Eldorado Gold Corp
Annual Report 2008

Plain-text annual report

Eldorado Gold Corporation 2008 Annual Report E L D O R A D O G O L D C O R P O R A T I O N 2 0 0 8 A N N U A L R E P O R T Tanjianshan mine, China Tanjianshan mine, China Kişladağ mine, Turkey Kişladağ mine, Turkey Summary Corporate Profile.................................................................................................................................. 2008 Highlights................................................................................................................................... Letter to Our Shareholders................................................................................................................. Resources and Reserves.................................................................................................................... Production Highlights.......................................................................................................................... Stakeholder and Community Relations............................................................................................. Financial Review Management’s Discussion & Analysis of Financial Condition and Results of Operations....... Management’s Responsibility for Financial Reporting................................................................ Independent Auditors’ Report....................................................................................................... Consolidated Balance Sheets....................................................................................................... Consolidated Statements of Operations and Deficit................................................................... Consolidated Statements of Cash Flows...................................................................................... Consolidated Statements of Comprehensive Income................................................................. Notes to the Consolidated Financial Statements........................................................................ Consolidated Financial Information.............................................................................................. Corporate Information......................................................................................................................... Forward-Looking Statements.............................................................................................................. 3 3 4 6 7 8 16 37 38 40 41 42 43 44 82 84 86 Corporate Profile Eldorado Gold Corporation is a gold producer active in exploration and development in Brazil, China, Greece, Turkey and surrounding regions. We are one of the lowest cost pure gold producers reporting, with a strong balance sheet, no debt and no hedge positions. Our goal is to produce 700,000 to 800,000 ounces of gold annually by 2013. We are well positioned to grow in value as we create and pursue new opportunities in gold and other resources. Our shares trade on the Toronto Stock Exchange (TSX) under the symbol ELD and on the New York Stock Exchange Amex (NYSE-A) under the symbol EGO. 2008 Highlights (All amounts expressed in U.S. dollars, unless otherwise stated) Solid growth ▪ 308,802 ounces of gold produced (15% increase) ▪ ▪ 11.8 million ounces of measured and indicated resources and 4.2 million ounces of inferred resources (12% increase) 7.6 million ounces of proven and probable gold reserves (replaced reserves mined in 2008) Proven ability to explore, develop, and operate ▪ Advanced construction at the Efemçukuru gold project in Turkey and at the Vila Nova iron ore project in Brazil ▪ Completed two transactions with the potential to add 300,000 ounces of annual production by 2013 Low cost production ▪ Total cash cost of $289 per ounce, which positions Eldorado in the lowest quartile of production cost Enhancing shareholder value ▪ Top performer on the S&P/TSX composite index with share appreciation of 65.5 per cent ▪ Record earnings of $0.46 per share Strong balance sheet ▪ Debt free and unhedged ▪ ▪ Paid all debt owed to HSBC Bank, releasing restricted cash Completed sale of São Bento mine to AngloGold Ashanti for $70.0 million ▪ Cash flow from operations of $0.30 per share 2008 Annual Report 3 Sulphide Ore Processing Facilities Sulphide Ore Processing Facilities Tanjianshan mine, China Tanjianshan mine, China Coarse Ore Stock Pile Coarse Ore Stock Pile Kişladağ mine, Turkey Kişladağ mine, Turkey Letter to Our Shareholders I am extremely pleased to report that 2008 was another successful year for Eldorado despite an extremely turbulent and volatile economic environment. Our teams around the world continue to execute in accordance with our articulated plans. In 2008, our mines produced 308,802 ounces of gold at a total cash cost of $289 per ounce, maintaining our position as one of the lowest cost pure gold producers. Despite significant cost pressures we expanded operating cash margins for the fourth consecutive year. Our ability to grow our margins is in sharp contrast to other companies in our sector who have, despite higher gold prices, failed to deliver improved margins. Our strong operating performance contributed significantly to the profit of $0.46 per share for the year. The market recognized and rewarded this performance: Eldorado was the top performer on the S&P/TSX composite index, with a share appreciation of 65.5 percent. In Turkey at our Kişladağ mine the year saw the successful expansion of throughput from 5 to 10 million tonnes per annum and the conversion to owner operated mining with the purchase of our own mining fleet. Construction began at our Efemçukuru project, where production is now anticipated to begin in 2010. In China, our Tanjianshan mine produced in excess of plan with 118,468 ounces of gold for the year, while successfully managing the construction of the sulphide processing circuit that is presently being commissioned. 4 Eldorado Gold In 2008, we also completed two transactions, acquiring the Perama Hill project in Greece and establishing participation in the highly prospective Tocantinzinho project in the Tapajos district in Brazil. We believe that the development of these projects will provide the opportunity to contribute approximately 300,000 ounces of annual gold production to Eldorado within a five-year time frame. The Company’s exploration efforts, which totalled $19.7 million in expenditures, were rewarded by an expanded resource base. This enabled us to essentially replace reserves mined maintaining 7,561,000 ounces of proven and probable reserves at year-end. The continued success of our Company is largely attributed to the dedication of our staff in the regions we operate. $/oz 1,000 Growing Margins 800 600 400 200 0 876 674 609 409 444 107 279 411 587 302 416 330 263 289 2004 2005 2006 2007 2008 Total Cash Cost Margins Realized Gold Price It is with great enthusiasm that I look forward to together continuing to build a Company that we all take great pride in. Au oz 800,000 Increasing Production We remain committed in 2009 to following our stated path that provides for the development of a strong sustainable mining company based on high quality, low- cost, long-lived assets. Our strong balance sheet with no debt and no hedge positions supports our continued growth. Sincerely, 640,000 480,000 320,000 160,000 0 2007 Actual 2008 Actual 2009 Forecast 2010 Forecast 2011 Forecast 2012 Forecast 2013 Forecast Paul N. Wright President and Chief Executive Officer March 19, 2009 São Bento Kişladağ Tanjianshan Efemçukuru Perama + TZ Expanding Resources and Reserves 000s Au oz 16,000 12,000 8,000 4,000 0 2005 2006 2007 2008 Reserves Measured Indicated Inferred 2008 Annual Report 5 Resources and Reserves GOLD Property Kişladağ Measured Indicated M + I Inferred Tanjianshan Measured Indicated M + I Inferred Efemçukuru Measured Indicated M + I Inferred Perama Measured Indicated M + I Inferred Total Measured Indicated M + I Inferred RESOURCES RESERVES Tonnes (x1000) Grade (Au g/t) In–Situ Gold ounces (x1000) Tonnes (x1000) Grade (Au g/t) In–Situ Gold ounces (x1000) 72,810 207,070 279,880 126,900 6,985 2,941 9,926 3,493 1,235 3,683 4,918 2,109 – 11,710 11,710 8,733 81,030 225,404 306,434 141,235 1.04 0.82 0.88 0.63 3.34 2.76 3.17 3.54 13.80 8.39 9.75 9.95 – 3.62 3.62 1.96 1.43 1.11 1.20 0.92 2,432 5,430 7,862 2,552 751 261 1,012 398 548 993 1,541 675 – 1,363 1,363 552 3,731 8,047 11,778 4,177 Proven Probable Total 67,746 93,811 161,557 1.08 1.05 1.06 Proven Probable Total 5,609 1,152 6,761 3.77 3.71 3.76 Proven Probable Total 1,320 2,465 3,785 11.89 9.04 10.04 Proven Probable Total – – – – – – 2,353 3,170 5,523 680 137 817 505 716 1,221 – – – Proven Probable Total 74,675 97,428 172,103 1.47 1.28 1.37 3,538 4,023 7,561 IRON RESOURCES Property Vila Nova Measured Indicated M + I Inferred Tonnes (x1000) Grade (Fe%) 2,285 7,679 9,964 2,022 63.5 61.0 61.6 61.2 RESERVES Tonnes (x1000) Grade (Fe%) Proven Probable Total 2,285 6,987 9,272 63.5 60.2 61.0 Notes for Resources: 1) Gold price used was $725/oz. 2) Cut–off grades (gold g/t): Kişladağ: 0.4 g/t; Tanjianshan: 1.0 g/t; Efemçukuru: 3.0 g/t; Perama: 1.0 g/t. 3) Qualified Person: Stephen Juras, Ph.D., P.Geo. and Manager, Geology for the Company is the qualified person responsible for all the mineral resource estimates for the Company’s material properties, namely Kişladağ, Tanjianshan and Efemçukuru; the Company does not currently consider Perama or Vila Nova to be material properties. Notes for Reserves: 1) Gold price used for Kişladağ and Tanjianshan was $725/oz. and for Efemçukuru was $530/oz. 2) Cut–off grades (gold g/t): Kişladağ: 0.35 g/t oxide, 0.50 g/t sulphide; Tanjianshan: 1.3 g/t JLG oxide, 1.64 g/t JLG sulphide; Efemçukuru: 4.5 g/t. 3) Qualified Persons: Richard Miller, P.Eng. and Manager, Mine Engineering of the Company, is responsible for the Kişladağ and Tanjianshan reserves; Andy Nichols, P.Eng., Chief Mining Engineer of Wardrop Engineering, is responsible for the Efemçukuru reserves. 4) Mineral Reserves include Mineral Resources. 6 Eldorado Gold Production Highlights Gold Production Total Ounces Produced Commercial Production Cash Operating Cost ($/oz)1,4 Total Cash Cost ($/oz)2,4 Total Production Cost ($/oz)3,4 Realized Price ($/oz–sold) Kişladağ Mine, Turkey5 Commercial Production Tonnes to Pad Grade (grams/tonne) Cash Operating Cost ($/oz)4 Total Cash Cost ($/oz)2,4 Total Production Cost ($/oz)3,4 Tanjianshan Mine, China Total Ounces Produced Commercial Production Tonnes Milled Grade (grams/tonne) Cash Operating Cost ($/oz)4 Total Cash Cost ($/oz)2,4 Total Production Cost ($/oz)3,4 São Bento Mine, Brazil Commercial Production Tonnes Milled Grade (grams/tonne) Cash Operating Cost ($/oz)4 Total Cash Cost ($/oz)2,4 Total Production Cost ($/oz)3,4 First Quarter 2008 Second Quarter 2008 Third Quarter 2008 Fourth Quarter 2008 Fourth Quarter 2007 2008 2007 67,234 67,234 213 268 393 933 87,380 87,380 229 259 293 904 72,343 72,343 283 313 402 870 81,845 81,845 298 319 404 800 32,000 32,000 216 262 522 774 308,802 308,802 257 289 370 876 281,135 268,643 236 263 338 674 27,228 529,480 1.18 217 218 246 55,490 2,092,957 1.47 230 232 273 46,863 2,562,343 1.05 270 273 310 60,753 2,371,101 1.34 279 281 314 – – – – – – 190,334 7,555,881 1.27 254 256 291 135,306 4,547,860 1.33 189 192 224 40,006 40,006 223,395 6.83 211 302 493 31,890 31,890 193,035 6.04 229 305 327 25,480 25,480 226,126 4.16 306 387 571 21,092 21,092 216,273 4.33 352 429 664 32,000 32,000 173,945 7.20 216 261 526 118,468 118,468 858,829 5.31 261 343 496 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 138,162 125,670 757,354 6.23 288 342 472 7,667 20,069 11.71 208 224 152 1 Cost figures calculated in accordance with the Gold Institute Standard. 2 Cash Operating Costs, plus royalties and the cost of off-site administration. 3 Total Cash Costs, plus foreign exchange gain or loss, depreciation, amortization and reclamation expenses. 4 Cash Operating, Total Cash and Total Production Costs are non-GAAP measures. See the section “Non-GAAP Measures” in the MD&A. 5 Kişladağ temporarily ceased operations on August 18, 2007 and re-opened on March 6, 2008. 2008 Annual Report 7 Vineyard project in Efemçukuru, Turkey Vineyard project in Efemçukuru, Turkey Stakeholder and Community Relations At Eldorado, we believe that only by taking a responsible approach can a company achieve long-term financial success and maintain its “social license” to operate. For us, corporate social responsibility means doing the right thing – investing in infrastructure, economic development, and health and education – so that we can help enrich the communities where we operate. Over the past decade, we have operated mines around the world – in Mexico, Brazil, Turkey and China. We are proud of our record of implementing industry best practices that minimize environmental impacts while maximizing social and economic benefits. We are committed to fostering open dialogue between ourselves and the members of the local communities where our mines are located. This enables us to undertake initiatives that bring positive impacts to communities and meet their specific needs – whether it’s creating new infrastructure, investing in education and training, or supporting economic development projects in the area. In the following section, we describe our commitment to responsible operations throughout all stages of the mine cycle, and then highlight our initiatives relating to the environment and community development over the past 10 years of our operations. 