European Goldfields Limited
TSX : EGU
AIM : EGU

European Goldfields Limited

March 29, 2006 08:00 ET

European Goldfields: Results for 2005; Commenced Production at Stratoni

WHITEHORSE, YUKON--(CCNMatthews - March 29, 2006) - European Goldfields Limited (TSX:EGU)(AIM:EGU) -

INAUGURAL GROSS PROFIT IN GREECE FOR Q4 2005

BUSINESS PLANS COMPLETED FOR OLYMPIAS & SKOURIES

CERTEJ PROJECT MOVING FORWARD

European Goldfields Limited (TSX:EGU)(AIM:EGU) ("European Goldfields" or the "Company") today reports its results for the financial year ended 31 December 2005. Highlights of the year are:

Greece:

- Commenced production at Stratoni in October 2005

- Hellas Gold awarded all environmental and mining permits for its Stratoni mine; plant commissioned in September 2005, underground mining commenced in late October, off-take agreements signed in November and first concentrates shipped in December

- Hellas Gold records inaugural gross profit for Q4 2005; first revenue booked in December 2005 from sale of Stratoni concentrates

- Work progressing on new Stratoni decline, leading to production ramp-up in 2007

- Business plans submitted to the Greek government in January 2006, the first major step in applying for permits to develop major projects of Skouries and Olympias

- Increased Stratoni reserve by 17%

Romania:

- In-house pre-feasibility study on Certej completed, confirming that a high-grade gold/silver concentrate can be produced at a gold recovery of greater than 87% from open-pit mining

- Letters of interest received for sale of Certej gold/silver concentrate

- Environmental Impact Assessments completed

- Promising exploration results on Certej satellites; joint venture signed for the exploration of a new mining concession in Romania at Magura Tebii

Corporate:

- Management team-building completed with appointments of Neil Hepworth as VP Operations and Jeff O'Leary as Non-executive Director

- Loss for 2005 down by almost 50% compared to 2004; US$34 million in cash assets and financial instruments at 31 December 2005; funded through 2007 until permits awarded for Olympias, Skouries and Certej

- Increased analyst coverage; broadened shareholder base and improved share liquidity; appointed Williams de Broe and RBC Capital Markets as brokers

Commenting on the results, David Reading, Chief Executive Officer of European Goldfields, said: "European Goldfields had a successful year in its evolution to a mid-tier producer by delivering on its promises in 2005: production from our base metal mine at Stratoni commenced in late October, cash flow has been secured through off-take agreements for the sale of concentrates produced at Stratoni, business plans were submitted to the Greek government for the development of the major gold and base metals projects of Skouries and Olympias, and the in-house pre-feasibility study on the Certej deposit in Romania was completed, demonstrating the viability of the project. These events have created the platform for European Goldfields to become one of Europe's most significant mining and development companies."

Stratoni underpins the value

The year 2005 was a busy one at the Stratoni mine. Refurbishment of existing underground, plant and port facilities was completed by mid year and by September all the necessary environmental and mining permits were received. The mill and flotation plant was successfully commissioned in the same month and by late October we were in the position to start underground mining operations.

During the two months to the end of December, the Stratoni plant processed over 16,000 tonnes of ore and a further 11,000 remained on the stockpile. In December, some 2,500 tonnes of concentrates grading 52% zinc was shipped and sold. The modest Stratoni figures represent a promising start as over ten working ends were opened up and the underground infrastructure was repaired and equipped in order to increase production. This preparatory work has facilitated a solid platform for production build-up, which saw us move from 300 tonnes per day (tpd) in December to 400 tpd in January and 500 tpd in March 2006. Furthermore, the plant was commissioned without any technical problems, and optimum recoveries of above 90% are now being achieved.

Good progress has also been made on the new decline, which is now 130 metres in, and through the bad ground associated with the footwall fault zone. The decline is not necessary for mining in 2006 but becomes critical for the future production ramp-up involving the deeper portions of the orebody as well as providing potential exploration upside. The ore production forecast for 2006 is 170,000 tonnes, which is expected to increase steadily thereafter up to a maximum of 400,000 tonnes per annum.

The Stratoni project underpins the value of the Company. Off-take agreements for the sale of concentrates have been signed and secure our sales until mid 2008. The Company negotiated very favourable terms which included some of the lowest treatment charges on record. This reflects the fact that Stratoni is the only new zinc and lead producer to come on stream in 2005 and coincides with a strong upturn in the prices of these metals.

The fourth-quarter results for our 65% Greek subsidiary, Hellas Gold, reflect this robustness with the announcement of an inaugural gross profit for the quarter.

In summary, Stratoni is a robust business with minimal capital investment due the extensive existing infrastructure and also has well-defined reserves over a six-year life. The project has exciting exploration upside as the orebody is open in all directions and the new decline is transgressing the zone between old, mined-out areas and the current reserve. All these areas will be the subject to new exploration drilling during the forthcoming year.

