 and the year ended December 31, 2005, the Company made the following share, warrant and unit issues:

3 months ended March 31, 2006

On March 21, 2006, the Company completed an offering (the "2006 Offering") that consisted of approximately 67 million units at Cdn$1.05 ($0.90) each, raising gross proceeds of approximately $60 million. Pursuant to the exercise of the over-allotment option granted to the agents in connection with the 2006 Offering, on March 24, 2006, the Company issued an additional 10.05 million units at Cdn$1.05 ($0.90) each, raising further gross proceeds of approximately $9 million. Each unit is comprised of one common share and one-half of one common share purchase warrant. Each whole common share purchase warrant entitles the holder to purchase one common share until March 21, 2011 at a price of Cdn$1.55 per share. Proceeds from the sales of the units have been split between share capital and share purchase warrants. Issue costs totaled $4.6 million and have been recorded as a reduction to the value of share capital and share purchase warrants.

During the 3 months ended March 31, 2006, a total of 100,000, 50,000 and 452,000 common shares were issued on the exercise of stock options, warrants and agent compensation units, respectively (note 8). Each agent compensation unit allowed the holder to acquire one common share and one-half of one common share purchase warrant at a cost of Cdn$1.05 until September 21, 2007, with each whole share purchase warrant exercisable at Cdn $1.55 until March 21, 2011.

Year ended December 31, 2005

On April 11, 2005, the Company completed an offering (the "2005 Offering") which consisted of approximately 120 million units at Cdn$0.75 ($0.62) each and approximately 10 million units at Pounds Sterling 0.33 ($0.62) each, raising gross proceeds of approximately $80 million. Pursuant to the exercise of the over-allotment option granted to the agents in connection with the 2005 Offering, on April 26, 2005, the Company issued an additional 8 million units at Cdn$0.75 ($0.62) each, raising further gross proceeds of approximately $5 million. Each unit is comprised of one common share and one-half of one common share purchase warrant. Each whole common share purchase warrant entitles the holder to purchase one common share until April 11, 2010 at a price of Cdn$1.20 per share. Proceeds from the sales of the units have been split between share capital and share purchase warrants. Issue costs totalled $6.6 million and have been recorded as a reduction to the value of share capital and share purchase warrants.

During the year ended December 31, 2005, a total of 75,000 common shares were issued on the exercise of stock options (note 8(d)) and 567,949 common shares on the exercise of agent compensation options (note 8(e)). Each agent compensation option allowed the holder to acquire one common share and one-half of one common share purchase warrant exercisable at Cdn $1.20 ($0.99) until April 11, 2010.

The company also issued 100,000 common shares in payment of consulting fees totalling $49,000.

b) Contributed surplus

A summary of the changes in the Company's contributed surplus for the 3 months ended March 31, 2006 and the year ended December 31, 2005, is set out below:



------------------------------------------------------------------------
2006 2005
------------------------------------------------------------------------
Amount Amount
($000's) ($000's)
--------------------
At January 1 186 157
Transfer of fair value of expired/forfeit
Incentive stock options 259 29

------------------------------------------------------------------------

Balance - end of period 445 186
------------------------------------------------------------------------
------------------------------------------------------------------------


c) Share purchase warrants

A summary of the changes in the Company's share purchase warrants for the 3 months ended March 31, 2006 and the year ended December 31, 2005, is set out below:



------------------------------------------------------------------------
2006 2006 2006 2005 2005 2005
------------------------------------------------------------------------
Weighted Weighted
Warrants average Warrants average
Value out- exercise Value out- exercise
assigned standing price assigned standing price
($000) (000's) ($) ($000) (000's) ($)
------------------------------------------------------------------------
As at January 1 28,708 80,084 1.00 780 9,550 1.11
Exercised (25) (50) 0.72 - - -
Issued 20,771 38,525 1.33 30,381 71,284 0.99(1)
Issued on
exercise of Units 96 226 1.33 - - -
Expired - - - - (750) 0.85
Issue costs (1,606) - - - - -
------------------------------------------------------------------------
Balance -
end of period 47,944 118,785 1.11 28,708 80,084 1.00
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) Converted to $US. Actual exercise price is Cdn$1.20


A summary of the share purchase warrants outstanding and exercisable as at March 31, 2006 and December 31, 2005, is set out below:



