European Minerals Corporation
TSX : EPM
AIM : EUM

European Minerals Corporation

November 03, 2006 14:00 ET

European Minerals Corporation: Results For Third Quarter and Nine Months ended September 30, 2006

LONDON, UNITED KINGDOM--(CCNMatthews - Nov. 03, 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 nine months ended September 30, 2006. All amounts are expressed in US dollars unless otherwise indicated.

HIGHLIGHTS

Financial

- $75.4 million debt facility completed in October 2006 for the Varvarinskoye gold and copper mine (the "Project") and first drawdown expected before end November 2006.

- With the debt facility in place the Project is now fully funded through to production.

- Overall capital costs now estimated at approximately $158 million, an increase of 9% over previous estimate.

- As at September 30, 2006, the Company had assets of $177.5 million, including unrestricted cash of $20.5 million.

- No operating revenues during the period as the Company continued to focus its efforts on the development of the Project.

- Consolidated net loss for the 9 months ended September 30, 2006 was $5.2 million. The loss included expenditures of $3.3 million offset by $1.4 million of interest income. Non-cash expenses consisted of stock-based compensation of $4.0 million and foreign exchange gains of $753,000. This compares with a net loss of $3.5 million with expenditures of $2.2 million offset by interest income of $796,000, stock-based compensation costs of $535,000 together with foreign exchange losses of $1.6 million over the same period in 2005.

- Capital expenditures on the development of the Project, including equipment purchases and construction on the project's processing facility amounted to approximately $51.0 million for the nine months ended September 30, 2006.

Operational

- Earthworks and civil construction around the process plant continues; almost 10,000m3 of concrete had been poured by the end of the third quarter of 2006 and most of the major concrete structures and foundations are more than 95% complete

- Entire mining fleet purchased and delivered to site on budget ($24 million). The 70km dedicated power line had been completed and should be energised during November 2006.

- EMC is revising the mining plan and preparing an updated reserve estimate for the Project, both of which are close to completion.

- Some construction delays, outside the control of the Company, have recently been experienced.

- Currently estimated that commissioning the process plant will probably now commence in October 2007. The Company is currently preparing a revised construction and commissioning schedule.

- Work on various infrastructure buildings, including the accommodation camp, is progressing. The accommodation buildings have been erected and are having the services installed.

MANAGEMENT'S DISCUSSION AND ANALYSIS

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

The following has been extracted from the MD&A.

FINANCIAL REVIEW

The Company has not generated operating revenues and losses have continued to incur throughout the Company's third quarter of 2006 and nine months ended September 30, 2006.

Three months ended September 30, 2006 compared to three months ended September 30, 2005 The Company's only source of income during the period was from interest on bank deposits which amounted to $636,000 compared to $478,000 over the same period in 2005.

The consolidated net loss for the third quarter of 2006 amounted to $2.1 million ($0.01 per share) compared with $460,000 ($Nil per share) during the third quarter of 2005. The consolidated net loss was comprised primarily of legal and administration expenses of $716,000 (Q3-2005 - $263,000), project costs written off of $644,000 (Q3-2005 - $301,000) and stock-based compensation of $952,000 (Q3-2005 - $302,000).

Nine months ended September 30, 2006 compared to nine months ended September 30, 2005

EMC's only source of income during the period was from interest on bank deposits which amounted to $1.4 million compared to $796,000 over the same period in 2005.

The consolidated net loss for the nine months ended September 30, 2006 amounted to $5.2 million ($0.02 per share) compared with $3.5 million ($0.02 per share) during the same period in 2005. The consolidated net loss was comprised primarily of legal and professional fees of $380,000 (2005 - $519,000), project costs written off of $987,000 (2005 - $436,000), stock-based compensation of $4.0 million (2005 - $535,000) and administrative expenses of $1.7 million (2005 - $1.0 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 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 Overview of Operations section of this MD&A, the Company has now completed a debt facility and as a result the Varvarinskoye project is fully funded through to production. EMC currently expects to make its first drawdown under the debt faciltiy by the end of November, 2006.

During the nine months ended September 30, 2006:

In addition to the completion of the 2006 Offering (see Overview of Operations - Public financing of this MD&A), a total of 200,000 common shares were issued on the exercise of stock options, 3,691,411 common shares were issued on the exercise of agent compensation units (of which 383,333 common shares were issued during the third quarter) and 50,000 common shares were issued on the exercise of warrants, raising aggregate proceeds of $2,474,000. 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 (or Pounds Sterling 0.33) until October 11, 2006, with each whole share purchase warrant exercisable at Cdn $1.20 until April 11, 2010.