Permit process for gold projects commences with submission of business plans

In January 2006, Hellas Gold submitted business plans to the Greek government for the major gold and base metals projects of Skouries and Olympias, effectively starting the permitting process for these mines.

The emphasis is on a phased approach for capital and project development, with priority assigned to full production from the Skouries copper - gold project. At Olympias, the initial development is designed to utilise existing infrastructure and focus on the sale of concentrates with production ramp-up and building of a gold plant occurring in later years.

The phased strategy reflects cognizance of project history, a practical approach to project building and takes into account the concerns and issues of local stakeholders. The submission of these plans is a major milestone in the Company's history involving the collaboration of our Greek and London teams, as well as extensive input from external consultants.

Skouries is a robust project at copper prices of $1.06/lb and gold at $400/oz. The project has simple metallurgy and a low strip ratio, with open-pit mining followed by underground development. Skouries will produce some 750,000 tonnes of copper metal and 3.6 Moz of gold over a 20-year life. Skouries is located on an uninhabited, high plateau, but close to roads, power and water infrastructures. The latest paste production technology has been incorporated in the tailings management facility to minimise and control active waste areas. The Skouries project is well researched, and updating the bankable feasibility study will be straightforward and achievable during 2006. We believe that on receipt of the permits the project can be built in approximately 18 months.

Olympias has two distinct advantages: existing shaft and underground infrastructure down to a depth of 400 metres below surface, and stockpiles of gold concentrates (270,000 tonnes grading +20 g/t gold), which we intend to sell as soon as possible, some in 2006. The business plan is phased with underground production expected to commence at 250,000 tonnes per annum (tpa) and ramping-up to 900,000 tpa over eight years. The sale of surface stockpiles will generate early cash flow and the plan is to continue selling gold and base metal concentrates during the production ramp-up. In the final phase, a new decline will be used to convey ore to a plant complex involving concentrator, gold plant and tailings management facility that will be centralised in the Stratoni valley. The phasing of the project allows time for optimisation and development of the metallurgical process for the treatment of auriferous arsenopyrite/pyrite concentrates, as this is still in the research and development stage.

Submission of the business plans is a significant milestone in the Company's development as it effectively engages the Greek government and the local communities in our development plans for the projects, and starts the clock on countdown to receiving the necessary permits to commence mining.

Turning the corner in Romania

In 2005, the Romanian exploration and feasibility team took great steps towards project development by understanding the grade, mining potential and metallurgy of our Certej gold project. A promising in-house pre-feasibility study was completed showing that Certej could produce a viable return at a gold price of $425/oz and above by way of open-pit mining and production of high-grade concentrates, which could be sold commercially or oxidised on site to produce gold dore.

With this study, the project has now turned the corner. We are now completing a final feasibility study for submission to the Romanian government in support of our permit application. We have completed final pit optimisation studies based on new geotechnical drilling and levels I and II of the Environmental Impact Assessment have been completed. We have also received letters of interest from metal traders for the Certej concentrate, which will enable us to file for project reserves in Q2 2006.

On the exploration front, our teams continue to evaluate satellite targets surrounding Certej, and encouraging results to date suggest we can probably supply additional gold ounces to the Certej project. The Company has also entered into a JV agreement with a local Romanian company to drill-test the Magura Tebii prospect, an attractive exploration target located 35 km north-west of Certej.

European Goldfields: a mining and development company

Many of our longstanding shareholders have remarked that European Goldfields is a very different company from the one that they knew over two years ago. This statement is endorsed by the instalment of new management and technical teams, our project pipeline, the commencement of production and revenue-generation, our strong cash position and reduction in expenditure, and finally the broadening of our shareholder base and improvement in share liquidity during the second half of 2006. All these events have transformed the Company into a mining and development group that is on track to become a mid-tier producer by the end of 2008.

In addition to Hellas Gold's inaugural gross profit for Q4 2005, we are also pleased to report that European Goldfields' loss for 2005 was down by almost 50% compared to 2004, reflecting the Company's increasing control over costs and better management of assets. The Company also had US$34 million in cash assets and financial instruments at 31 December 2005, which is expected to provide funding through 2007, covering the permitting process for Olympias, Skouries and Certej.

2006 and beyond: a new commodity cycle

The forthcoming year is a very important one for European Goldfields.

Our production team in Greece is focused on mining and processing 170,000 tons of ore from Stratoni and completing the new decline. Subsequent to submission of the business plans for the major gold and base metal projects of Skouries and Olympias, we are now in the permitting process and currently preparing our Environmental Impact Assessment. In parallel with this work, we will be updating the Skouries feasibility study and completing our final mining studies for Olympias. Our view on permitting is that we have successfully completed this process once for Stratoni, and will be dealing with all of the same government and local stakeholders again for the Skouries and Olympias projects.

In Romania, considerable progress has been made in the completion of the pit optimisation and metallurgical studies in order to file for reserves. Work continues on the forthcoming submission of a final feasibility study to the government so that we can begin the permitting process on the Certej project.