8 Eldorado Gold Committed to responsible operations throughout the life of a mine We bring new opportunities and build value for our stakeholders at all stages of the mining cycle, from initial exploration through to mine closure and reclamation. Exploration Development Construction and Training Mining and Processing Reclamation and Closure Exploration We initiate our community relations activities in the early stages of the mining cycle. During exploration, while we conduct geological surveys and sampling to determine the existence and location of an ore deposit, we initiate dialogue with local community members to identify their main social and environmental concerns and start our baseline data recording. This is a period of building trust – of listening to our stakeholders to better understand their needs. Development During the development stage, we complete a feasibility study that outlines the economics, optimal mining method and mineral recovery process for the project, including closure considerations. It is also during this stage that we file an Environmental Impact Assessment (EIA) report with the appropriate authorities. As part of preparing an EIA, we conduct extensive environmental testing and studies to firmly establish baseline data and characteristics for air, water, soil and biodiversity. materialize. Depending on the communities’ needs and priorities, we begin infrastructure development initiatives that include improving roads, building sewage systems or drilling water wells. Construction and training We train all employees and instruct construction contractors in the best environmental, health and safety practices, procedures and controls. We also make it a priority to hire local residents when recruiting new personnel. Based on our dialogue with the communities, we identify gaps in skills, provide on-the-job training and work with local technical schools and universities to enhance their mining-specific programs to help increase employability. An example of this kind of partnership was our agreement with the Technical School in Barão de Cocais, Brazil. We helped approximately 80 new technicians each year in the mining and mechanics technical programs by providing the facilities for their internship at our São Bento mine, until its closure. During the development stage, the results of our dialogue with the surrounding communities start to Mining and processing All our mining operations comply with local Exploration activities in Brazil Exploration activities in Brazil Construction of the Vila Nova iron ore Construction of the Vila Nova iron ore project, Brazil project, Brazil Gold pour at the Kişladağ mine, Turkey Gold pour at the Kişladağ mine, Turkey 2008 Annual Report 9 and international environmental standards. We implement the practices described in our EIA and our feasibility study to mitigate any potentially negative environmental effects of the mine’s construction and operation. We work to maintain a good safety record by investing in environmental, health and safety training. This is of considerable importance in mining operations, which require the use of hazardous materials and substances such as explosives and process chemicals. It is during this stage of a mine’s life cycle that communities begin to more fully benefit from the nearby presence of an operating mine. We employ approximately 1,400 employees and contractors worldwide, the majority of whom are from the local communities near our operations. The competitive salaries and benefits we pay our employees and contractors enable them to improve their families’ standard of living. In addition to creating jobs in local communities, we promote many sustainable economic development initiatives. Since the life of any mine is limited, we encourage and work with local communities to create new opportunities for economic development, even after the mine is closed. In Brazil, for example, we partnered with four other companies and the Santa Bárbara government to create and support the Municipal Social and Economic Development Agency, an organization mandated to help local enterprises identify and pursue opportunities. In Turkey, we donated funds to the Uşak Agricultural Directorate for the Sheep Genetic Improvement Project. Rams were distributed to the Uşak villages, and there has been an improvement in the quality of the local flocks. Community members have seen increased profits resulting from improved sheep fertility and better wool value. In 2008, we also launched a pilot project in Efemçukuru to establish a local vineyard based on a study conducted by a university researcher to identify how we could help local farmers obtain greater value from their crops. As part of the project, we planted 11,200 vines on our Efemçukuru property. Local farmers will benefit from the introduction of new technologies and best practices. Vineyard project at Efemçukuru developing mine, Turkey Vineyard project at Efemçukuru developing mine, Turkey Reclamation and closure During the operating life of a mine, research is conducted to establish best reclamation practices. These reclamation activities are concurrent with mine operations. Once a mine is no longer profitable to operate, we close the mine site and conduct reclamation activities so that the physical environment can successfully transition to a productive ecosystem. We have an excellent record on mining closure and reclamation. In October 2000, we were the first company to receive a final full regulatory environmental release from the Mexican government for reclamation activities at our La Trinidad mine near Rosario, Mexico. The former mine became a lake capable of supporting fish. La Trinidad mine in Mexico La Trinidad mine in Mexico 10 Eldorado Gold Protecting the environment We are committed to best practices in protecting the environment and ensuring the health and safety of our workers. Water sampling at São Bento mine, Brazil Water sampling at São Bento mine, Brazil Environmental Education Centre at São Environmental Education Centre at São Bento mine, Brazil Bento mine, Brazil Waste management at Kişladağ mine, Waste management at Kişladağ mine, Turkey Turkey Ongoing monitoring and analysis We monitor the air, water and soil throughout the development phase of a project and during mine operations to ensure that our mitigation measures are having their intended effect. We share the results of our monitoring programs and analyses with governments and other stakeholders, including non-governmental organizations and local communities. At our Kişladağ mine in Turkey, for example, we are regularly audited by the Inspection and Monitoring Committee – a group created by the Uşak government that includes members from non- governmental organizations. Water We monitor and evaluate both surface and underground water on a monthly basis, in line with the local water control regulations and the commitments we have made in our EIA report. An independent agent analyzes these samples and we share the results with government agencies as well as with other stakeholders. Additionally, we conduct a thorough evaluation of the water samples we collect from strategically located monitoring wells to check for any changes in the underground water quality. Biodiversity To minimize the impact on the local fauna and flora in the areas where we operate, we invest in programs that help preserve native biodiversity. At our Kişladağ gold mine in Turkey, we planted native trees along the mine roads and we maintain greenhouses around the mine area where we grow flowers and shrubs. We’ve also helped reforest the neighbouring communities. In 2002, we planted 72,000 young trees in the Eşme area and we reforested Söğütiü Village/Ulubey in 2008. In Brazil, we created a 180-hectare environmental preservation area inside the mine property, for which we received the government’s Environmental Preservation Award in 2004. This preservation area was created to safeguard and enhance habitat for native flora and fauna. The Environmental Education Centre we established at the site to share the results of our studies on the local flora and fauna has provided information to more than 50,000 students and teachers. In 2008, our Tanjianshan mine received one of two Provincial Awards for Environment Friendly Projects from the Provincial Environment Protection Bureau in recognition of our environmental initiatives at the mine site. 2008 Annual Report 11 Air quality We regularly monitor dust levels at our mine sites as stipulated by air quality control regulations. Waste We manage our waste and have implemented recycling programs throughout our operations. At our Kişladağ mine, we paved the main access road. We also use water trucks to minimize dust on the mine’s internal roads during intense production periods, and the crushing areas include water sprays and filters to collect dust. In Turkey, for example, the wastes generated by the operation of our Kişladağ mine are sent to a licensed firm authorized by the Environmental and Forestry Ministry to be recycled or disposed of according to the relevant regulations. Noise We use advanced equipment to monitor each site’s noise levels, and our employees use ear protection during production periods. Worker safety The health and safety of our workers is our top priority. We conduct ongoing health and safety training. Kişladağ is currently the largest gold mine in Turkey Kişladağ is currently the largest gold mine in Turkey 12 Eldorado Gold Enhancing local communities Our community enhancement programs have evolved out of our ongoing conversations with local community members. These programs are generally focused on four areas: education and training, infrastructure, community life and economic development. Desks upgrade at the Agong Chunwa Tibetan Desks upgrade at the Agong Chunwa Tibetan Village Primary School, China Village Primary School, China Uşak Governor and Eldorado’s CEO at Uşak Governor and Eldorado’s CEO at dedication of village water system, Turkey dedication of village water system, Turkey Community historical heritage preservation Community historical heritage preservation close to São Bento mine, Brazil close to São Bento mine, Brazil Education and training Brazil ▪ Preventive health and safety program: offered training to employees and their family members on health, nutrition, hygiene and safety ▪ ▪ ▪ ▪ ▪ School uniforms: donated uniforms to public school students in Brumal and Barra Feliz Partnership with local technical schools: allowed students enrolled in the mining and mechanics technical courses in the Barão de Cocais community to use our facilities during their internships Partnership with schools: welcomed students to our facilities so they could better understand the industrial application of academic subjects such as chemistry, mathematics and biology Employee education: offered tutoring and support materials for employees to complete their elementary and secondary education Volunteer tutoring: created a tutoring program in the public schools in Barra Feliz and Carrapato China ▪ School facility upgrade: replaced the roof, improved the facilities and purchased equipment and books for students and teachers at the Agong Chunwa Tibetan Village Primary School Turkey ▪ High school education: encouraged female students to complete their high school education in Efemçukuru’s neighbouring villages; five girls recently completed high school compared to only one the year before ▪ Donated computers to Ulubey College Infrastructure Brazil ▪ Provided furnishings for a court hearing room in Santa Bárbara Turkey ▪ Helped finance a new building planned for Uşak University ▪ ▪ ▪ Completed in 2003 water distribution pipelines to bring fresh water to nine villages nearest to the mine Paved all main roads in Kişladağ with cobblestones and conducted ongoing repairs and upgrades to all roads in the Gümüşkol, Katrancilar, and Söğütiü villages Installed sewage systems in Gümüşkol village and Ulubey, Katrancilar village and Eşme and Söğütiü village and Ulubey, and planned a similar program for Bekişli village and Eşme 2008 Annual Report 13  ▪ ▪ ▪ ▪ ▪ Drilled water wells to provide potable water for the communities of Ulubey, Eşme, Gümüşkol, Katrancilar, Bekişli, Söğütiü, Küçükilyasli, Karaömerli, Akçaköy and Güzelköy; planned a similar program for Söğütiü village/Ulubey Constructed a hemodialysis centre in Eşme (prior to this, people needed to travel 60 km to be treated in Uşak) Donated money to the Uşak health department to purchase a health scan bus for Uşak and surrounding villages Repaired the Crisis Center in the village of Ulubey Donated a pickup truck to the municipality of Kişladağ, built fire ponds to help the Uşak Forestry Department prevent fires, built a milk tank building in Gümüşkol village and Ulubey, built a water pump in the Omurca municipality and installed a septic tank in the Hasköy municipality ▪ Repaired a camera system for the Eşme police department to assist in crime prevention China ▪ Contributed to an earthquake relief fund after the Sichuan earthquake in May 2008 Community life Brazil ▪ Matriz de Santo Antonio: restored the nineteenth-century church towers as part of a community historical heritage preservation project ▪ ▪ Pio XII Square: assisted in re-building this historical heritage square in the commercial centre of Santa Bárbara Christmas party: donated toys to children in need in Brumal and Barra Feliz Turkey ▪ Built a football field in the Gümüşkol village/ Ulubey area, a wedding hall in Kişladağ, a meeting hall/village house in Katrancilar village and a new public house building for the imam in Söğütiü village/Ulubey ▪ Mosque repair and painting: planned repairs to the mosques of Söğütiü and Gümüşkol villages Sustainable economic development Brazil ▪ Along with four other companies and the Santa Bárbara government, we helped establish the Municipal Economic and Social Development Agency to support socio-economic development in the region Turkey ▪ Vineyard project in Efemçukuru: we hired a university professor to conduct a study on how we could help local farmers get more value from their vineyards. We recently planted 11,200 cabernet sauvignon, merlot and syrah vines on our property; this may provide a valuable economic opportunity for local farmers as the vines develop and mature over the next five to ten years. ▪ ▪ Sheep Genetic Improvement Project: we donated funds to Uşak Agricultural Directorate to distribute rams to the Uşak villages. As a result, there was an improvement in the quality of the local flocks (in terms of both improved fertility and better wool value) and community members saw increased revenues. Kişladağ Mine Foundation: in co-operation with the Canadian International Development Agency, we developed a business plan that identified initiatives with specific sustainable development criteria, including agriculture and training. Health scan bus for Uşak and its Health scan bus for Uşak and its surrounding villages, Turkey surrounding villages, Turkey 14 Eldorado Gold Kişladağ's own mining fleet, Turkey Kişladağ's own mining fleet, Turkey Financial Review Management’s Discussion & Analysis of Financial Condition and Results of Operations................... Management’s Responsibility for Financial Reporting........................................................................... Independent Auditors’ Report.................................................................................................................. Consolidated Balance Sheets.................................................................................................................. Consolidated Statements of Operations And Deficit.............................................................................. Consolidated Statements of Cash Flows................................................................................................. Consolidated Statements of Comprehensive Income............................................................................ Notes to the Consolidated Financial Statements................................................................................... Consolidated Financial Information......................................................................................................... 16 37 38 40 41 42 43 44 82 2008 Annual Report 15 MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (For the years ended December 31, 2008 and 2007) This Management’s Discussion and Analysis (“MD&A”) reviews the business of Eldorado Gold Corporation (“Eldorado”, “we” or “the Company”) and compares the Company’s financial results for 2008 with those of 2007. For a comprehensive understanding of Eldorado’s financial condition and results of operations, you should read this MD&A together with the consolidated financial statements and accompanying notes. Unless otherwise noted, all monetary amounts are in United States dollars. This MD&A is prepared as of March 18, 2009. 1. 2008 – Year in Review Eldorado is one of the world’s lowest cost gold producers engaged in gold mining and related activities including exploration, development, extraction, processing and reclamation. Based in Vancouver, Canada, Eldorado is listed on the Toronto Stock Exchange (TSX) under the symbol ELD and on the New York Stock Exchange Amex (NYSE-A) under the symbol EGO. ELD is on the S&P/TSX Global Gold Index and EGO is part of the AMEX Gold BUGS Index. We own and operate the Kişladağ gold mine (“Kişladağ”) in Turkey and the Tanjianshan gold mine (“TJS”) in China, and we are developing gold projects in Turkey and Greece as well as an iron ore project in Brazil. During the year ended December 31, 2008, we: ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ Reported record earnings of $0.46 per share (2007 – $0.10), Produced 308,802 ounces of gold at a cash operating cost of $257 per ounce (2007 – 281,135 ounces at $236 per ounce), Sold 316,918 ounces of gold at a realized average price of $876 per ounce (2007 – 266,012 ounces, $674 per ounce), Resumed operations on March 6, 2008 at Kişladağ, which had been on standby since August 18, 2007, and completed the mine’s expansion project, doubling its mining and processing capacity to a rate of 10 million tonnes of ore per year, Completed the sale of our São Bento gold mine in Brazil (“São Bento”) to AngloGold Ashanti for $70.0 million in AngloGold Ashanti shares, resulting in a gain of $72.5 million after consideration of net liabilities divested ($0.21 per share), Began construction of our Efemçukuru gold mine (“Efemçukuru”) in Turkey, Neared completion of construction of our Vila Nova iron ore mine (“Vila Nova”) in Brazil, Acquired Frontier Pacific Mining Corporation (“Frontier”) and its Perama Hill gold development project (“Perama Hill”) in Greece, Finalized an agreement with Brazauro Resources Corporation to earn an interest in the 43,000 hectare Tocantinzinho gold project (“Tocantinzinho”) in Brazil and Generated $105.5 million in cash from operating activities (2007 - $69.8 million), which was used to pay off debt of $70.9 million and fund ongoing development projects. Net income for the year In 2008, Eldorado’s profits increased substantially over the previous year. Our consolidated net income for 2008 was $163.7 million or $0.46 per share (2007 – $35.4 million or $0.10 per share). The main contributors to our 2008 operating results were strong performances from Kişladağ and TJS as well as the $72.5 million gain on the sale of São Bento. 16 Eldorado Gold Sales from Kişladağ totalled 185,425 ounces of gold (2007 – 142,725 ounces) at an average price of $871 per ounce (2007 – $660), while cash operating costs averaged $254 per ounce (2007 – $189). Sales from TJS totalled 131,493 ounces of gold (2007 – 112,646 ounces) at an average price of $884 per ounce (2007 – $694), while cash operating costs averaged $261 per ounce (2007 – $288). Net income for the fourth quarter Our consolidated net income for Q4 2008 was $100.7 million or $0.27 per share (Q4 2007 – net loss of $9.1 million or $0.03 per share). Excluding the $72.5 million gain on the sale of São Bento, our consolidated net income was $28.2 million or $0.08 per share. Gold revenues for Q4 2008 increased 159% compared to Q4 2007 due to higher selling prices and increased ounces sold. Selling prices during Q4 2008 increased 3% and units sold increased 48,063 ounces, or 151%, compared to Q4 2007. Kişladağ operations shut down on August 18, 2007 and remained shut down during all of Q4 2007, resulting in lower gold production for that quarter. Operating costs for Q4 2008 were $25.9 million, an increase of 187% over Q4 2007 due to the shutdown of the Kişladağ during Q4 2007. Costs of sales per ounce increased at TJS as a result of lower grades and recoveries from transitional ore at the newly opened Jinlonggou pit (“JLG”) as well as higher stripping costs. Financial position Gold has maintained its value during the current global economic crisis, with average prices up 30% as compared to 2007. In 2008, we sold 19% more ounces of gold than in 2007, at an average realized gold price of $876 per ounce, a 30% increase from 2007. In general, unit costs of our Turkish and Chinese operations have increased due to inflation and operational factors, offset at Kişladağ by gains from the weakening of the Turkish lira relative to the US dollar and at TJS by the shift to contract mining. The Turkish lira weakened by 20% relative to the US dollar during the second half of 2008. A beneficiary of the current economic crisis is the US dollar, which has gained relative to a number of currencies since August 2008. While Eldorado’s financial performance has not been negatively impacted, the economic downturn has adversely affected other exploration stage or intermediate mining companies in which Eldorado holds equity interests. In the fourth quarter, we recorded an impairment loss of $0.5 million relating to an other than temporary decline in the fair value of one of our investments. Additionally, we recorded a $5.9 million charge to other comprehensive losses related to unrealized losses on two of our investments. As part of our growth strategy, we will continue to leverage our resources by making strategic equity investments. Investments in marketable securities available-for-sale represented 1.3% of our total assets as at December 31, 2008. Eldorado is well positioned to confront the current economic crisis with strong cash reserves and no long-term debt. At December 31, 2008, we held $61.9 million in cash and short-term deposits (2007 – $46.0 million), had no restricted cash or long-term debt (2007 – $65.7 million restricted cash, $65.5 million long-term debt) and had an environmental guarantee deposit of $2.5 million (2007 – $8.3 million). The reduction in the environmental guarantee is the result of obtaining a favourable bank guarantee. We remain hedge free. Corporate developments Frontier acquisition On July 7, 2008, we completed the acquisition of Frontier. Under the terms of the agreement, each Frontier common share was exchanged for 0.122 common shares of Eldorado, CA$0.0001 in cash and one Exchange Receipt. Each Exchange Receipt entitles the holder to receive an additional 0.008 Eldorado common shares if, prior to July 1, 2009, a Joint Ministerial Resolution is issued in Greece by the Joint Ministerial Council (comprised of the ministries of the Environment, Agriculture, Development and Health) accepting the Environmental Terms of Reference drafted by the Ministry of Environment regarding Perama Hill. 2008 Annual Report 17 MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Eldorado issued 20,339,334 common shares and paid $0.02 million in cash in connection with this transaction. No value was assigned to the Exchange Receipts as we believe it is highly unlikely that the condition for their exchange into Eldorado shares will be met. The total consideration paid for Frontier was valued at $158.6 million and Eldorado incurred acquisition costs of $3.9 million. This transaction was accounted for as an asset acquisition because Frontier was in the development stage. Eldorado’s consolidated financial statements include 100% of Frontier results from July 7, 2008. This acquisition affected our balance sheet as is explained in Note 4 of the consolidated financial statements. We recorded a future tax liability of $51.4 million, which results from an imputed income tax liability we incurred due to the difference between the allocated fair values and tax values of the property, plant and equipment assets we acquired. Brazauro agreement On July 8, 2008, Eldorado entered into an option agreement with Brazauro Resources Corporation (“Brazauro”) under which Eldorado can acquire from Brazauro a 60% to 75% interest in Tocantinzinho in Brazil in return for purchasing Brazauro securities (“units”), undertaking $9.5 million of exploration and development expenditures and paying Brazauro $90.0 million plus a production decision fee of up to $10.0 million. On July 24, 2008, Eldorado subscribed for 8,800,000 units of Brazauro at a price of C$0.95 per unit. Each unit includes one common share of Brazauro and one warrant. Each warrant will entitle the holder to acquire one-half of one common share of Brazauro at a price of C$1.30 per share for a period of 18 months. The purchase price of the 8,800,000 units was allocated between marketable securities and mineral interest based on the fair value of the Brazauro units on July 18, 2008 – the date that Eldorado notified Brazauro of its decision to proceed with the transaction. The fair value of the units of $4.9 million was recorded in marketable securities while the value of the option of $3.4 million was record in mineral interest. São Bento divestiture On December 15, 2008, we completed the sale of São Bento to AngloGold Ashanti (“AngloGold”) for $70.0 million payable by the issuance of 2,701,660 common shares of AngloGold, resulting in a gain on the sale of $72.5 million after consideration of net liabilities divested. As of December 31, 2008, we had sold 1,566,500 AngloGold shares for cash of $25.5 million and accounts receivable of $16.2 million, generating a gain on disposal of $1.1 million over the cost of the shares. The remaining 1,135,160 shares were valued at $31.5 million at December 31, 2008 and reported as Marketable Securities on the Balance Sheet. The shares generated an unrealized gain of $2.0 million when marked to the market price at year-end. All of the remaining shares were sold in January 2009. 