Working Capital:

The Company's working capital amounted to approximately $42.4 million as at September 30, 2006, compared to $28.0 million as at December 31, 2005. Management expects that working capital requirements for the remainder of 2006 to be approximately $27 million. Total 2006 expenditures are currently estimated at approximately $90 million, comprised of capital expenditures of $85 million related to building the mine and $5 million for overhead and administrative costs. The Company expects that its remaining 2006 expenditures will be met adequately with existing funds together with drawdowns under the debt facility.

As at September 30, 2006, the book value of resource assets, plant, machinery and equipment and buildings and assets under construction amounted to approximately $110.8 million (Q2-2006 - $92.4 million and December 31, 2005 - $59.7 million) and relates to expenditures on the Varvarinskoye project. The net increase over the second quarter of 2006 is due to development expenditures, machinery and equipment purchases and construction costs for the processing plant totalling $18.4 million.

OVERVIEW OF OPERATIONS

Varvarinskoye Project

During the third quarter progress continued to be made on the development and construction of the Company's Varvarinskoye project, although some construction delays, outside the control of the Company, have recently been experienced.

As announced on October 18, 2006, commissioning the process plant will probably now commence in October 2007. The delay in commissioning has arisen as a result of the late delivery of structural steel to site as well as a delay in the manufacture and delivery of the semi-autogenous grinding mill for the gold circuit. The Company is currently preparing a revised construction and commissioning schedule.

In addition, the Company is revising the mining plan and preparing an updated reserve estimate for the Varvarinskoye project, both of which are close to completion. The Company is revising the mining plan in conjunction with the revised construction and commissioning schedule, referred to above, in order to avoid incurring mining costs ahead of plant availability.

By the end of September 2006 the entire mining fleet had been purchased and delivered to site on budget ($24 million). The 70km dedicated power line had been completed and should be energised during November 2006. In addition, 6.2 million tonnes of pre-strip material had been removed on schedule. The Company currently plans to have one million tonnes of ore on the stockpiles when the process plant commences commissioning.

Earthworks and civil construction around the process plant continues; almost 10,000m3 of concrete had been poured by the end of the third quarter of 2006 and most of the major concrete structures and foundations are more than 95% complete. Erection and welding of the tanks associated with the process plant is well advanced and will be completed on schedule. Construction of the Tailings Management Facility for the Varvarinskoye project is also well advanced with only the final drainage and delivery piping to be installed.

Work on various infrastructure buildings, including the accommodation camp, is progressing. The accommodation buildings have been erected and are having the services installed.

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 Adams Ltd. (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.

Debt facility

On October 18, 2006, the Company also announced completion of a debt facility with Investec Bank (UK) Limited and Investec Bank Limited ("Investec") and with Nedbank Limited and NBSA Nominees Limited ("Nedbank"), collectively the "Lenders", to fund the debt portion of the Varvarinskoye project (the "Debt Facility"). Completion of the project financing had been delayed mainly as a result of revisions to the facility documentation arising from the termination of the turnkey contract with MDM Ferroman (Pty) Limited and the appointment of SENET CC as contractor earlier in the year.

EMC is the guarantor of the Debt Facility until the project is complete and JSC Varvarinskoye, its 100%-owned subsidiary, is the borrower.

Details of the limited recourse facility are as follows:

- a commercial loan of $28 million (the "Commercial Loan") at LIBOR plus 2.80%, falling to LIBOR plus 2.30% when the project has passed standard completion tests stipulated by the Lenders;

- a loan facility supported by the Export Credit Insurance Corporation of South Africa of $39.4 million (the "ECIC Loan") at LIBOR plus 1.25% fixed for the term of the loan; and

- a convertible loan facility of $8 million (the "Convertible Loan") at LIBOR plus 2.80%, falling to LIBOR plus 2.30% when the project has passed standard completion tests stipulated by the Lenders.

The Commercial Loan and the ECIC Loan are each for an eight year term with semi-annual repayments currently scheduled to commence on November 30, 2007. First drawdown is expected to be made prior to the end of November, 2006.