The Company's project pipeline gives many value-creating opportunities within the current commodity cycle. These include the ability to sell our stockpile of gold concentrates at Olympias (270,000 tonnes grading +20 g/t gold) and the opportunity to immediately monetise a portion of our Stratoni silver reserve. We are currently aggressively pursuing these opportunities in order to give ourselves flexibility in the financing of the Skouries and Olympias projects.

In 2006, we will also initiate a focused exploration programme at Stratoni to define further resources within ore-bearing marble horizons between the two known deposits and around the peripheries of the existing reserves. In addition to this, we have also initiated a generative study to outline targets for follow-up exploration. This work will form a solid platform for brown field exploration for further major Olympias and Skouries-style deposits in 2007 within our 317 km2 of highly prospective permits in northern Greece.

In summary, the Company now has a clear strategic direction with a management team capable of delivering on our promises. It is a great time to be a silver, zinc and lead producer and the revenue-generation provides a strong platform for further project development. European Goldfields is now well on the way to achieving its mission statement and becoming a mid-tier, gold and base metals producer within South-East Europe by the end of 2008.

Resources & reserves parameters

For additional information on the resource and reserve estimates quoted in this news release, please refer to the Company's Resources & Reserves Declaration at www.egoldfields.com/goldfields/resources.jsp. Patrick Forward, General Manager, Exploration of the Company, was the Qualified Person under Canadian National Instrument 43-101 responsible for reviewing the disclosure of resource and reserve estimates quoted in this news release.

Forward-looking statements

Certain information included in this news release, 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 statements". The words "expect", "will", "intend", "estimate" and similar expressions identify forward-looking statements. 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 worldwide price of gold, base metals or certain other commodities (such as fuel and electricity) and currencies; 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 reserves; and the risks normally involved in the exploration, development and mining business. These factors are discussed in greater detail in the Company's Annual Information Form for the year ended 31 December 2005, filed on SEDAR at www.sedar.com. The Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED 31 DECEMBER 2005

The following discussion and analysis, prepared as at 29 March 2006, is intended to assist in the understanding and assessment of the trends and significant changes in the results of operations and financial conditions of European Goldfields Limited (the "Company"). Historical results may not indicate future performance. Forward-looking statements are subject to a variety of factors that could cause actual results to differ materially from those contemplated by these statements. The following discussion and analysis should be read in conjunction with the Company's audited consolidated financial statements for the years ended 31 December 2005 and 2004 and accompanying notes (the "Consolidated Financial Statements").

Additional information relating to the Company, including the Company's Annual Information Form, is available on the Canadian System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com.

Except as otherwise noted, all dollar amounts in the following discussion and analysis and the Consolidated Financial Statements are stated in United States dollars.

Overview

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

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

Greece - The Company holds a 65% interest in Hellas Gold S.A. ("Hellas Gold"). Hellas Gold owns assets in northern Greece which consist of three deposits within 70-year mining concessions covering a total area of 317 km2. The deposits include the polymetallic projects of Stratoni and Olympias which contain gold, lead, zinc and silver, and the copper/gold porphyry body referred to as Skouries. All three deposits have been well defined with over 200,000 metres of drilling and the completion of feasibility studies and later engineering studies.

The total proven and probable reserves of these assets are 7.6 Moz gold, 65.8 Moz silver, 0.7 Mt copper, 0.7 Mt lead and 0.9 Mt zinc, from a measured and indicated resource base of 9.4 Moz gold, 74.5 Moz silver, 1.0 Mt copper, 0.8 Mt lead and 1.1 Mt zinc (65% attributable).

These assets represent some of the largest defined deposits in Europe. The three deposits are located within a 10 km radius of each other, making this effectively a gold and base metals centre. Furthermore, both Stratoni and Olympias were previously in production and have extensive existing mining and plant infrastructure and a ship-loading facility on the Aegean Sea.

Hellas Gold's assets also include potential revenue-generating stockpiles of gold concentrates.

In September 2005, Hellas Gold resumed production at Stratoni following the award by the Greek State of all necessary environmental and mining permits. Hellas Gold is in the process of applying for similar permits for Olympias and Skouries, having met its first milestone by submitting business plans to the Greek government in January 2006.

Romania - The Company holds five mineral properties located within the "Golden Quadrilateral" area of Romania, where it has recently completed an in-house pre-feasibility study underpinning the value of its 80%-owned Certej deposit. The Certej deposit hosts measured and indicated resources of 31.4 Mt grading 2.1 g/t gold and 11 g/t silver for 2.2 Moz gold and 11.0 Moz silver (80% attributable).

Results of operations

The Company's results of operations for the year and three-month period ended 31 December 2005 were comprised primarily of activities related to the results of operations of the Company's 65%-owned subsidiary Hellas Gold in Greece and the Company's regional exploration programs in Romania. The Company currently incurs losses and until significant revenues are generated, the Company will continue to do so.

In September 2005, Hellas Gold commenced production at its Stratoni mine in Greece. The following table summarises operational results at Stratoni for the three-month period ended 31 December 2005.