18 Eldorado Gold 2. Production OPERATING DATA 1 2008 2007 2006 TOTAL GOLD PRODUCTION Total ounces produced Commercial production Cash operating costs ($/oz) 4 Total cash cost ($/oz) 2, 4 Total production cost ($/oz) 3, 4 KISLADAG MINE, TURKEY 5 Commercial production Cash operating costs ($/oz) 4 Total cash cost ($/oz) 2, 4 Total production cost ($/oz) 3, 4 TANJIANSHAN MINE, CHINA 6 Total ounces produced Commercial production Cash operating costs ($/oz) 4 Total cash cost ($/oz) 2, 4 Total production cost ($/oz) 3, 4 SAO BENTO MINE, BRAZIL 7 Commercial production Cash operating costs ($/oz) 4 Total cash cost ($/oz) 2, 4 Total production cost ($/oz) 3, 4 308,802 308,802 $ 257 $ 289 $ 370 190,334 $ 254 $ 256 $ 291 118,468 118,468 $ 261 $ 343 $ 496 – $ – $ – $ – 281,135 268,643 $ 236 $ 263 $ 338 135,306 $ 189 $ 192 $ 224 138,162 125,670 $ 288 $ 342 $ 472 7,667 $ 208 $ 224 $ 152 135,653 135,653 $ 324 $ 330 $ 343 70,895 $ 206 $ 208 $ 229 n/a n/a n/a n/a n/a 64,758 $ 454 $ 464 $ 467 Notes 1 Cost figures calculated in accordance with the Gold Institute Standard. 2 Cash operating costs, plus royalties and off-site administration costs. 3 Total cash costs, plus foreign exchange gain or loss, depreciation, amortization and reclamation expenses. 4 Cash operating, total cash and total production costs are non-GAAP measures. See the section “Non-GAAP Measures” of this MD&A. 5 The Kişladağ mine temporarily ceased operations on August 18, 2007 and reopened on March 6, 2008. 6 The Tanjianshan mine began commercial production on February 1, 2007. 7 Q2 2007 was the last quarter of production at the São Bento mine. 3. Operations Tanjianshan mine In 2008, we milled a total of 858,829 tonnes of ore at TJS at an average grade of 5.31 g/t, resulting in 118,468 ounces of gold produced at an average cash operating cost of $261 per ounce. Capital expenditures for the year were $38.9 million, with the majority of the capital spending allocated to the Phase II construction program. At completion, Phase II will include a sulphide ore processing facility to treat sulphide ore from the newly opened JLG pit as well as an expanded tailings dam. Commissioning is expected in the first quarter of 2009. The mining contractor operated to expectations in 2008, validating our decision to move to contract mining. 2008 Annual Report 19 MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Kişladağ mine During 2008, approximately 7,555,881 tonnes of ore were placed on the leach pad at Kişladağ at an average grade of 1.27 g/t, and we produced 190,334 ounces of gold at an average cash operating cost of $254 per ounce. Mining operations resumed on March 6, 2008 after a court injunction forced the mine to close on August 18, 2007. Capital expenditures for the year were $27.3 million, with capital spending allocated to mobile equipment for plant and infrastructure upgrades ($11.3 million), an excavator and trucks ($5.2 million), the lime project ($3.4 million), geological core drilling ($2.3 million) and a 200 tonne process crane ($1.7 million). The remaining $3.4 million consisted of smaller purchases and upgrades. 4. Development Efemçukuru We drilled 1,519 meters at Efemçukuru in 2008. Of this, 961 meters were to explore the down plunge and along-strike extensions of the North Ore Shoot and 558 meters were for geotechnical purposes to support detailed mine designs. We received forestry permits during the year covering all the forestry land needed for construction. By the end of 2008, we had completed the new access road to the site and had cleared and grubbed the plant site, rock dump and tailings area. We began constructing the north and south underground portals during the year, as well as the access road and pad for the north portal. We have ordered items with long lead times, such as the ball and SAG mills, and we have finalized the process design criteria. We negotiated the contract for underground pre-production development and awarded it to a Turkish contractor. Manpower increased significantly as staff positions were filled during the year. At the end of 2008, we had purchased approximately 78% of the land required for operations. An expropriation decree was awarded to our wholly owned subsidiary, Tüprag Metal Madencilik Sanayi ve Ticaret A.S. (“Tüprag”) that will allow the company to acquire the remaining private land at a price set by the government. During the year, the Fourth Administrative Court in Izmir ruled in favour of the Environmental Positive Opinion issued by the Ministry of Environment and Forestry for the project. Capital spending at Efemçukuru in 2008 was $14.3 million. Vila Nova iron ore On February 25, 2008, we received a construction permit issued by the Environmental Agency of Amapa State for the Vila Nova Iron Ore project and we were able to start construction and development activities. During 2008, the majority of the construction was completed, including the crushing and screening plant, the run of mine (“ROM”) and finished product stockpiles, and the tailings impoundment area. We finished clearing the open pit, stockpiled topsoil and took delivery of all the major mining equipment, which is ready for use. We drilled a total of 2,708 meters during the year for metallurgical characterization and mine planning, and we are continuing negotiations on the sale of the iron ore. 5. Exploration In 2008, exploration costs increased to $19.7 million (2007 – $14.6 million) as we expanded our exploration activities in Brazil, Turkey, China and the USA. Included in these costs were $7.4 million (2007 – $3.0 million) in deferred exploration costs reported in mineral interests on the balance sheet. Exclusive of stock-based compensation costs of $1.4 million, we incurred exploration expenditures of $8.7 million in Turkey, $3.4 million in China, $3.1 million in Brazil, $1.1 million in the USA and $2.0 million in other locations. 20 Eldorado Gold Turkey Our main reconnaissance focus in 2008 was on the Sayacik project, adjacent to Kişladağ. Work included detailed mapping, a magnetic geophysical survey and soil geochemical sampling. Program planning and government permitting processes were also begun for planned drill testing in 2009. We also conducted work on properties in the Central and Eastern Pontide regions of Turkey that included stream sampling and general mapping/prospecting. Positive results were obtained for the Arpali porphyry project and further work is planned in 2009. At Efemçukuru, we completed 7 drill holes totalling 1,292 meters over the North Ore Shoot. The holes successfully intersected precious metal and base metal rich intercepts down plunge from current limits. Detailed mapping and soil geochemical sampling programs were also carried out over the property. We executed a 45 hole, 16,586 meter exploration drilling program at Kişladağ. Results outlined areas of new oxide mineralization in the southeast portion of the deposit and confirmed lateral extensions of sulphide mineralization to the southeast and west. Brazil Our exploration efforts in Brazil focused on general reconnaissance of prospective lands in the Carajas and Tapajos regions of Para state. During Q4 2008, emphasis switched to managing an infill diamond drill campaign at Tocantinzinho as part of our joint venture commitment with Brazauro Resources. We drilled 3,518 meters in 11 diamond drill holes by year-end. Results confirmed extent and predicted gold grades in areas of inferred mineral resources. China We completed 70 drill holes totalling 15,500 meters at TJS during 2008. Most of the drilling tested the Xijinggou and Qinlongtan (“QLT”) areas of the property. Xijinggou drilling outlined two main areas of gold mineralization on which inferred mineral resources were estimated at year-end. QLT drilling proved the presence of a dip reversal in the mineralized zone below the open pit floor. USA We conducted mapping, soil geochemical sampling and ground magnetic geophysical surveys on our joint venture projects with AuEx Ventures (Buffalo Canyon, Green Monster, Hays Canyon and Klondike North). We also executed a reverse circulation drill program on one of the projects, Klondike North, where drilling totalled 2,584 meters in 12 holes. 6. Legal Kişladağ On February 28, 2008, the Turkish Ministry of Environment and Forestry and Eldorado’s subsidiary Tüprag (as co- defendant) filed an appeal requesting the 6th Department of the High Administrative Court reconsider its February 6 decision on the essence of the Kişladağ EIA case. This appeal is now at the high administrative court waiting for consideration. There has been no change in the status of the case since the first quarter of 2008. Efemçukuru On January 26, 2009, the Sixth Department of the High Administrative Court in Ankara, Turkey delivered a favourable decision for the Company in cases by certain third parties seeking to cancel the Environmental Positive Certificate for Efemçukuru issued by the Turkish Ministry of Environment and Forestry. 2008 Annual Report 21 MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7. Review of Financial Results Net income Our consolidated net income for 2008 was $163.7 million or $0.46 per share (2007 – $35.4 million or $0.10 per share). Strong performances from Kişladağ and TJS as well as the $72.5 million ($0.21 per share) gain on the sale of São Bento, were the main factors in explaining our record net income. Additionally, net income was positively affected by a $9.2 million decrease in future income tax related to a 20% reduction in Greek income tax rates. Gold revenues Our gold revenues consist of gold bullion sales at spot. We sell the refined bullion either to large financial institutions or on the Istanbul and Shanghai Gold Exchanges. Gold revenues in 2008 increased 55% over 2007 due to increases in both selling prices and sales volumes. Selling prices in 2008 increased 30% over 2007, and ounces sold in 2008 increased 19% over 2007, reflecting increased production from Kişladağ and TJS. Gold ounces sold Kişladağ Tanjianshan São Bento Total gold ounces sold Average selling price per ounce Gold revenues (000s) 2008 2007 2006 185,425 131,493 - 316,918 $ 876.32 $ 277,723 142,725 112,646 10,641 266,012 $ 674.04 $ 179,302 63,352 – 64,200 127,552 $ 608.70 $ 77,641 Interest and other income Interest income earned on cash, short-term money market investments and restricted cash balances held during 2008 was $2.9 million (2007 – $7.5 million). The decrease in interest income from 2007 was the result of lower average cash balances during 2008 as well as a decline in interest rates. Other income of $7.6 million in 2008 (2007 – $1.9 million) was related to the sale of excess electricity at São Bento as well as Brazilian tax credits resulting from the spin- off of Vila Nova from São Bento prior to the sale of São Bento to AngloGold. Operating costs Operating costs in 2008 increased 27% over 2007 due to increased sales volumes and higher costs of production at Kişladağ. At Kişladağ, production costs increased due to increased lime consumption, as ore with higher sulphide content was treated on the leach pad. Production costs at TJS were lower than 2007 as a result of lower mining costs related to the change from Company-owned mining equipment to contract mining, as well as lower strip ratios at the QLT pit. Depletion, depreciation and amortization Depletion, depreciation and amortization (“DD&A”) expense of $26.0 million (2007 – $20.0 million) was higher than 2007 due to higher volumes of ore processed at Kişladağ. General and administrative General and administrative costs reflect the costs of our head office in Vancouver, Canada, as well as our liaison offices in Ankara, Turkey and Beijing, China. We have continued to add to our administrative staff to support expanding 22 Eldorado Gold international operations. General and administrative expense of $38.3 million increased $11.5 million over 2007, primarily due to higher stock-based compensation costs allocated to general administrative expense, and the addition of administrative staff in Vancouver. Exploration expense Exploration activities are discussed in the section “Exploration” of this MD&A. Mine standby costs Mine standby costs of $2.4 million reflected the costs of maintaining Kişladağ while it was shut down in Q1 2008 (2007 – $6.6 million). Asset retirement obligation costs Asset retirement obligation costs in 2008 of $3.1 million reflected a $2.5 million revision to estimated future reclamation costs at São Bento prior to its sale (2007 – $0.6 million). Foreign exchange (gain) loss We reported a foreign exchange loss of $0.2 million in 2008 (2007 – $4.7 million gain). Foreign exchange losses in Brazil and China were partially offset by foreign exchange gains in Greece and Turkey. The major factor in the foreign exchange gains was the revaluation of future income tax liabilities denominated in non-US currencies into US dollars. Gain on disposal of assets We reported a net gain on the disposal of assets totalling $70.8 million (2007 – $3.6 million). The net gain included a $72.5 million gain on the sale of São Bento and a $1.7 million loss on the disposal of mining equipment at TJS. Gain on marketable securities In 2008 we reported a net gain on marketable securities of $2.5 million (2007 – $0.2 million). The net gain included a $1.1 realized gain on the sale of AngloGold shares, a $2.0 unrealized gain on AngloGold shares marked to market at year-end, a $0.5 million impairment adjustment to the carrying value of marketable securities treated as available for sale financial instruments and a $0.1 million unrealized loss in other marketable securities held for trading. Interest and financing costs Interest expense in 2008 was $2.9 million, compared to $3.4 million in 2007, reflecting the decrease in interest rates and the repayment of debt in during the year. Unrealized gain on derivative contract In 2007 we recorded a $3.0 million asset, reflecting the fair value of an energy contract related to São Bento, which we concluded was a derivative financial instrument. This resulted in the recognition of an unrealized gain in 2007 of $2.1 million. In 2008 we charged $3.0 million to loss on derivative contract as the life of the contract had expired prior to the sale of São Bento. Income taxes Current income tax expense for 2008 was $25.4 million (2007 – $4.8 million). Tax expense by country was: Turkey – $14.4 million (2007 – nil), China – $6.9 million (2007 – $4.8 million) and Brazil – $4.1 million (2007 – nil). Tax expense in Turkey was nil in 2007 due to the mine shutdown of Kişladağ in the second half of the year. Tax expense in China increased due to higher profits. Tax expense in Brazil related to a taxable gain that was triggered by the repayment of intercompany debt as part of the Vila Nova spin-off prior to the sale of São Bento. The taxes due in Brazil were completely offset by tax credits from prior years. 