The Convertible Loan is available for a term of 18 months from October 17, 2006, with semi-annual repayments commencing on May 31, 2012 until final repayment date on November 30, 2013. The principal amount of the Convertible Loan can be converted into common shares of the Company at the option of the Lenders at an exercise price of $0.93 per share (the US dollar equivalent of Cdn$1.06) and can be repaid by the Company at anytime without penalty.

Costs to complete construction of the Varvarinskoye project

Overall capital costs are now estimated at approximately $158 million, an increase of 9% compared to the previously estimated $145 million. This increase can be categorised as follows:

- $3.5 million for additional general and administrative costs resulting from the delays in the construction schedule;

- $2.5 million for additional financing costs, including increased banking fees, insurance costs and legal fees;

- $2.5 million for additional pre-stripping costs in respect of a larger initial open pit that the Company anticipates will arise from the revised mining plan;

- $2.5 million for Tenge/$US exchange rate losses since February 2006 (during this period the exchange rate has moved from 135 Tenge to 122 Tenge to the US dollar); and

- $2.0 million for contingencies.

The Company has expended approximately $90 million on the project to the end of September 2006 and a further $68 million is required to meet the revised estimated Varvarinskoye project capital costs. Following completion of the Debt Facility the project is now fully funded through to production.

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 risks regarding resources, reserves, production, the Debt Facility, use of financial derivatives, litigation and currency risks as detailed in the Company's 2005 Annual MD&A, actually occur, the Company's business, financial condition and operating results could be adversely affected. Such risks have not changed during the nine months ended September 30, 2006.

There can be no assurance that the Company will be able to complete the planned development of the Varvarinskoye Project on time or to budget due to, among other things, delays in receiving required consents, permits and registrations, the delivery and installation of plant and equipment and cost overruns, or that the current personnel, systems, procedures and controls will be adequate to support the Company's operations. Any such operational delays or inadequacies may result in failure to meet development targets and could delay the commencement of the operation of mining facilities and may have a material adverse effect on the Company's business, financial condition and prospects.



Investor Information:
United Kingdom
Company:
Tony Williams
Chairman

or

Bert Kennedy
President & CEO
Tel: +44 (0) 20 7529 7508
NOMAD/Broker:
Canaccord Adams Limited
Robert Finlay
Tel: +44 (0) 20 7518 2777

North America
Keith Schaefer: ir@vanguardsolutions.ca
Vanguard Shareholder Solutions Inc.
Tel: 1.866.448.0780


CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION

This release contains certain "forward-looking statements". All statements, other than statements of historical fact, that address activities, events or developments that the Company believes, expects or anticipates will or may occur in the future (including, without limitation, 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) are forward-looking statements. These forward-looking statements reflect the current expectations or beliefs of the Company based on information currently available to the Company. Forward-looking statements are subject to significant risks and uncertainties and other factors that could cause the actual results to differ materially from those discussed in the forward-looking statements, and even if such actual results are realized or substantially realized, there can be no assurance that they will have the expected consequences to, or effects on the Company. Factors that could cause actual results or events to differ materially from current expectations 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 and commencement of operations at the Varvarinskoye project caused by unavailability of equipment, labour or supplies, delays in the delivery and/or installation of plant and equipment, climatic conditions or otherwise; termination or suspension of the Debt Facility; failure to raise any additional funds required to finance the completion of the Varvarinskoye project; uncertainty of outcome of any litigation; and other factors. Any forward-looking statement speaks only as of the date on which it is made and, except as may be required by applicable securities laws, the Company disclaims any intent or obligation to update any forward-looking statement, whether as a result of new information, future events or results or otherwise. Although the Company believes that the assumptions inherent in the forward-looking statements are reasonable, forward-looking statements are not guarantees of future performance and accordingly undue reliance should not be put on such statements due to the inherent uncertainty therein.