---------------------------------------------------------------------
Stratoni Mine (Greece)
---------------------------------------------------------------------
Three-month period ended
31 December 2005
---------------------------------------------------------------------
Production
Start of period inventory of ore mined (tonnes) 13,188
Ore mined (tonnes) 13,800

Ore processed (tonnes) 16,025
- Average grade: Zinc (%) 7.80
Lead (%) 7.10
Silver (g/t) 182

Zinc concentrate (tonnes) 2,385
- Containing: Zinc (tonnes) 1,254

Lead concentrate (tonnes) 1,268
- Containing: Lead (tonnes) 907
Silver (kg) 2,284

End of period inventory of ore mined (tonnes) 10,963

Sales
Zinc concentrate (tonnes) 2,290
- Containing: Zinc (tonnes)(i) 1,009

Lead concentrate (tonnes) Nil
- Containing: Lead (tonnes)(i) Nil
Silver (kg)(i) Nil
---------------------------------------------------------------------
(i) Net of smelter deductions

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

---------------------------------------------------------------------
2005 2005 2005 2005
(in thousands of US dollars, Q4 Q3 Q2 Q1
except per share amounts) $ $ $ $
---------------------------------------------------------------------
Statement of loss and deficit
Sales 1,464 - 57 -
Cost of sales 1,367 - - -
Gross profit 97 - 57 -
Interest income 339 272 326 326
Expenses 5,079 3,536 2,287 3,831
Loss 4,309 2,726 723 2,652
Loss per share 0.04 0.02 0.01 0.02
Balance sheet
Working capital 33,765 39,171 49,544 57,285
Total assets 266,618 295,914 298,948 300,689
Non current liabilities 62,807 70,053 71,056 71,179
Statement of cash flows
Deferred exploration and
development costs - Romania 1,081 1,067 893 860
Plant and equipment - Greece 1,298 2,506 2,453 1,582
Deferred development costs
- Greece 1,510 439 891 -
---------------------------------------------------------------------



---------------------------------------------------------------------
2004 2004 2004 2004
(in thousands of US dollars, Q4 Q3 Q2 Q1
except per share amounts) $ $ $ $
---------------------------------------------------------------------
Statement of loss and deficit
Sales - - - -
Cost of sales - - - -
Gross profit - - - -
Interest income 279 143 60 18
Expenses 9,225 2,854 2,848 5,042
Loss 8,134 2,190 3,580 5,279
Loss per share 0.17 0.05 0.09 0.18
Balance sheet
Working capital 63,480 29,045 31,117 14,413
Total assets 305,541 86,879 83,517 67,875
Non current liabilities 72,103 - - -
Statement of cash flows
Deferred exploration and
development costs - Romania 2,462 1,172 943 1,394
Plant and equipment - Greece - - - -
Deferred development costs
- Greece - - - -
---------------------------------------------------------------------


The Company's results of operations for the years ended 31 December 2005, 2004 and 2003, and the three-month periods ended 31 December 2005 and 2004 are summarised in the following table:



Years ended 31 December Three-month periods
ended 31 December
-----------------------------------------------
(in thousands of 2005 2004 2003 2005 2004
US dollars) $ $ $ $ $
---------------------------------------------------------------------
Statement of loss
and deficit
Sales 1,521 - - 1,464 -
Cost of sales 1,367 - - 1,367 -
Gross profit 154 - - 97 -
Interest Income 1,263 500 170 339 279
Expenses 14,733 19,969 2,627 5,079 9,224
Loss 10,410 19,183 2,457 4,309 8,134
Loss per share 0.09 0.39 0.11 0.04 0.17
Balance sheet
Working capital 33,765 63,480 5,058 33,765 63,480
Total assets 266,618 305,541 45,943 266,618 305,541
Non current
liabilities 62,807 72,103 - 62,807 72,103
Statement of
cash flows
Deferred
exploration
and development
costs - Romania 3,901 5,971 4,257 1,081 2,462
Plant and equipment
- Greece 7,839 - - 1,298 -
Deferred development
costs - Greece 2,840 - - 1,510 -
---------------------------------------------------------------------


The breakdown of deferred exploration and development costs per mineral property for the years ended 31 December 2005, 2004 and 2003, and the three-month periods ended 31 December 2005 and 2004 is as follows:



Years ended 31 December
-----------------------------------------------
(in thousands of 2005 2004 2003
US dollars) $ $ $
---------------------------------------------------------------------
Romanian mineral
properties
Certej 2,380 (61%) 4,516 (76%) 2,251 (53%)
Cainel 1,014 (26%) - (-%) - (-%)
Zlatna - (-%) 530 (9%) 985 (23%)
Voia 78 (2%) 182 (3%) 158 (4%)
Baita-Craciunesti 390 (10%) 553 (9%) 721 (17%)
Bolcana 39 (1%) 190 (3%) 142 (3%)
---------------------------------------------------------------------
3,901 (100%) 5,971 (100%) 4,257 (100%)
---------------------------------------------------------------------
Greek mineral
properties
Stratoni 421 (14%) 11,376 (6%) -
Skouries 687 (23%) 110,914 (57%) -
Olympias 1,939 (63%) 73,517 (37%) -
---------------------------------------------------------------------
3,047 (100%) 195,807 (100%) - (-%)
---------------------------------------------------------------------
Total 6,948 (100%) 201,778 (100%) 4,257 (100%)
---------------------------------------------------------------------