2008 Annual Report 23 MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Future income tax recovery for 2008 was $12.9 million (2007 – expense $17.3 million). Future tax recovery (expense) by country was: Turkey – $3.5 million expense (2007 – $9.5 million expense), China – $3.4 million expense (2007 – $3.2 million expense), Brazil – $9.5 million recovery (2007 – $4.6 million expense), Greece – $10.3 million recovery (2007 – no Greek business investment). Future tax recovery in Brazil related to the reversal of unrealized foreign exchange gains on intercompany loans, while future income tax recovery in Greece related to the reduction of the Greek tax rate from 25% to 20%. The two major factors causing the effective tax rate to decline from 38.41% in 2007 to 6.90% in 2008 are the tax-free gain from the sale of São Bento and the reduction of the future income tax recorded on the Frontier acquisition due to a reduction in the Greek future income tax rates from 25% to 20%. Non-controlling interest We reported a charge of $5.1 million in 2008 related to our joint venture partners’ 10% interest in TJS (2007 – nil). 8. Summary of Quarterly Results Revenue Net income (loss) Earnings (loss) per share (US$) Basic Diluted ($000 except per share amounts) Year ended December 31, 2008 4th Quarter 65,148 100,724 3rd Quarter 68,238 17,040 2nd Quarter 82,462 25,155 1st Quarter 72,383 20,737 0.27 0.27 0.05 0.05 0.07 0.07 0.06 0.06 Revenue Net income (loss) Earnings (loss) per share (US$) Basic Diluted 4th Quarter 28,512 (9,105) (0.03) - Year ended December 31, 2007 3rd Quarter 40,038 5,213 2nd Quarter 76,662 26,731 1st Quarter 43,487 12,582 0.02 0.02 0.08 0.08 0.04 0.04 The first quarter of 2007 included the first two months of commercial production at TJS. The third and fourth quarter of 2007 were impacted by the temporary shutdown of Kişladağ resulting from the suspension of operations from August 18, 2007 to March 6, 2008. The fourth quarter of 2008 included the $72.5 million gain ($0.21 per share) on the sale of São Bento. 9. Outlook Eldorado plans to produce 325,000 to 340,000 ounces in 2009 at a cash operating cost of approximately $300 per ounce. Production is expected to increase at Kişladağ by approximately 40,000 to 50,000 ounces from the 2008 total of 190,334 ounces as a result of operating the mine for a full year. On the other hand, production at TJS is expected to decrease approximately 20,000 ounces from the 2008 total of 118,468 ounces due to an expected decrease in Q1 2009 production resulting from the commissioning of the sulphide ore processing facility. Assumptions used to 24 Eldorado Gold forecast total cash costs for 2009 include: exchange rates of Cdn$1.10 = US$1.00, Brazilian Real 2.00 = US$1.00, Turkish Lira 1.45 = US$1.00, and Chinese RMB 6.50 = US$1.00; and diesel fuel = US$1.52 per liter (Kişladağ only). Capital expenditures for 2009 are forecast at $117.1 million, including $84.8 million at Efemçukuru, $11.1 million at TJS, $10.0 million at Kişladağ, $10.6 million at Vila Nova and $0.6 in other. Exploration expenditures in 2009 are expected to amount to $18.4 million, of which $12.4 million will be expensed, with efforts focused on Tocantinzinho, TJS and general exploration in Turkey. General and administrative expense is forecast at $31.6 million for the year. Depreciation and depletion expense is expected to be $34.0 million, and we anticipate an overall effective tax rate of 30%. 10. Financial Instruments and Related Risks Eldorado manages its exposure to financial risks, including liquidity risk, credit risk, currency risk, interest rate risk and price risk, through a risk management review process. On a quarterly basis, management prepares a risk assessment report outlining the Company’s operational and financial risks. The Company’s Board of Directors reviews this report with management to evaluate and assess the risks Eldorado is exposed to in various markets and the steps that the Company takes to protect itself against adverse price movements. All transactions undertaken are to support the Company’s ongoing business. Eldorado does not acquire or issue derivative financial instruments for trading or speculative purposes. The following section describes the types of risks that the Company is exposed to and its objectives and policies for managing these risk exposures. Liquidity risk Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. Eldorado has a rigorous planning, budgeting and forecasting process to help determine the funds required to support its normal operating requirements on an ongoing basis and its expansion plans. The Company believes that its anticipated cash flows from operations and its holdings of cash and cash equivalents are sufficient to meet its obligations in 2009 and beyond. At December 31, 2008, we held $61.8 million in cash and cash equivalents (December 2007 – $46.0 million) and $nil in restricted collateral accounts (December 2007 – $65.7 million), which securitize debt of $nil (December 2007 – $65.0 million). Credit risk Credit risk is the risk that the counterparty to a financial instrument will cause a financial loss for the Company by failing to discharge its obligations. Credit risk is primarily associated with trade receivables; however, it also arises on cash and cash equivalents. To mitigate exposure to credit risk on financial assets, we have established policies to ensure counterparties demonstrate minimum acceptable credit worthiness and to ensure liquidity of available funds. The Company also monitors its concentration of credit risk. Eldorado closely monitors its financial assets. We sell our products exclusively to large international financial institutions and other organizations with strong credit ratings, and payment is normally in advance or within one week of receipt of shipment. The historical level of customer defaults is negligible, and as a result, the credit risk associated with trade receivables at December 31, 2008 is considered to be negligible. We invest our cash and cash equivalents in major financial institutions and in government issuances in accordance with our short-term investment policy, and the credit risk associated with our investments is considered to be low. As a result of current global financial conditions, numerous financial institutions have gone into bankruptcy or have been rescued by government authorities. As such, the Company is subject to the risk of loss of its deposits with 2008 Annual Report 25 MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS financial institutions that hold the Company’s cash. As at December 31, 2008, approximately 55% of the Company’s cash and cash equivalents were with one financial institution. Eldorado’s maximum exposure to credit risk at December 31 was as follows: Cash and cash equivalents Accounts receivable ($000s) 2008 61,851 36,109 2007 46,014 28,720 The increase in accounts receivable from 2007 related to the sale of AngloGold shares in the amount of $16.2 million. This balance was received in January 2009. The remaining balance related to Turkish value added tax credits and subsidies, mining contractor advances and prepaid land leases and insurance premiums. Market risk a. Currency risk Currency risk is the risk that the fair values or future cash flows of the Company’s financial instruments will fluctuate because of changes in foreign exchange rates. Exchange rate fluctuations may affect the costs that Eldorado incurs in its operations. Gold is sold in US dollars and the Company’s costs are incurred principally in US dollars, Canadian dollars, Turkish lira, Brazilian real and Chinese renminbi. The appreciation of non-US dollar currencies against the US dollar can increase the cost of gold production and capital expenditures in US dollar terms. We also hold cash and cash equivalents that are denominated in non-US dollar currencies that are subject to currency risk. Accounts receivable and other current and long-term assets denominated in non-US dollars relate to goods and services taxes, income taxes, value added taxes and insurance receivables. As a result of the acquisitions of Afcan Mining Corporation (“Afcan”) and Frontier assets in 2005 and 2008 respectively, we recorded $56.6 million of future income tax liabilities on mining interests that are recorded in local currencies. The future income tax liabilities are monetary items that are revalued each period-end at current exchange rates, with the gain or loss recorded in net earnings in the period. The Company is exposed to currency risk through the following financial assets and liabilities, value added tax and other taxes recoverable and future income tax asset and liabilities denominated in currencies other than US dollars at December 31, 2008: Cash and cash equivalents Marketable securities Accounts receivable and other Future income tax receivable Canadian dollar 4,618 14,804 1,902 - Accounts payable and accrued liabilities Future Income tax liabilities Net balance Equivalent in US dollars (8,549) - 12,775 10,489 26 Eldorado Gold Australian dollar 70 - 78 - - ($000s) Turkish lira 1,280 - 12,733 Chinese renminbi 48,453 - 44,426 Euro 139 - 357 Brazilian real 3,487 Peruvian sol 415 830 - - - - 1,197 - (153) (14,233) (155,879) (2,113) (165) - 148 103 (26,390) (26,047) (36,462) (15,302) (15,522) (10,140) (88,144) (149,947) (22,025) (2,826) (622) (277) - 250 112 During the year ended December 31, 2008, Eldorado recognized a loss of $0.2 million (2007 – $4.7 million gain) on foreign exchange. Included in this amount was a $4.0 million gain resulting from the revaluation of future income taxes denominated in currencies other than US dollars (2007 – nil). Based on the above net exposures at December 31, 2008, a 10% depreciation or appreciation of the above currencies against the US dollar would result in a $5.8 million increase or decrease in our after-tax net earnings. Eldorado currently does not hedge to reduce risks associated with currency fluctuation. b. Interest rate risk Interest rate risk is the risk that the fair values and future cash flows of the Company will fluctuate because of changes in market interest rates. The Company’s debt is not exposed to interest rate cash flow risk as the interest rate has been fixed at the time of each drawdown. As at December 31, 2008, Eldorado had an outstanding $0.1 million debt to Sino Gold Mining Limited (“Sino Gold”) related to our acquisition of Afcan. The approximate average interest rate earned by the Company in 2008 on its cash and cash equivalents was 2.36% (2007 – 5.17%). A 10% increase or decrease in the interest earned from financial institutions on deposits and money market investments held at December 31, 2008 would result in a $0.1 million increase or decrease in our after-tax net earnings. The status of our financing arrangements and obligations is as follows: In April 2005, Tüprag entered into a $65.0 million term revolving credit facility (the “Revolving Credit Facility”) with HSBC due February 28, 2010. The Revolving Credit Facility is secured by Eldorado cash deposits in restricted accounts equivalent to the HSBC advances to Tüprag. The Revolving Credit Facility bears interest fixed at the prevailing LIBOR on the date of the draw plus 0.50%. As at December 31, 2008, the Company has repaid all the amounts drawn previously on the facility. At December 31, 2008, $65.0 million remained available under the Revolving Credit Facility. In November 2007, our 90% owned subsidiary QDML entered into a $15.0 million revolving facility (“the Facility”) with HSBC Bank (China). The Facility has a term of one year and is subject to annual review and renewal. In November 2008, the Facility was renewed for a second year and the interest rate is fixed at 1.2 times the prevailing lending rate stipulated by the People’s Bank of China. At December 31, 2008, $15.0 million remained available under the Revolving Credit Facility. Subsequent to year- end, QDML drew down $5.0 million under the Facility. c. Price risk Price risk is the risk that the fair value or future cash flows of the Company’s financial instruments will fluctuate because of changes in market prices. Eldorado’s profitability depends on the price of gold, which is affected by numerous factors such as the sale or purchase of gold by various central banks and financial institutions, interest rates, exchange rates, inflation or deflation, fluctuations in the value of the US dollar and foreign currencies, global and regional supply and demand, and the political and economic conditions of the world’s major gold- producing countries. A 10% increase or decrease in the price