Consolidated Financial Statements (Unaudited)

Third Quarter and Nine Months ended September 30, 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 September 30, 2006 and December 31, 2005
(In thousands of U.S. dollars)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
2006 2005
---------------------------------------------------------------------------

ASSETS

Current assets
Cash and cash equivalents (note 2) 20,512 9,474
Restricted cash (note 3) 20,161 24,435
Advances held by contractors bank (notes 1 and 4) 3,647 4,518
Accounts receivable and prepaid expenses (note 1) 12,565 324
-------------------
56,885 38,751
Net investment in oil and gas residual interests (note 5) 1,939 2,544
Resource assets (notes 1 and 6) 44,136 34,795
Machinery and equipment (notes 1 and 7) 23,278 12,796
Buildings and assets under construction (notes 1 and 7) 43,366 12,157
Deferred financing costs 7,926 5,310
-------------------
177,530 106,353
-------------------
-------------------

LIABILITIES

Current liabilities
Accounts payable and accrued liabilities (note 9) 12,258 8,621
JSC Varvarinskoye purchase consideration (note 6(b)) 2,214 2,108
-------------------
14,472 10,729
-------------------
Future income taxes (note 10(a)) 2,600 2,600
Asset retirement obligations 623 470
-------------------
3,223 3,070
-------------------
17,695 13,799
-------------------

SHAREHOLDERS' EQUITY

Share capital (note 8(a)) 167,235 120,359
Share purchase options (note 8(d)) 6,236 2,285
Share purchase warrants (note 8(c)) 48,633 28,708
Share purchase units (note 8(e)) 3,714 3,141
Contributed surplus (note 8(b)) 1,309 186
Deficit (67,292) (62,125)
-------------------
159,835 92,554
-------------------
177,530 106,353
-------------------
-------------------

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 nine months ended September 30, 2006 and September 30, 2005
(In thousands of U.S. dollars except per share amounts)
---------------------------------------------------------------------------

---------------------------------------------
3 Months ended 9 months ended
September 30 September 30
---------------------------------------------
2005 2005
2006 as restated 2006 as restated
---------------------------------------------

Income
Interest 636 478 1,372 796
---------------------------------------------
636 478 1,372 796
---------------------------------------------

Expenses
Investor relations 105 26 204 217
Administration 573 301 1,697 1,023
Legal and professional fees 143 (38) 380 519
Stock-based compensation
(note 8(f)) 952 302 4,024 535
Foreign exchange
(gain)/loss 322 46 (753) 1,614
Resource projects 644 301 987 436
---------------------------------------------
2,739 938 6,539 4,344
---------------------------------------------

Net loss for the period (2,103) (460) (5,167) (3,548)
Deficit at beginning of
period (65,189) (60,586) (62,125) (57,498)
---------------------------------------------

Deficit at end of period (67,292) (61,046) (67,292) (61,046)
---------------------------------------------
---------------------------------------------

Basic and diluted loss
per common share $(0.01) $(0.00) $(0.02) $(0.02)
---------------------------------------------
---------------------------------------------

Weighted average number
of shares 277,436 195,974 253,348 144,967
---------------------------------------------
---------------------------------------------

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 nine months ended September 30, 2006 and September 30, 2005
(In thousands of U.S. dollars)


3 Months ended 9 months ended
September 30 September 30
---------------------------------------------
2005 2005
2006 as restated 2006 as restated
---------------------------------------------

Cash flow provided from
(used in)
Operating activities
Net loss for the period (2,103) (460) (5,167) (3,548)
Adjustments to reconcile
net loss to cash flow
from operating:
Stock-based compensation 952 303 4,024 535
Unrealized foreign
exchange (gains) / losses 1,006 - (69) -
Shares provided for
consulting services - 49 - 49
Changes in non cash
working capital:
Subscription receivable - - 86 -
(Increase)/decrease in
accounts receivable
and prepaid expenses (461) (86) (11,858) (41)
Increase/(decrease) in
accounts payable and
accrued liabilities 1,834 (47) 7,259 (124)
---------------------------------------------
Cash flow provided from
(used in) operating
activities 1,228 (241) (5,725) (3,129)
---------------------------------------------

Investing activities
Development of
Varvarinskoye project (3,198) (8,303) (10,578) (12,200)
Purchase of machinery and
equipment 223 - (11,012) -
Construction of plant and
buildings (15,158) (3,095) (31,209) (7,467)
Recovery of net investment
in oil and gas residual - - 605 640
Acquisition of minority
interest in Varvarinskoye - (5,000)
Change in restricted cash 1,111 (12,111) 4,274 (12,111)
---------------------------------------------
Cash flow used for investing
activities (17,022) (23,509) (47,920) (36,138)
---------------------------------------------