Three-month periods ended 31 December
-----------------------------------------------
(in thousands of 2005 2004
US dollars) $ $
---------------------------------------------------------------------
Romanian mineral
properties
Certej 724 (67%) 1,799 (73%)
Cainel 205 (19%) - (-%)
Zlatna - (-%) 266 (11%)
Voia 11 (1%) 74 (3%)
Baita-Craciunesti 130 (12%) 157 (6%)
Bolcana 11 (1%) 166 (7%)
---------------------------------------------------------------------
1,081 (100%) 2,462 (100%)
---------------------------------------------------------------------
Greek mineral
properties
Stratoni 11 (1%) 11,376 (6%)
Skouries 118 (7%) 110,914 (57%)
Olympias 1,588 (92%) 73,517 (37%)
---------------------------------------------------------------------
1,717 (100%) 195,807 (100%)
---------------------------------------------------------------------
Total 2,798 (100%) 198,270 (100%)
---------------------------------------------------------------------


The Company incurred a loss of $10.41 million ($0.09 per share) for the year ended 31 December 2005, compared to $19.18 million ($0.39 per share) for 2004. The Company incurred a loss of $4.31 million ($0.04 per share) for the three-month period ended 31 December 2005, compared to $8.13 million
($0.17 per share) for the same period of 2004.

The following factors have contributed to this large reduction in loss for the year and three-month period ended 31 December 2005, compared to the same periods of 2004:

- Hellas Gold commenced production at its Stratoni mine in September 2005. As a result, the Company recorded $0.15 million in gross profit on revenues of $1.52 million in 2005 and $1.46 million in Q4 2005 for the sale of concentrates by Hellas Gold, compared to $Nil for the same periods of 2004. Cost of sales of $1.37 million included non-recurring costs relating to the start-up of operations at Stratoni, fixed costs disproportionate to production output in a ramp-up phase, and $0.20 million in amortisation and depletion expenses.

- The Company's interest income has increased to $1.26 million in 2005 and $0.34 million in Q4 2005, from $0.50 million and $0.23 million, respectively, for the same periods of 2004, primarily as a result of the Company holding significantly higher cash balances during 2005 following the completion of private placements during 2004.

- On 9 February 2004, the Company acquired an initial 37.97% interest in Hellas Gold. From 9 February 2004 to 30 November 2004, the Company's interest in Hellas Gold was accounted for as an equity investment. On 30 November 2004, the Company completed the acquisition of additional shares in Hellas Gold, increasing its total interest from 37.97% to 55.70% (65% on a fully-diluted basis). The acquisition was accounted for as a purchase and the operating expenses of Hellas Gold were included in the consolidated statements of loss and deficit from 30 November 2004, the effective date of the acquisition.

In 2005, Hellas Gold's administrative and overhead expenses amounted to $2.11 million, compared to the Company's share of loss in equity investment of $0.73 million from 9 February to 30 November 2004 and Hellas Gold's administrative and overhead expenses of $0.30 million for the remainder of 2004. Hellas Gold's administrative and overhead expenses in 2005 and 2004 are mostly attributable to the various costs involved in preparing the commencement of production at Stratoni in September 2005, and preparing studies and business plans for Hellas Gold's projects of Skouries and Olympias.

In 2005, Hellas Gold incurred an expense of $3.85 million, compared to $1.47 million from 30 November to 31 December 2004, for ongoing water pumping and treatment at its non-operating mines of Olympias and Stratoni (Madem Lakkos) (including non-recurring costs in 2005 of approximately $2.0 million associated with the refurbishment of pumps and pipes), in compliance with Hellas Gold's commitment to the environment under its contract with the Greek State.

- The Company's corporate administrative and overhead expenses have decreased significantly from $6.25 million in 2004 and $1.95 million in Q4 2004, to $3.15 million and $1.06 million, respectively, for the same periods of 2005, primarily as a result of the Company's newly adopted practice of recharging costs and overheads to its operating subsidiaries in 2005, a portion of which is capitalised by such subsidiaries.

- Effective 31 December 2005, the Company relinquished its 80%-owned exploitation license for the Bolcana perimeter in Romania and an impairment cost of $2.36 million was recorded for the year and three-month period ended 31 December 2005, compared to a greater impairment cost of $4.81 million for the same periods of 2004 relating to the relinquishment of the Zlatna perimeter in Romania effective 31 December 2004.