of gold would result in approximately a $20.0 million increase or decrease in our after-tax net earnings based on the expectations and assumptions we used in our 2009 outlook. At present, Eldorado does not hedge gold sales. The costs relating to Eldorado’s production, development and exploration activities vary depending on the market prices of certain mining consumables, including diesel fuel and electricity. A 10% increase or decrease in diesel 2008 Annual Report 27 MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS fuel market prices would result in approximately a $1.0 million decrease or increase in our after-tax net earnings. We are evaluating a hedge against diesel fuel price fluctuations. Electricity is regionally priced in Turkey and China and semi-regulated by the federal governments of those countries. The regulation of electricity reduces the risk of price fluctuations and we therefore do not contemplate entering into contracts to hedge against such risk. Defined benefit plans During the year ended December 31, 2008, the company implemented a defined benefit pension program with two components: a registered pension plan (“the Pension Plan”) and a non-registered supplementary pension plan (“the SERP”). These plans, which are only available to certain qualifying employees, provide benefits based on an employee’s years of service and final average earnings at retirement. Annual contributions to these plans are actuarially determined and made at or in excess of minimum requirements prescribed by legislation. The Company is not required to pre-fund any benefit obligation under the SERP. Total cash payments for pension benefits for 2008, including cash contributed to the Pension Plan and the SERP were $3.8 million. We expect to contribute $0.1 million to the Pension Plan and $1.3 million to the SERP in 2009 based on minimum funding requirements. Capital resources During the year ended December 31, 2008, Eldorado invested $124.0 million in capital expenditures and mine development. At Kişladağ, capital expenditures totalling $27.3 million related mostly to the Phase II expansion program. Capital expenditures at Tanjianshan totalling $38.9 million related to the sulphide ore processing construction project and stripping of the JLG pit. At Efemçukuru, development expenditures totalled $14.3 million, while at Vila Nova we spent $31.0 million on mine construction and development. We also spent $5.3 million on Tocantinzinho (including $3.4 million related to the Brazauro units purchased as part of the option agreement) and $4.2 million on mineral licenses in Turkey. The remaining $3.0 million of expenditures relate to Perama Hill, and the acquisition of fixed assets in Vancouver, Canada and Ankara, Turkey. During Q4 2008 we received $25.5 million on the sale of AngloGold shares. In 2008, we received net proceeds of $14.7 million in consideration for issuing 3,730,155 common shares related to the exercise of stock options. At December 31, 2008, we had cash and cash equivalents of $61.8 million and working capital of $184.8 million, compared with $46.0 million of cash and cash equivalents and working capital of $97.6 million at the beginning of the year. In the opinion of management, the working capital at December 31, 2008, together with future cash flows from operations, is sufficient to support the Company’s commitments. The Company’s total planned capital expenditures for 2009, with a focus on bringing Efemçukuru to commercial production by Q3 2010, are forecasted to be $117.1 million. These expenditures will be funded partly by cash flows from operations and partly from the sales proceeds of the AngloGold Ashanti shares received by the Company from the sale of São Bento. Looking beyond 2009, Eldorado’s cash flows from operations are expected to significantly increase with commercial production at Efemçukuru and are expected to be sufficient to support currently planned expansions and growth. Acquisitions of additional mineral resource properties may require additional capital. Our ability to pursue growth through acquisitions will depend on our ability to obtain financing through joint venture projects, debt financing and equity financing or other means. There is no assurance that we will be successful in obtaining the required financing. Contractual obligations and guarantees In the normal course of business, we enter into contracts that give rise to commitments for future minimum payments. The following table summarizes the remaining contractual maturities of our financial liabilities and operating and capital commitments at December 31, 2008: 28 Eldorado Gold Debt Capital leases Operating leases Purchase obligations Totals ($000s) 2009 2010 2011 2012 150 65 2,336 33,805 36,356 - 65 2,016 11,557 13,638 - 36 1,877 11,498 13,411 - 23 1,860 11,476 13,359 2013 and later - - 2,140 - 2,140 Total 150 189 10,229 68,336 78,904 Purchase obligations from 2010 forward relate solely to Kişladağ, including the estimated commitments under the unhedged diesel fuel purchase commitments for 2010 through 2012. Imputed interest relating to the Sino Gold loan is included in the debt commitment. 11. Off-Balance Sheet Arrangements None. 12. Critical Accounting Policies and Estimates 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 liabilities at the date of the financial statements, and the reported amounts of revenues and expenditures during the reporting period. Management has identified the following critical accounting policies and estimates. Note 2 of the Company’s consolidated financial statements describe all of the significant accounting policies. Inventories Finished goods, work-in-process, heap leach ore and stockpiled ore are valued at the lower of average production cost and net realizable value. We record the cost of mining ore stacked on our leach pads and in process at our mines as work-in-process inventory, which we value at the lower of cost and estimated net realizable value. These costs are charged to earnings and included in cost of sales on the basis of ounces of gold recovered. The assumptions used to value work-in-process inventories include estimates of gold contained in the ore stacked on leach pads, assumptions of the amount of gold stacked that is expected to be recovered from the leach pads, the amount of gold in the mill circuits and an assumption of the gold price expected to be realized when the gold is recovered. If these estimates or assumptions prove inaccurate, we could be required to write down the recorded value of our work-in-process inventories, which would reduce our earnings and working capital. At December 31, 2008, the average cost of inventory was significantly below its net realizable value. Reserves and resources Mineral reserves and resources are calculated in accordance with National Instrument 43-101, as required by Canadian Securities regulatory authorities. For United States reporting purposes, Industry Guide 7 (under the Securities Exchange Act of 1934, as interpreted by the staff of the Securities and Exchange Commission (“SEC”)) applies different standards to classify mineralization as a reserve. We advise our investors that while the terms “mineral resource,” “measured mineral resource,” “indicated mineral resource” and “inferred mineral resource” are recognized and required by Canadian regulations, they are not defined 2008 Annual Report 29 MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS terms under standards in the United States and normally are not permitted to be used in reports and registration statements filed with the SEC. As such, information contained in this report concerning descriptions of mineralization and resources required under Canadian standards may not be comparable to similar information made public by US companies in SEC filings. Investors are cautioned not to assume that any part or all of the mineral deposits in these categories will ever be converted into reserves. Mining interests A significant portion of Eldorado’s mining properties, plant and equipment is depreciated and amortized on a unit-of- production basis. Under the unit-of-production method, the calculation of depreciation, depletion and amortization of mining properties, plant and equipment is based on the amount of reserves expected to be recovered from each location. If these estimates of reserves prove to be inaccurate, or if we revise our mining plan for a location due to reductions in the metal price forecasts or otherwise, to reduce the amount of reserves expected to be recovered, we could be required to write down the recorded value of our mining properties, plant and equipment, or to increase the amount of future depreciation, depletion and amortization expense, both of which would reduce our earnings and net assets. In addition, generally accepted accounting principles require us to consider at the end of each period whether there has been an impairment of our capitalized mining properties, plant and equipment. For producing properties, this assessment is based on expected future net cash flows to be generated from the location. For non-producing properties, this assessment is based on whether factors that may indicate the need for a write-down are present. If the Company determines there has been an impairment because its prior estimates of future net cash flows have proven to be inaccurate, due to reductions in the metal price forecasts, increases in the costs of production, reductions in the amount of reserves expected to be recovered or otherwise, or because the Company has determined that the deferred costs of non-producing properties may not be recovered based on current economics or permitting considerations, the Company would be required to write down the recorded value of its mining properties, plan and equipment, which would reduce the Company’s earnings and net assets. A review of Eldorado’s mining properties, plant and equipment at December 31, 2008 indicated that their estimated undiscounted net cash flows are significantly in excess of their carrying values. In our review, we used an average projected gold price of $895 per ounce for the period 2009 to 2013 and $750 per ounce from 2014 onwards. Goodwill and impairment testing The Company’s business combinations are accounted for using the purchase method of accounting whereby assets acquired and liabilities assumed are recorded at their fair market values as of the date of acquisition and any excess of the purchase price over such fair value is recorded as goodwill. The Company evaluates on an annual basis the carrying amount of goodwill to determine whether current events and circumstances indicate that such carrying amount may no longer be recoverable. To accomplish this, the Company compares the fair value of its reporting units to their carrying amounts. If the carrying value of a reporting unit exceeds its fair value, the Company compares the implied fair value of the reporting unit’s goodwill to its carrying amount, and any excess of the carrying value over the fair value is charged to operations. Assumptions underlying the fair value estimates are subject to significant risks and uncertainties. Goodwill totalling $2.2 million related to TJS was reflected on the consolidated balance sheet at year-end 2008. A review of TJS’s fair value indicated that there was no impairment of goodwill at December 31, 2008. We used a discount rate of 9% to calculate the net present value of cash flows from TJS in order to estimate its implied fair value. Operating costs We report our operating costs in accordance with the Gold Institute Standard. Future operating costs include estimates of foreign currency exchange and inflation trends. 30 Eldorado Gold Stock-based compensation We use the Black-Scholes Model to determine the fair value for awards of stock options to employees, officers and directors. Key assumptions used in this model are share price, volatility and expected life of options. Asset retirement obligation When assessing the carrying value of the asset retirement obligation, we estimate, among other things, the mine closure date, the credit-adjusted risk-free rate, the inflation rate and the timing of reclamation costs. Income taxes Income taxes are recorded using income tax rates expected to apply in the years in which the temporary differences are estimated to be recovered or settled. In circumstances where the applicable tax laws and regulations are either unclear or subject to varying interpretations, it is reasonably possible that changes in these estimates could occur that would materially affect the amount of income tax liabilities recorded at the balance sheet date. Financial instruments Investments classified as held for trading and derivative financial instruments are reported at fair value with unrealized gains or losses included in earnings. Fair values are determined directly by reference to published price quotations in an active market when available, or by using a valuation technique that uses inputs observed from the market. Pension plans To measure the obligations and expenses of pension plans, we are required to set various actuarial assumptions including a long-term estimate of the expected rate of return on plan assets, the discount rate, the rate of salary escalation and the average remaining service period of active employees expected to receive benefits. The following table outlines the key assumption of our pension plans: Expected long term rate of return on plan assets Discount rate beginning of year Discount rate end of year Rate of salary escalation Average remaining service period of active employees expected to receive benefits December 31, 2008 Pension Plan 6.50% 5.25% 7.50% 4.50% 5 years SERP 6.50% 5.25% 7.50% 4.50% 5 years 13. Future Canadian Accounting Pronouncements The CICA has issued three new standards and an EIC abstract that may affect Eldorado’s financial disclosures and results of operations for interim and annual periods beginning January 1, 2009, 2010 and 2011. We will adopt the requirements beginning in the interim period ended March 31, 2009, 2010 and 2011 and we are considering the impact this will have on our financial statements. Goodwill and Intangible Assets (Section 3064) In February 2008, the CICA issued Section 3064, “Goodwill and Intangible Assets”, which replaces Section 3062, “Goodwill and Other Intangible Assets”. This new standard provides guidance on the recognition, measurement, presentation and disclosure of goodwill and intangible assets and is effective beginning January 1, 2009. Concurrent with the adoption of this standard, EIC-27, “Revenues and Expenditures in the Pre-operating Period”, will be withdrawn. 