Financing activities
Common shares issued, net
of issue costs - - 64,910 49,030
Share purchase warrants issued - - - 29,353
Proceeds from exercise of
stock options - 10 49 31
Proceeds from exercise of
warrants - - 36 -
Proceeds from exercise of
units 257 - 2,303 -
Deferred financing costs (25) (244) (2,615) (477)
---------------------------------------------
Cash flow provided from
financing activities 232 (234) 64,683 77,937
---------------------------------------------
(Decrease)/increase in cash
and cash equivalents (15,562) (23,984) 11,038 38,670
Cash and cash equivalents
at beginning of period 36,074 70,753 9,474 8,099
---------------------------------------------
Cash and cash equivalents
at end of the period 20,512 46,769 20,512 46,769
---------------------------------------------
---------------------------------------------

Cash and Cash Equivalents
comprise:
Cash balances on deposit
with bank 1,672 7,034 1,672 7,034
High-interest deposit
accounts 18,840 39,735 18,840 39,735
---------------------------------------------
20,512 46,769 20,512 46,769
---------------------------------------------
---------------------------------------------

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 nine months ended September 30, 2006 and September 30, 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 $20.1 million of funds not available for general or other purposes. Approximately $0.1 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 two accounts by the Company's lenders as required under its debt and hedging facilities, both of which are, as yet, not drawn.

4. Measurement Uncertainty

The Company previously made advances under a lump sum turnkey contract totalling approximately $4.0 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 September 30, 2006, the Company has recorded a receivable of approximately $3.6 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)
---------------------
Closing balance 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). This royalty is payable to Lisburne Holdings Limited, a 55%-owned subsidiary of the Company, from all oil sales exceeding 2.0 million barrels of oil equivalent from interests in three oil fields in Kazakhstan.

6. Resource assets

Changes in resource assets for the 9 months ended September 30, 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 34,795 4,786
Development expenditures 7,926 19,858
Capitalised expenses (a) 1,262 -
Asset retirement obligation 153 470
Acquisition of 14% minority interest (b) - 9,681
---------------------
Closing balance 44,136 34,795
---------------------
---------------------


(a) Capitalised expenses include interest of $107,000 on the outstanding purchase price of the 14% minority-interest acquisition in the Varvarinskoye project (see note (b)) and stock-based compensation of the Varvarinskoye project personnel of $1,155,000.

(b) The discounted value of the outstanding purchase price balance of $2.25 million was $2.21 million at September 30, 2006 and has been recorded as a liability.



7. Machinery, equipment and buildings under construction

Changes for the 9 months ended September 30, 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 24,953 -
Additions for the period 41,691 24,953
---------------------
Closing balance, net 66,644 24,953
---------------------
---------------------


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 Number of
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 - (2,985) - (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 200 135 75 31
Exercise of agent compensation
units 3,691 2,304 568 367
Transfer of fair value of
stock-based compensation on
exercise of stock options,
warrants and units - 1,156 - 194
---------------------------------------------------------------------------
Balance -- End of Period 277,636 167,235 196,645 120,359
---------------------------------------------------------------------------
---------------------------------------------------------------------------


During the period ended September 30, 2006 and the year ended December 31, 2005, the Company made the following share, warrant and unit issues:

9 months ended September 30, 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 totalled $4.6 million and have been recorded as a reduction to the value of share capital and share purchase warrants.

During the 9 months ended September 30, 2006, a total of 200,000 common shares were issued upon the exercise of stock options, 50,000 upon the exercise of warrants and 3,691,411 upon the exercise of agent compensation units.

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 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 9 months ended September 30, 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 1,123 29
---------------------------------------------------------------------------
Balance - end of period 1,309 186
---------------------------------------------------------------------------
---------------------------------------------------------------------------


c) Share purchase warrants

A summary of the changes in the Company's share purchase warrants for the 9 months ended September 30, 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 1.39(1) 30,381 71,284 0.99(1)
Issued on
exercise
of
Units 785 1,846 1.08(2) - - -
Expired - - - - (750) 0.85
Issue costs (1,606) - - - - -
---------------------------------------------------------------------------
Balance
- end of
period 48,633 120,405 1.18 28,708 80,084 1.00
---------------------------------------------------------------------------
---------------------------------------------------------------------------

(1) Converted to $US. Actual exercise price is Cdn$1.55
(2) Converted to $US. Actual exercise price is Cdn$1.20