------------------------------------------------------------------------
2006 2006 2006 2005 2005 2005
------------------------------------------------------------------------
Exercise Number Exercise Number
Price ($) Exp. Date (000's) Price ($) Exp. Date (000's)
------------------------------------------------------------------------
0.99(1) 11-Apr-10 69,284 0.99(1) 11-Apr-10 69,284
0.86(2) 30-Nov-10 2,000 0.86(2) 30-Nov-10 2,000
1.20 23-Dec-08 7,500 1.20 23-Dec-08 7,500
- - - 0.72 05-Oct-06 50
0.77(3) 30-Sep-09 1,250 0.77(3) 30-Sep-09 1,250
1.03(1) 11-Apr-10 174
1.03(1) 11-Apr-10 53
1.33(4) 21-Mar-11 38,525
-------- --------
Total 118,785 80,084
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) Converted to $US. Actual exercise price is Cdn$1.20.
(2) Converted to $US. Actual exercise price is Cdn$1.00.
(3) Converted to $US. Actual exercise price is Pounds Sterling 0.40.
(4) Converted to $US. Actual exercise price is Cdn$1.55.


The warrants issued in 2006 were comprised of 38.5 million issued together with the common shares of the 2006 Offering. In addition, 226,000 warrants were issued when 452,000 agent compensation units were exercised. These warrants have an exercise price of Cdn$1.55 and are exercisable until April 11, 2010.

In accordance with Canadian generally accepted accounting principles, the fair value of the warrants granted has been calculated using the Black-Scholes option pricing model.

A summary of the warrants issued in the period and the related Black-Scholes model assumptions used in their valuation is as outlined below:



------------------------------------------------------------------------
Warrants issued
upon exercise of
agent
Offering compensation
Warrants units Total
------------------------------------------------------------------------

------------------------------------------------------------------------
Number of warrants (000's) 38,525 226 38,751
------------------------------------------------------------------------

------------------------------------------------------------------------
Risk-free interest rate 4.0% 5.0%
------------------------------------------------------------------------
Expected dividend yield Nil Nil
------------------------------------------------------------------------
Expected stock price volatility 88.4% 112.9%
------------------------------------------------------------------------
Expected warrant life 5 years 5 years
------------------------------------------------------------------------

------------------------------------------------------------------------
Total value assigned ($000's) 20,771 96(1) 20,867
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) The total of $96,000 was transferred from the share purchase units
category within equity.


Pricing models require the input of highly subjective assumptions, including the expected price volatility. Changes in the subjective input assumptions can materially affect the fair value estimate and, therefore, the existing models do not necessarily provide a reliable single measure of the fair value of warrants granted by the Company.

d) Incentive stock options

The Company maintains an incentive stock option plan (the "Plan") covering directors, officers, employees and consultants of the Company and its subsidiary companies. The exercise price of an option is determined by the Board of Directors on the basis of the closing market price of the Company's shares on the trading day prior to the date of issue of the option. Options are granted for a period of three years and the Board of Directors determines the vesting provisions of each option granted, which may vary. The Plan provides that options may be granted for a maximum period of ten years and the aggregate number of shares which may be issued and sold under the Plan may not exceed 15,957,500 shares. As at March 31, 2006, a total of 9,510,000 options remained available for granting under the Plan.

A summary of the Company's stock options for the 3 months ended March 31, 2006 and the year ended December 31, 2005, is set out below:



------------------------------------------------------------------------
2006 2006 2006 2005 2005 2005
------------------------------------------------------------------------
Weighted Weighted
average average
Value Out- exercise Value Out- exercise
assigned standing price assigned standing price
($) (000's) ($) ($) (000's) ($)
------------------------------------------------------------------------
As at January 1 2,285 4,965 0.49 1,730 4,580 0.48
Exercised (39) (100) 0.49 (24) (75) 0.41
Issued 369 550 0.97 203 550 0.58
Extended(2) (208) - 0.76 405 - 0.46(1)
Expired - - - - - -
Forfeited (51) (100) 0.61 (29) (90) 0.41
------------------------------------------------------------------------
Balance - end of
period 2,356 5,315 0.54 2,285 4,965 0.49
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) Converted to $US. Actual exercise prices range between Cdn$0.71 and
Cdn$0.73.
(2) Options' expiry dates extended: 315,000@$0.76 until 23-Jan-09.