- The Company recorded a non-cash equity-based compensation expense of $1.82 million in 2005 and $1.06 million in Q4 2005, compared to $6.42 million and $1.88 million, respectively, for the same periods of 2004. This decrease in 2005 reflects the fact that fewer share options and shares were granted as compensation in that period compared to the same periods of 2004, and that the cost of share options granted in 2005 has been amortised according to the vesting periods of such share options, in contrast with the share options granted in 2004 which, for the most part, vested immediately upon grant. Also, in 2005, the Company adopted a practice of recharging some of its equity-based compensation expense to its operating subsidiaries, a portion of which is capitalised by such subsidiaries.

- Effective 1 October 2004, the Company changed its functional currency from the Canadian dollar to the United States dollar. Despite this, during 2005, the Company retained significant cash balances in Euro in order to meet a Euro subscription obligation in Hellas Gold in Q1 2005. Hellas Gold also retained significant cash balances in Euro in order to meet operating, administrative and overhead expenses. Consequently, the Company recorded a foreign exchange loss of $0.94 million and $0.04 million in 2005 and Q4 2005, respectively. The loss resulted primarily from a strengthening of the United States dollar against the Euro as at 31 December 2005 compared to 31 December 2004. In contrast, the Company had realised a foreign exchange gain of $0.51 million and $1.27 million in 2004 and Q4 2004, respectively.

- The Company's amortisation expense has increased to $0.24 million in 2005 from $0.09 million in 2004, primarily as a result of the Company acquiring significant assets through the acquisition of a 65% interest in Hellas Gold in November 2004.

- In December 2003, the Company raised $15.09 million by way of a brokered private placement of convertible loan notes, for which the Company recorded a non-cash expense for financing costs of $1.12 million in 2004 and $Nil in Q4 2004, compared to $Nil for the same periods of 2005.

- The Company recorded a credit for income taxes of $1.70 million in 2005 and $0.39 million in Q4 2005, compared to a lesser credit of $0.48 million and $0.53 million, respectively, for the same periods of 2004. The credits have arisen due to the Company recognising a future tax asset for the losses carried forward in Hellas Gold. The credits for 2005 have increased compared to 2004 due to the increase in losses in Hellas Gold.

Liquidity and capital resources

As at 31 December 2005, the Company had cash and cash equivalents of $30.54 million, compared to $65.25 million as at 31 December 2004, and working capital of $33.77 million, compared to $63.48 million as at 31 December 2004.

The decrease in cash and cash equivalents as at 31 December 2005, compared to the balances as at 31 December 2004, resulted primarily from operating losses ($8.21 million), capital expenditure in Greece ($7.84 million), the effects of foreign currency translation on cash ($4.86 million), deferred exploration and development costs in Romania ($3.90 million), funds pledged as collateral to guarantee environmental commitments at Stratoni ($3.54 million), a net increase in accounts receivable vs. accounts payable ($3.14 million), deferred development costs in Greece ($2.84 million), an increase in inventory ($1.63 million), purchase of equipment ($0.22 million) and capital raising costs ($0.01 million), offset by interest earned ($1.26 million) and the exercise of options ($0.17 million).

In September 2005, Hellas Gold pledged $3.54 million (EUR 3.00 million) to the National Bank of Greece as collateral for a Letter of Guarantee issued by the National Bank of Greece to the Greek Ministry of Development to guarantee Hellas Gold's environmental commitments under its mining permit at Stratoni. The Letter of Guarantee expires on 31 December 2010. The investment bears a rate of interest of Euribor plus 0.8% per annum.

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



(in thousands of US dollars) Payments due by period
---------------------------------------------------------------------
Total Less than 1 - 3 4 - 5 After
Contractual obligations 1 year years years 5 years
---------------------------------------------------------------------
Operating lease
(London office) 933 187 373 373 -
Exploration licence
spending commitments
(Voia, Romania) 1,459 - 1,459 - -
---------------------------------------------------------------------
Total contractual
obligations 2,392 187 1,832 373 -
---------------------------------------------------------------------


In 2006, the Company expects to spend (i) $12.80 million in capital expenditures to fund the development of its projects of Stratoni ($11.05 million), Olympias ($1.75 million), Skouries ($Nil) and Certej ($Nil), (ii) $6.63 million in exploration and development costs for Greece ($4.05 million) and Romania ($2.58 million), and (iii) $3.39 million on corporate administrative and overhead expenses. The Company expects to fund such costs from existing cash balances and operating cash flow generated at Stratoni.

Transactions with related parties

During the financial year ended 31 December 2005, Hellas Gold incurred costs of $9.66 million (2004 - $3.65 million) for management, technical and engineering services received from a related party, Aktor S.A., a 35% shareholder in Hellas Gold. As at 31 December 2005, Hellas Gold had accounts payable of $1.47 million (2004 - $1.37 million) 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.

Significant acquisition in 2004

In February 2004, the Company acquired an initial 37.97% interest (30% on a fully-diluted basis) in Hellas Gold for a total subscription price of EUR 18 million ($24.06 million) in cash.