2008 Annual Report 31 MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This will result in a change to our accounting for the start-up of mining operations, as pre-commercial production costs will no longer be capitalized as an asset. The adoption of this new accounting policy will not have any material impact on the Company’s consolidated financial statements. Business Combinations (Section 1582) In January 2009, the CICA issued Handbook Section 1582, “Business Combinations” (“CICA 1582”). CICA 1582 requires that all assets and liabilities of an acquired business be recorded at fair value at acquisition. Obligations for contingent considerations and contingencies will also be recorded at fair value at the acquisition date. The standard also states that acquisition-related costs will be expensed as incurred and that restructuring charges will be expensed in the periods after the acquisition date. The Section applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period on or after January 1, 2011. Consolidations (Section 1601) and Non-Controlling Interest (Section 1602) In January 2009, the CICA issued Handbook Section 1601, “Consolidations” (“CICA 1601”), and Section 1602, “Non-Controlling Interests” (“CICA 1602”). CICA 1601 establishes standards for preparing consolidated financial statements and CICA 1602 establishes standards for accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. These standards apply to interim and annual consolidated financial statements relating to fiscal years beginning on or after January 1, 2011. The Company is currently assessing the impact of the new standard on its consolidated financial statements. Credit Risk and the Fair Value of Financial Assets and Financial Liabilities (EIC Abstract 173) In January 2009, the CICA issued EIC Abstract 173, “Credit Risk and the Fair Value of Financial Assets and Financial Liabilities”. The EIC requires the Company to take into account the Company’s own credit risk and the credit risk of the counterparty in determining the fair value of financial assets and financial liabilities, including derivative instruments. This abstract applies to interim and annual consolidated financial statements relating to fiscal years beginning on or after January 1, 2010. We are currently assessing the impact of the new standard on our consolidated financial statements. International Financial Reporting Standards (“IFRS”) We have established a changeover plan to adopt IFRS by 2011 and have created an implementation team. The implementation team has started the process of assessing accounting policy choices and elections that are allowed under IFRS. We are also assessing the impact of the conversion on our business activities, including the effect on information technology and data systems, internal controls over financial reporting and disclosure controls. We will continually review and adjust our changeover plan to ensure our implementation process properly addresses the key elements of the plan. 14. Other Risks and Uncertainties Exploration and development The costs and results of our exploration and development programs affect our profitability and value. Since mines have finite lives based on proven reserves, we actively seek to replace and expand our reserves, primarily through recognizance exploration and acquiring, exploring and developing our existing operations. Exploration for minerals involves many risks and may not result in any new economically viable mining operations or yield new reserves to replace and expand current reserves. Determination of reserves is a process of estimation and, as such, reserve calculations are subject to the assumptions and limitations of the estimation process. Acquiring title to mineral properties is a detailed and time-consuming process. We take steps, in accordance with industry standards, to verify and secure legal title to mineral properties in which we have or are seeking an interest. 32 Eldorado Gold Although we take every precaution to ensure that legal title to our properties is properly recorded in the name of Eldorado, there can be no assurance that such title will ultimately be secured on every property. The legal title to our properties depends on the appropriate and consistent application of the laws in the countries in which we operate. Operations The business of gold mining involves many operational risks and hazards. We work to reduce the risks associated with our projects through high operational standards, an emphasis on hiring and training appropriately skilled personnel and operational improvements. We also maintain adequate insurance to cover normal business risk. We also rely on a number of key employees. Our success depends on attracting and retaining qualified personnel in a competitive labour environment. Environment Our activities are subject to extensive federal, provincial, state and local laws and regulations governing environmental protection and employee health and safety. We must obtain governmental permits and provide associated financial assurance to carry on certain activities. We are also subject to various reclamation-related conditions imposed under federal, state or provincial air, water quality and mine reclamation rules and permits. While we have budgeted for future capital and operating expenditures to maintain compliance with environmental laws and permits, any future changes to these laws could adversely affect Eldorado’s financial condition, liquidity or results of operations. Laws and regulations Eldorado’s mining operations and exploration activities are subject to extensive federal, provincial, state and local laws and regulations governing prospecting, development, production, exports, taxes, labour standards, occupational health and safety, mine safety and other matters. These laws and regulations are subject to change, which may restrict our ability to operate. We draw on the expertise and commitment of our management team, advisors, employees and contractors to ensure compliance with current laws, and we foster a climate of open communication and co-operation with regulatory bodies. Litigation All industries, including the mining industry, are subject to legal claims, with and without merit. In addition to the litigation in Turkey as described under Item 6 – Legal of this MD&A and under the heading “Development Projects – Turkey Projects” in the Company’s Annual Information Form and the litigation risks discussed therein, we are also involved in various legal proceedings. Defence and settlement costs can be substantial, even with respect to claims that have no merit. Due to the inherent uncertainty of the litigation process, there can be no assurance that the resolution of any particular legal proceeding will not have a material adverse effect on our future cash flow, results of operations or financial condition. Political risk Eldorado conducts operations in a number of countries outside of North America, namely Turkey, China, Brazil and Greece. These operations are potentially subject to a number of political, economic and other risks that may affect our future operations and financial position. 15. Non-GAAP Measures Throughout this document, we have provided measures prepared according to Canadian generally accepted accounting principles (GAAP), as well as some non-GAAP performance measures. Because the non-GAAP performance 2008 Annual Report 33 MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS measures do not have any standardized meaning prescribed by GAAP, they may not be comparable to similar measures presented by other companies. We provide these non-GAAP measures as they are used by some investors to evaluate Eldorado’s performance. Accordingly, they are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with Canadian GAAP. We have defined the non-GAAP measures below and reconciled them to reported GAAP measures. Unit costs A reconciliation of cash operating costs calculated in accordance with the Gold Institute Standard to the cost of sales is included below: Cash operating cost ($000s, except cash operating cost per ounce) Gold ounces sold Operating costs Royalty expense and production taxes Effects of inventory adjustments Fair value of stock option grants Expense of contractual severance costs Expense of certain development costs Cash operating cost Cash operating cost per ounce 2008 316,918 $92,004 (10,117) 625 (1,526) - - $ 80,986 $ 257 2007 266,012 $72,691 (7,343) (979) (1,504) - (113) $ 62,752 $ 236 2006 127,552 $45,850 (824) (771) (359) (1,377) (1,129) $ 41,390 $ 324 Cash operating costs are calculated in accordance with the Gold Institute Standard. Cash costs are derived from amounts included in the Consolidated Statements of Operations. 16. Other MD&A Requirements Additional information relating to the Company, including the Company’s Annual Information Form, is available on SEDAR at www.sedar.com. 17. Disclosure of Outstanding Share Data The following table describes the share capital structure as at March 18, 2009, the date of this MD&A. These figures may be subject to minor accounting adjustments prior to presentations in future consolidated financial statements. Equity Type Common shares Share purchase options 18. Control and Procedures Weighted average exercise price per share Cdn$ Total number of common shares 5.93 370,329,056 11,650,887 Disclosure controls and procedures Disclosure controls and procedures are designed to provide reasonable assurance that material information is gathered and reported to senior management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to permit timely decisions regarding public disclosure. 34 Eldorado Gold Management, including the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in the rules of the U.S. Securities and Exchange Commission and Canadian Securities Administration, as at December 31, 2008. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective to a reasonable assurance standard to ensure that information required to be disclosed in reports filed or submitted by the Company under United States and Canadian securities legislation is recorded, processed, summarized and reported within the time periods specified in those rules. Management’s report on internal control over financial reporting The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Any system of internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Management has used the Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework to evaluate the effectiveness of the Company’s internal control over financial reporting. Based on this assessment, management has concluded that as at December 31, 2008, the Company’s internal control over financial reporting was effective. On July 7, 2008, we completed our acquisition of Frontier Pacific Mining Corporation (“Frontier”). We consider the acquisition of Frontier non-material to our results of operations, financial position and cash flows from the date of acquisition through December 31, 2008, and believe that the internal controls and procedures at Frontier have a non- material effect on our internal control over financial reporting. We are in the process of integrating the Frontier operations and will be expanding our internal control over financial reporting compliance program to include Frontier over the next year. We excluded Frontier from our annual assessment of internal control over financial reporting for the year ended December 31, 2008 as permitted by the Sarbanes-Oxley Act and applicable rules relating to business acquisitions. The Frontier operations represent $220 million of total assets and $nil of consolidated revenues as at and for the year ended December 31, 2008. Management’s assessment of the effectiveness of internal control over financial reporting has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, who have expressed their opinion in their report included with the Company’s annual consolidated financial statements. Changes in internal control over financial reporting There have been no changes in the Company’s internal control over financial reporting during the year ended December 31, 2008 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting. 19. Cautionary Statement on Forward-Looking Information Certain statements and information in this MD&A, including all statements that are not historical facts, contain