A summary of the share purchase warrants outstanding and exercisable as at
September 30, 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)
---------------------------------------------------------------------------
1.08(1) 11-Apr-10 69,284 0.99(1) 11-Apr-10 69,284
0.90(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
0.75(3) 30-Sep-09 1,250 0.77(3) 30-Sep-09 1,250
1.08(1) 11-Apr-10 1,845 - -
1.39(4) 21-Mar-11 38,525 - -
---------- ---------
Total 120,404 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. These warrants have an exercise price of Cdn$1.55 until March 21, 2011. In addition, 1.85 million warrants were issued when 3.7 million agent compensation units were exercised. These warrants have an exercise price of Cdn$1.20 and are exercisable 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 1,846 40,371
---------------------------------------------------------------------------
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) 20,771 785(1) 21,556
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) The total of $785,000 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 10% of the aggregate number of common shares of the Company issued and outstanding (calculated on a non-diluted basis) from time to time. As at September 30, 2006, a total of 14,091,148 options remained available for granting under the Plan.

A summary of the Company's stock options for the 9 months ended September 30, 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 (125) (200) 0.68 (24) (75) 0.41
Issued 5,199 7,775 0.98 203 550 0.58
Extended(2) (1,072) - 0.76 405 - 0.46(1)
Expired - - - - - -
Forfeited (51) (100) 0.61 (29) (90) 0.41
---------------------------------------------------------------------------
Balance - end
of period 6,236 12,440 0.79 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,
350,000@$0.41 until 01-Oct-09, 2,250,000@$0.425 until 16-oct-09.

A summary of the stock options outstanding and exercisable as at
September 30, 2006 and at 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)
---------------------------------------------------------------------------
0.37 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 1-Oct-09(10) 350 0.41 01-Oct-06 400
0.425 16-Oct-09(11) 2,250 0.425 16-Oct-06 2,250
0.86 03-Mar-07 100 0.86 03-Mar-07 200
0.61(1) 1-Sept-08 100 0.61(1) 1-Sept-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) 12-Nov-08 200 0.57(4) 12-Nov-08 200
0.73(5) 16-Jan-09 150 - - -
1.06(6) 07-Feb-09 100 - - -
0.98(12) 01-Apr-09 7,225 - - -
------- -------
12,440 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.
(10) Options' expiry dates extended until 01-Oct-09.
(11) Options' expiry dates extended until 16-Oct-09.
(12) Converted to $US. Actual exercise price is Cdn$1.09.


e) Agent compensation units

During the first quarter of 2006, the Company entered into an agency agreement with Canaccord Adams Ltd. (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 9 months ended September 30, 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 3,141 6,332 0.64 - - -
Granted 2,384 3,853 0.94(2) 3,431 6,900 0.64(1)
Exercised (1,026) (3,692) 0.67(1) (290) (568) 0.64(1)
Exercised
- value
transfer to
warrants (785) - - - - -
Expired - - - - - -
---------------------------------------------------------------------------
Balance
- end of period 3,714 6,493 0.83 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 September 30, 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 2,467 - 11-Oct-06 5,520
0.64(1) 11-Oct-06 171 - 11-Oct-06 690
0.64(1) 11-Oct-06 2 - 11-Oct-06 122
0.90(2) 21-Sep-07 3,853
------- -------
Total 6,493 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 9 months ended September 30, 2006 was $5,179,000 (same period in 2005 - $535,000) of which $4,024,00 was expensed in the statement of operations (2005 - $535,000) and $1,155,000 (2005 - Nil) was related to Varvarinskoye project personnel and capitalized to resource assets.

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% - 4.5% 5.0%
Expected dividend yield Nil Nil
Expected stock price volatility 76.9% - 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 9 months ended September 30, 2006: $(000)
---------
Legal fees -
Administrative costs 1,017
---------
1,017
-----------------------------------------------------------------------
-----------------------------------------------------------------------

Related-party payables included in Accounts payable
and accrued liabilities 153

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


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:



---------------------------------------------------------------------------
2006 2005
---------------------------------------------------------------------------
Statutory tax rate (Kazakhstan) 30% 30%
----------------------
Difference between cost and tax basis of
acquisition of additional 14% interest in JSC
Varvarinskoye $ 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)
----------------------
$ 2,600 $ 2,600
---------------------------------------------------------------------------
---------------------------------------------------------------------------


(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 EMC's debt facility (the "Debt Facility"), the Company has agreed to implement the 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 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 September 29, 2006, London Precious Metals index closing spot price for gold ($599.25/oz), the value of the Hedging Facility as at September 30, 2006 amounts to a loss of $38.9 million.