In November 2004, the Company completed the acquisition of additional shares in Hellas Gold (the "Purchased Shares"), increasing its total interest from 37.97% to 55.70%, and assumed an obligation to subscribe to additional shares in Hellas Gold for a subscription price of $23.48 million (the "Subscription Obligation"), resulting in an interest of 65% on a fully-diluted basis (the "Acquisition"). The total price paid by the Company for the Purchased Shares and for the assumption of the Subscription Obligation was
$125.35 million, satisfied as follows:

(a) $77.43 million by the issue in November 2004 of 30,423,280 common shares to the vendors at a deemed issue price of Pounds Sterling 1.75 (C$3.98) per share. This was accounted for at a price per share of Pounds Sterling 1.38 (C$3.14), representing the then fair market value of such shares; and

(b) $47.92 million paid in cash to the vendors in December 2004.

Transaction costs of $3.99 million were also accounted for as part of the Acquisition.

In January 2005, the Company satisfied the Subscription Obligation for a subscription price of $23.48 million.

The Acquisition was accounted for as a purchase and the results of operations of Hellas Gold were included in the consolidated statements of loss and deficit from 30 November 2004, the effective date of the Acquisition. From 9 February 2004 to 30 November 2004, the Company's initial 37.97% interest (30% on a fully-diluted basis) in Hellas Gold was accounted for as an equity investment and the Company's share of loss in Hellas Gold was included in the consolidated statements of loss and deficit.

Change in functional and reporting currency

Effective 1 October 2004, the Company changed its functional currency from the Canadian dollar to the United States dollar. In general, this change resulted from a combination of a gradual increase in the operational exposure to the United States dollar and predominantly United States dollar based asset and investment base of the Company and from a gradual increase in the overall proportion of business activities conducted in United States dollars. Concurrent with this change in functional currency, the Company adopted the United States dollar as its reporting currency. In accordance with accounting principles generally accepted in Canada ("Canadian GAAP"), the change was effected by translating all assets and liabilities, at the end of the prior reporting periods, at the existing United States/Canadian dollar foreign exchange spot rate, while income for those periods were translated at the average rate for each period. Equity transactions have been translated at the historical rates, with opening equity on 30 June 2000, restated at the rate of exchange on that date. The resulting net translation adjustment has been credited to the cumulative translation adjustment account in the equity section of the balance sheet.

Significant accounting policies

In this document, unless otherwise indicated, all financial data and discussion is based upon consolidated financial statements prepared on the going concern basis in accordance with Canadian GAAP and reflect the following significant accountant policies.

Basis of consolidation - Business acquisitions are accounted for under the purchase method and the results of operations of these businesses are included in these consolidated financial statements from the acquisition date. Investments in affiliated companies over which the Company has significant influence are accounted for using the equity method. Investments in other businesses are recorded at cost.

Estimates, risks and uncertainties - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the period. Significant estimates and assumptions include those related to the recoverability of deferred exploration and development costs for mineral properties. While management believes that these estimates and assumptions are reasonable, actual results could vary significantly.

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.

Based on annual impairment reviews made by management, in the event that the long-term expectation is that the net carrying amount of these capitalised exploration and development costs will not be recovered such as would be indicated where:



- Producing properties:
- the carrying amounts of the capitalised costs exceed the related
undiscounted net cash flows of reserves;

- Exploration properties:
- exploration activities have ceased;
- exploration results are not promising such that exploration will
not be planned for the foreseeable future;
- lease ownership rights expire; or
- insufficient funding is available to complete the exploration
program;


then the carrying amount is written down accordingly and the write-down amount charged to operations.

Foreign currency translation - The Company's functional currency is the United States dollar. Monetary assets and liabilities denominated in foreign currencies are translated at the exchange rate in effect at the balance sheet date. Non-monetary assets and liabilities and revenue and expenses arising from foreign currency transactions are translated at the exchange rate in effect at the date of the transaction. Exchange gains or losses arising from the translation are included in operations.

Integrated foreign subsidiaries are accounted for under the temporal method. Under this method, monetary assets and liabilities are translated at the exchange rate in effect at the balance sheet date. Non-monetary assets and liabilities are translated at historical rates. Revenue and expenses are translated at average rates for the period. Exchange gains or losses arising from the translation are included in operations except for those related to mineral properties which are capitalised. The Company accounts for Deva Gold and European Goldfields Deva SRL as integrated foreign subsidiaries.

Self-sustaining foreign subsidiaries are accounted for under the current rate method. Under this method, all assets and liabilities are translated at the exchange rate in effect at the balance sheet date. Revenue and expenses are translated at average rates for the period. Exchange gains or losses arising from the translation are recorded in equity in the cumulative translation adjustment account. The Company accounts for Hellas Gold as a self-sustaining foreign subsidiary.

Financial instruments - The Company's financial instruments consist of cash and cash equivalents, accounts receivable and accounts payable and accrued liabilities. Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest or credit risks arising from these financial instruments. The fair values of these financial instruments approximate their carrying values unless otherwise noted.