A summary of the stock options outstanding and exercisable as at March 31, 2006 and at December 31, 2005, is set out below:



------------------------------------------------------------------------
2006 2006 2006 2005 2005 2005
------------------------------------------------------------------------
Exercise Exercise
Price Expiry Number Price Expiry Number
$ Date (000's) $ Date (000's)
------------------------------------------------------------------------
0.37 16-May-08(8) 400 0.37 16-May-08(8) 400
0.50 05-Sep-08(9) 800 0.50 05-Sep-08(9) 835
0.76 23-Jan-09(7) 315 0.76 23-Jan-09(7) 330
0.41 30-Sep-06 350 0.41 01-Oct-06 400
0.425 16-Oct-06 2,250 0.425 16-Oct-06 2,250
0.86 02-Mar-07 200 0.86 02-Mar-07 200
0.61(1) 31-Aug-08 100 0.61(1) 31-Aug-08 100
0.58(2) 28-Jan-08 150 0.58(2) 28-Jan-08 150
0.75(3) 18-Jan-08 75 0.57(3) 05-Jan-08 100
0.84(3) 18-Jan-08 75 - - -
1.18(3) 18-Jan-08 75 - - -
1.48(3) 18-Jan-08 75 - - -
0.57(4) 11-Nov-08 200 0.57(4) 11-Nov-08 200
0.73(5) 16-Jan-09 150 - - -
1.06(6) 07-Feb-09 100 - - -
------- -------
5,315 4,965
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) Converted to $US. Actual exercise price is Cdn$0.72.
(2) Converted to $US. Actual exercise price is Cdn$0.73.
(3) Converted to $US. Actual exercise prices are Cdn$0.88, Cdn$1.16,
Cdn$1.39 and Cdn$1.74, respectively.
(4) Converted to $US. Actual exercise price is Cdn$0.68.
(5) Converted to $US. Actual exercise price is Cdn$0.85.
(6) Converted to $US. Actual exercise price is Cdn$1.22.
(7) Options' expiry dates extended until 23-Jan-09.
(8) Options' expiry dates extended until 16-May-08.
(9) Options' expiry dates extended until 05-Sep-08.


e) Agent compensation units

During the first quarter of 2006, the Company entered into an agency agreement with Canaccord Capital (the "Agent"). Under the terms of the agency agreement, the Agent was granted 3,852,500 compensation units ("Agent Options").

Each Agent Option entitles the holder to purchase one unit (an "Agent Unit") for Cdn$1.05 until September 21, 2007. Each Agent Unit consists of one common share and one-half of one common share purchase warrant (each whole common share purchase warrant, an "Agent Unit Warrant"). Each Agent Unit Warrant entitles the holder thereof to acquire one common share until March 21, 2011, at a price of Cdn$1.55. The Agent Options were valued using the Black-Scholes pricing model and have been applied as share issue costs.

In accordance with Canadian generally accepted accounting principles, the fair value of the units granted to advisors was calculated using the Black-Scholes option pricing model, resulting in a value of $2,383,500.

Significant assumptions used in the Black-Scholes model in determining the unit values are as follows:



------------------------------------------------------------------------
2006 2005
------------------------------------------------------------------------
Risk-free interest rate 4.0% 5.0%
------------------------------------------------------------------------
Expected dividend yield Nil Nil
------------------------------------------------------------------------
Expected stock price volatility 88.4% 92.9% - 112.9%
------------------------------------------------------------------------
Expected agent unit/warrant life 1.5 - 5 years 1.5 - 5 years
------------------------------------------------------------------------


Pricing models require the input of highly subjective assumptions, including the expected price volatility. Changes in the subjective input assumptions can materially affect the fair value estimate and, therefore, the existing models do not necessarily provide a reliable single measure of the fair value of units granted by the Company.

A summary of the changes in the Company's share purchase units for the 3 months ended March 31, 2005 and the year ended December 31, 2005, is set out below:



------------------------------------------------------------------------
2006 2006 2006 2005 2005 2005
------------------------------------------------------------------------
Weighted Weighted
Units average Units average
Value out- exercise Value Out- exercise
assigned standing price assigned standing price
($) (000's) ($) ($) (000's) ($)
------------------------------------------------------
As at January 1 3,141 6,332 0.64 - - -
Granted 2,384 3,853 0.90(2) 3,431 6,900 0.64(1)
Exercised (104) (452) 0.64(1) (290) (568) 0.64(1)
Exercised - value
transfer to
warrants (96) - - - - -
Expired - - - - - -
------------------------------------------------------------------------
Balance - end
of period 5,325 9,733 0.74 3,141 6,332 0.64
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) Converted to $US. Actual exercise price is Cdn$0.75 / Pounds
Sterling 0.33.
(2) Converted to $US. Actual exercise price is Cdn$1.05.