13. Subsequent Events

On October 18, 2006, the Company announced the following:

Debt Facility

Completion of the Debt Facility with Investec Bank (UK) Limited and Investec Bank Limited ("Investec") and with Nedbank Limited and NBSA Nominees Limited ("Nedbank"), collectively the "Lenders", to fund the debt portion of the Varvarinskoye project. Completion of the Debt Facility had been delayed mainly as a result of revisions to the facility documentation arising from the termination of the turnkey contract with MDM Ferroman (Pty) Limited and the appointment of SENET CC as contractor earlier in the year. EMC is the guarantor of the Debt Facility until the project is complete and JSC Varvarinskoye, its 100%-owned subsidiary, is the borrower.

Details of the limited recourse facility are as follows:

1. a commercial loan of $28 million (the "Commercial Loan") at Libor plus 2.80%, falling to Libor plus 2.30% when the project has passed standard completion tests stipulated by the Lenders;

2. a loan facility supported by the Export Credit Insurance Corporation of South Africa of $39.4 million (the "ECIC Loan") at Libor plus 1.25% fixed for the term of the loan; and

3. a convertible loan facility of $8 million (the "Convertible Loan") at Libor plus 2.80%, falling to Libor plus 2.30% when the project has passed standard completion tests stipulated by the Lenders.

The Commercial Loan and the ECIC Loan are each for an eight year term with semi-annual repayments currently scheduled to commence on November 30, 2007. First drawdown is expected to be made prior to the end of November, 2006.

The Convertible Loan is available for a term of 18 months from October 17, 2006, with semi-annual repayments commencing on May 31, 2012 until final repayment date on November 30, 2013. The principal amount of the Convertible Loan can be converted into common shares of the Company at the option of the Lenders at an exercise price of $0.93 per share (the US dollar equivalent of Cdn$1.06) and can be repaid by the Company at anytime without penalty.

Revised construction and commissioning schedule, mining plan and reserve update

Commissioning of the process plant will be delayed to later in 2007. This delay has arisen as a result of the late delivery of structural steel to site as well as a delay in the manufacture and delivery of the semi-autogenous grinding mill for the gold circuit. The Company currently estimates that as a result of these delays commissioning will probably commence in October 2007 and is currently preparing a revised construction and commissioning schedule.

In addition, the Company is revising the mining plan and preparing an updated reserve estimate for the project, both of which are close to completion. The Company is revising the mining plan in conjunction with the revised construction and commissioning schedule, referred to above, in order to avoid incurring mining costs ahead of plant availability.

Costs to complete construction of the Varvarinskoye project

Overall capital costs are now estimated at approximately $158 million, an increase of 9% compared to the previously estimated $145 million. This increase can be categorised as follows:

- $3.5 million for additional general and administrative costs resulting from the delays in the construction schedule;

- $2.5 million for additional financing costs, including increased banking fees, insurance costs and legal fees;

- $2.5 million for additional pre-stripping costs in respect of a larger initial open pit that the Company anticipates will arise from the revised mining plan;

- $2.5 million for Tenge/$US exchange rate losses since February 2006 (during this period the exchange rate has moved from 135 Tenge to 122 Tenge to the US dollar); and

- $2.0 million for contingencies.

The Company has expended approximately $90 million on the project to the end of September 2006 and a further $68 million is required to meet the revised estimated Varvarinskoye project capital costs. Following completion of the Debt Facility the project is now fully funded through to production.

No stock exchange, securities commission or other regulatory authority has approved or disapproved the information contained herein.

Contact Information

  • United Kingdom
    Tony Williams
    Chairman
    +44 (0) 20 7529 7508
    or
    Bert Kennedy
    President & CEO
    +44 (0) 20 7529 7508
    or
    NOMAD/Broker:
    Canaccord Adams Limited
    Robert Finlay
    +44 (0) 20 7518 2777
    or
    North America
    Vanguard Shareholder Solutions Inc.
    Keith Schaefer
    1-866-448.0780
    Email: ir@vanguardsolutions.ca