The Company's operations expose it to significant fluctuations in foreign exchange rates. The Company has monetary assets and liabilities denominated in British pounds sterling, Romanian lei, euros and Canadian dollars, which are, therefore, subject to exchange variations against the reporting currency, the United States dollar. Included in cash and cash equivalents is approximately $12.15 million denominated in euros.

The Company does not currently have any hedging policies or practices in place.

Revenue recognition - Revenues from the sale of concentrates are recognised and are recorded at market prices when title transfers and the rights and obligations of ownership pass to the customer. A number of the Company's concentrate products are sold under pricing arrangements where final prices are determined by quoted market prices in a period subsequent to the date of sale. These concentrates are provisionally priced at the time of sale based on forward prices for the expected date of the final settlement. The terms of the contracts result in non-hedge derivatives that do not qualify for hedge accounting treatment, because of the difference between the provisional price and the final settlement price. These embedded derivatives, if material, are adjusted to fair value through revenue each period until the date of final price determination. Subsequent variations in the price are recognised as revenue adjustments as they occur until the price is finalised.

Equity-based compensation - The Company operates a share option plan and a restricted share unit plan, which are described in Note 14. 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 income statement as an expense, or capitalised to deferred exploration and development costs when the compensation can be attributed to mineral properties. This cost is amortised over the relevant vesting period for grants to directors, officers and employees, and recorded in full on the date of grant for grants to non-employees. Any consideration received by the Company on exercise of share options is credited to share capital.

Asset retirement obligation - Effective 1 January 2004, the Company adopted the CICA Handbook Section 3110 "Asset Retirement Obligations", which established standards for asset retirement obligations and the associated retirement costs related to reclamation and abandonment. The fair value of the liability of an asset retirement obligation is recorded when it is incurred and the corresponding increase to the asset is depreciated over the life of the asset. The liability is increased over time to reflect an accretion element considered in the initial measurement at fair value. At 31 December 2005, the Company had an asset retirement obligation relating to its mineral properties in Greece.

Impairment of long-lived assets - Effective 1 January 2004, the Company adopted the new recommendations of CICA Handbook Section 3063 "Impairment of Long-lived Assets" on a prospective basis. Section 3063 requires that long-lived assets and intangibles to be held and used by the Company be 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. Effective 31 December 2004, the Company relinquished its 80%-owned exploitation license for the Zlatna perimeter in Romania and a provision for the costs of this property has been recorded. Effective 31 December 2005, the Company relinquished its 80%-owned exploitation license for the Bolcana perimeter in Romania and a provision for the costs of this property has been recorded.

Inventory - Inventories of ore mined and metal concentrates are valued at the lower of combined production cost and net realisable value. Production costs include the costs directly related to bringing the inventory to its current condition and location, such as materials, labour, mine site overheads and related depreciation of mining and processing facilities, related depletion of mineral properties and deferred exploration and development costs. Exploration supplies are valued at the lower of cost and net realisable value.

Disclosure controls and procedures & 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 year ended 31 December 2005 disclosure controls and procedures and internal control over financial reporting for the Company.

The Certifying Officers have caused disclosure controls and procedures 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 disclosure controls and procedures as at 31 December 2005 and have concluded that such procedures are adequate to meet the objectives for which they were established. The Certifying Officers believe that "cost effective" disclosure controls and procedures and internal control systems can only provide reasonable assurance, and not absolute assurance, that such objectives are met.

The Certifying Officers have caused internal control over financial reporting 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.

During the year ended 31 December 2005, 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.

Outstanding share data

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



Common shares: 112,688,708
Common share options: 4,017,667
Restricted share units: 850,000
------------
Common shares (fully-diluted): 117,556,375

Preferred shares: Nil


Outlook

Greece - In September 2005, Hellas Gold resumed production at Stratoni following the award by the Greek State of all necessary environmental and mining permits. Production of ore is expected to reach 170,000 tonnes by the end of the first year of production, steadily increasing to 400,000 tonnes per annum by year five.

In January 2006, Hellas Gold submitted business plans to the Greek government for its major gold and base metals projects of Skouries and Olympias. This submission represents a significant milestone in obtaining the necessary environmental and mining permits to develop the projects.

The Company also continues to look for new discoveries through focused exploration programmes.

Romania - In July 2005, the Company completed an in-house pre-feasibility study on its 80%-owned Certej project. The study confirms that a gold/silver flotation concentrate can be produced with high grades and recoveries.

In addition, the Company is pursuing a metallurgical testwork programme investigating the feasibility of producing gold dore on site by a cost effective process design.

Environmental Impact Assessments (EIA Levels I and II) were completed in December 2005. The next stage will be to complete an Environmental Impact Study (EIS) in order to progress to full feasibility study, permit application and project development.

Finally, the Company continues to conduct focused exploration programmes to expand the resource base in Romania.

Risks and uncertainties

The risks and uncertainties affecting the Company, its subsidiaries and their business are discussed in the Company's Annual Information Form for the year ended 31 December 2005, filed on SEDAR at www.sedar.com.

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