A summary of the share purchase units outstanding and exercisable as at March 31, 2006 and December 31, 2005, is set out below:



------------------------------------------------------------------------
2006 2006 2006 2005 2005 2005
------------------------------------------------------------------------
Exercise Number Exercise Number
Price ($) Exp. Date (000's) Price ($) Exp. Date (000's)
------------------------------------------------------------------------
0.64(1) 11-Oct-06 5,520 - 11-Oct-06 5,520
0.64(1) 11-Oct-06 344 - 11-Oct-06 690
0.64(1) 11-Oct-06 16 - 11-Oct-06 122
0.90(2) 21-Sep-07 3,853
------- -------
Total 9,733 6,332
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) Converted to $US. Actual exercise price is Cdn$0.75 / Pounds
Sterling 0.33.
(2) Converted to $US. Actual exercise price is Cdn$1.05.


f) Stock-based compensation

The fair value of stock options granted for the 3 months ended March 31, 2006 was $263,000 (same period in 2005 - $130,000) which was expensed in the statement of operations.

The fair value of stock options used to calculate compensation expense is estimated using the Black-Scholes option pricing model with the following assumptions:



------------------------------------------------------------------------
2006 2005
------------------------------------------------------------------------
Risk free interest rate 4.0% 5.0%
Expected dividend yield Nil Nil
Expected stock price volatility 88.4% 98.7% - 117.5%
Expected option life in years 3 3
------------------------------------------------------------------------


9. Related party transactions

These interim consolidated financial statements include balances and transactions with directors and officers of the Company and/or corporations related to them. All transactions have been recorded at the exchange amount which is the consideration established and agreed to between the related parties. Details are as follows:



------------------------------------------------------------------------
Amount
Transactions during the 3 months ended March 31, 2006: $(000)
---------
Legal fees 13
Administrative costs 209
---------
222
------------------------------------------------------------------------
------------------------------------------------------------------------

Related-party payables included in Accounts payable
and accrued liabilities 79

------------------------------------------------------------------------
------------------------------------------------------------------------


10. Income taxes

(a) Future income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. On acquisition of resource assets, the Company records a future tax liability and corresponding adjustment to the related asset carrying amount. The following table sets forth the tax effect of temporary differences that give rise to the deferred tax liability:



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2006 2005
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Statutory tax rate (Kazakhstan) 30% 30%

Difference between cost and tax basis of
acquisition of additional 14% interest in JSCV $ 7,250 $ 7,250

Future income taxes on acquisition of additional
interest $ 3,100 $ 3,100

Loss carry-forwards available to offset future
income taxes (500) (500)
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$ 2,600 $ 2,600
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(b) On April 8, 2005, EMC was continued from the Yukon Territory, Canada, to the British Virgin Islands (the "Continuance"). A corporation that ceases to be a resident of Canada for Canadian tax purposes may be liable to pay certain "departure" taxes under the Tax Act and applicable provincial or territorial legislation. Departure taxes would be payable in the event that the fair market value of the Company's property is greater than the cost of the property for purposes of the Tax Act or the fair value of the Company's property exceeds the total of the paid-up capital of the Company's shares and debts and other amounts owing to the Company. Although the Company has filed its final Canadian tax return, the final tax assessment on the matter remains outstanding. The Company believes that no such taxes are payable and no amounts have been provided for in these financial statements.

11. Segmented reporting

The Company has one operating segment, the exploration of natural resource properties. All capital assets of the Company are held in Kazakhstan. Short-term deposit interest, which is the Company's only regular source of income, is generally earned in the United Kingdom.

12. Financial instruments

As a condition of the Debt Facility, the Company has agreed to implement the Hedging Facility for the period of the Debt Facility. On December 6, 2005, EMC implemented the Hedging Facility by entering into monthly US dollar flat forward gold sales (the "Varvarinskoye Hedge") over the 8 year term of the Debt Facility. The Company has sold 443,000 ounces of gold and has locked in a guaranteed price of $574.25 per ounce for the entire period.

The Varvarinskoye Hedge is un-margined with deliveries of gold into the hedge scheduled to commence in the first quarter of 2007. The hedge represents approximately 50% of the estimated production during the term of the Debt Facility, but only approximately 19% of the current proven and probable reserves of gold calculated at $375/oz.

The Company has designated its Varvarinskoye Hedges as "normal sales contracts". Normal sales contracts include those contracts whose obligations permit physical delivery of a company's production.

As a result, any gains or losses on these forward contracts will be recognised in gold revenue at the earlier of when the related designated production is sold or the contract is closed out. Based on the March 31, 2006, London Precious Metals index closing spot price for gold ($584/oz), the value of the Hedging Facility as at March 31, 2006 is a negative $32.7 million.

13. Subsequent Events

During the period from April 1, 2006 until May 12, 2006, 2,726,050 Agent Compensation Units were exercised raising proceeds of $2,044,538 and causing the issuance of 2,726,050 common shares and 1,363,025 share purchase warrants with each share purchase warrant exercisable into 1 common share for Cdn$1.20 each until September 21, 2007.

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