forward-looking statements and forward-looking information within the meaning of applicable US and Canadian securities laws. Such forward-looking statements or information include, but are not limited to, statements or information with respect to financial disclosure, the future price of gold, estimation of mineral reserves and exploration and development capital requirements, and our goals and strategies. Often, these statements include words such as “plans”, “expects” or “does not expect”, “is expected”, “budget”, “scheduled”, “estimates”, “forecasts”, “intends”, “anticipates” or “does not anticipate” or “believes” or variations of such words and phrases or statements that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved. 2008 Annual Report 35 MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS With respect to forward-looking statements and the information included in this MD&A, we have made numerous assumptions, including, among other things, assumptions about the price of gold, anticipated costs and expenditures and our ability to achieve our goals, even though our management believes that the assumptions made and the expectations represented by such statements or information will prove to be accurate. By their nature, forward-looking statements and information are based on assumptions and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from future results, performance or achievements expressed or implied by such forward-looking information. Such risks, uncertainties and other factors include among other things the following: gold price volatility; discrepancies between actual and estimated production and mineral reserves and resources; the speculative nature of gold exploration; mining operational and development risk; and regulatory risks. See our Annual Information Form for additional information on risks, uncertainties and other factors relating to the forward-looking statements and information. Although we have attempted to identify factors that would cause actual actions, events or results to differ materially from those disclosed in the forward-looking statements or information, there may be other factors that cause actual results, performances, achievements or events not to be anticipated, estimated or intended. Also, many of the factors are beyond our control. Accordingly, readers should not place undue reliance on forward-looking statements or information. We undertake no obligation to reissue or update forward- looking statements or information as a result of new information or events after the date of this MD&A except as may be required by law. All forward-looking statements and information made in this document are qualified by this cautionary statement. Eldorado’s consolidated financial statements are prepared in accordance with Canadian GAAP and are filed with appropriate regulatory authorities in Canada and the United States. 36 Eldorado Gold MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING The management of Eldorado Gold Corporation is responsible for the integrity and fair presentation of the financial information contained in this annual report. Where appropriate, the financial information, including financial statements, reflects amounts based on management’s best estimates and judgments. The financial statements have been prepared in accordance with accounting principles generally accepted in Canada. Financial information presented elsewhere in the annual report is consistent with that disclosed in the financial statements. Management is responsible for establishing and maintaining adequate internal control over financial reporting. Management has established and maintains a system of internal accounting control designed to provide reasonable assurance that assets are safeguarded from loss or unauthorized use, financial information is reliable and accurate and transactions are properly recorded and executed in accordance with management’s authorization. This system includes established policies and procedures, the selection and training of qualified personnel and an organization providing for appropriate delegation of authority and segregation of responsibilities. Any system of internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Management has a process in place to evaluate internal control over financial reporting based on the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework. Based on this assessment, management has concluded that as at December 31, 2008, the Company’s internal control over financial reporting was effective. The Board of Directors oversees management’s responsibility for financial reporting and internal control systems through an Audit Committee, which is composed entirely of independent directors. The Audit Committee meets periodically with management, the Company’s outside advisors and the independent auditors to review the scope and results of the annual audit and to review the financial statements and related financial reporting and internal control matters before the financial statements are approved by the Board of Directors and submitted to the Company’s shareholders. PricewaterhouseCoopers LLP, an independent registered public accounting firm appointed by the shareholders, has audited the Company’s financial statements in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States) and has expressed its opinion in the auditors’ report. The effectiveness of the Company’s internal control over financial reporting as at December 31, 2008 has also been audited by PricewaterhouseCoopers LLP, and their opinion is included in their report. Paul N. Wright President and Chief Executive Officer Earl W. Price Chief Financial Officer March 18, 2009 Vancouver, British Columbia, Canada 2008 Annual Report 37 INDEPENDENT AUDITORS’ REPORT To the Shareholders of Eldorado Gold Corporation We have completed integrated audits of the consolidated balance sheets as at December 31, 2008 and 2007 and the related consolidated statements of operations and deficit, comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2008 of Eldorado Gold Corporation (the “Company”) and of its internal control over financial reporting as at December 31, 2008. Our opinions, based on our audits, are presented below. Consolidated financial statements We have audited the accompanying consolidated balance sheets of the Company as at December 31, 2008 and 2007, and the related consolidated statements of operations and deficit, comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of the Company’s consolidated financial statements in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. A financial statement audit also includes assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as at December 31, 2008 and 2007 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2008 in accordance with Canadian generally accepted accounting principles. Internal control over financial reporting We have also audited the Company’s internal control over financial reporting as at December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the Management’s Report on Internal Control over financial reporting included in the Management’s Discussion & Analysis of Financial Condition and Results of Operations. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that 38 Eldorado Gold transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as at December 31, 2008 based on criteria established in Internal Control – Integrated Framework issued by the COSO. Chartered Accountants Vancouver, BC March 18, 2009 2008 Annual Report 39 CONSOLIDATED BALANCE SHEETS (Expressed in thousands of U.S. dollars) December 31, 2008 $ December 31, 2007 $ Assets Current assets Cash and cash equivalents Restricted cash (note 6) Marketable securities (note 7) Accounts receivable and other (note 8) Inventories (note 9) Derivative contract (note 10) Future income taxes (note 16) Restricted assets and other (note 11) Mining interests (note 12) Liabilities Current liabilities Accounts payable and accrued liabilities Debt – current (note 13) Future income taxes (note 16) Debt – long-term (note 13) Contractual severance obligations Asset retirement obligations (note 14) Future income taxes (note 16) Non-controlling interest Shareholders’ Equity Share capital (note 17(a)) Contributed surplus (note 17(b)) Accumulated other comprehensive income (note 17(c)) Deficit Commitments (note 20) Approved on behalf of the Board of Directors 61,851 – 43,610 36,109 86,966 – 175 228,711 8,349 668,309 905,369 42,659 139 1,097 43,895 – – 4,812 60,043 108,750 4,799 931,933 19,378 (5,971) (153,520) 791,820 905,369 46,014 65,710 1,615 28,720 57,525 2,956 959 203,499 10,538 377,705 591,742 40,452 65,422 – 105,874 139 1,479 8,290 26,781 142,563 – 753,058 13,083 214 (317,176) 449,179 591,742 Robert Gilmore Director Paul N. Wright Director See accompanying notes to the consolidated financial statements. 40 Eldorado Gold CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT For the years ended December 31 (expressed in thousands of U.S. dollars, except per share amounts) 2008 $ 2007 $ Revenue Gold sales Interest and other income Expenses Operating costs Depletion, depreciation and amortization General and administrative Exploration Mine standby costs Asset retirement obligation costs (note 14) Foreign exchange loss (gain) Gain on disposal of assets Gain on marketable securities Interest and financing costs Loss (gain) on derivative contract (note 10) Writedown of assets Income before income taxes and non-controlling interest Income tax (expense) recovery (note 16) Current Future Non-controlling interest Net income for the year Deficit, beginning of year: As previously reported Change in accounting policy As adjusted Deficit, end of year Weighted average number of shares outstanding Basic Diluted Earnings per share Basic income (loss) per share – US$ Diluted income (loss) per share – US$ 2006 $ 77,641 7,048 84,689 45,850 1,763 19,030 12,719 – 661 (2,050) 77,973 (41) (904) 1,586 – 2,186 80,800 3,889 (2,080) 1,491 (589) 277,723 10,508 288,231 92,004 25,995 38,299 12,316 2,432 3,108 176 174,330 (70,774) (2,475) 2,940 2,956 – 106,977 181,254 (25,403) 12,904 (12,499) (5,099) 179,302 9,397 188,699 72,691 20,041 26,798 11,634 6,575 604 (4,658) 133,685 (3,602) (221) 3,415 (2,083) – 131,194 57,505 (4,823) (17,261) (22,084) – – 163,656 35,421 3,300 (317,176) – (317,176) (153,520) (353,470) 873 (352,597) (317,176) (356,770) – (356,770) (353,470) 355,132 356,308 343,194 344,621 337,376 339,177 0.46 0.46 0.10 0.10 0.01 0.01 See accompanying notes to the consolidated financial statements. 2008 Annual Report 41 CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31 (expressed in thousands of U.S. dollars, unless otherwise stated) Cash flows generated from (used in): Operating activities Net earnings for the year Items not affecting cash Asset retirement obligations costs Contractual severance expense Depletion, depreciation and amortization Unrealized foreign exchange (gain) loss Future income taxes (recovery) expense Gain on marketable securities Gain on disposal of assets Imputed interest and financing costs Stock-based compensation Fair value of bonus cash award units Pension expense Non-controlling interest Loss (gain) on derivative contract Property reclamation payments Contractual severance payments Changes in non-cash working capital (note 19) Investing activities Mining interests Acquisition of Frontier net of cash received (note 4) Capital expenditures Sales and disposals Marketable securities Purchases Disposals Pension plan contributions (note 15) Value added taxes recoverable on mining interests Restricted cash Financing activities Capital stock Share issuance costs Issuance of common shares for cash Dividend paid to non-controlling interest Long-term and bank debt Proceeds Repayments Net increase (decrease) in cash and cash equivalents Cash and cash equivalents – beginning of year Cash and cash equivalents – end of year Supplementary cash flow information (note 19) 2008 $ 2007 $ 2006 $ 163,656 35,421 3,300 3,108 – 25,995 (3,950) (12,904) (2,475) (70,774) 39 11,866 1,815 1,478 5,099 2,956 125,909 (1,225) (953) (18,187) 105,544 7,479 (123,950) 5,214 (20,462) 25,737 (3,791) – 71,515 (38,258) – 14,730 (300) 5,000 (70,879) (51,449) 15,837 46,014 61,851 604 721 20,041 796 17,261 (221) (3,602) 67 7,267 – – – (2,083) 76,272 (5,496) (2,458) 1,487 69,805 – (97,886) 1,482 (1,556) 663 – – 5,540 (91,757) – 9,500 – 24,859 (26,360) 7,999 (13,953) 59,967 46,014 661 1,377 1,763 – (1,491) (904) (41) 91 3,542 – – – – 8,298 – (598) (30,208) (22,508) – (95,170) 1,845 – – – (7,579) (29,550) (130,454) (7,089) 171,225 – 15,367 (400) 179,103 26,141 33,826 59,967 See accompanying notes to the consolidated financial statements. 42 Eldorado Gold CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the year ended December 31 (expressed in thousands of U.S. dollars, unless otherwise stated) 2008 $ 2007 $ Net earnings for the period ended December 31, 163,656 35,421 Other comprehensive income (loss) Unrealized gains (losses) on available-for-sale investments (note 17(c)) Realized gains on available-for-sale investments (note 17(c)) Reversal on acquisition of Frontier (note 4) Other than temporary impairment charges (6,431) (61) (153) 460 209 (270) - - Comprehensive income for the period ended December 31, 157,471 35,360 See accompanying notes to the consolidated financial statements. 2008 Annual Report 43 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 01 02 44 Eldorado Gold Nature of operations Eldorado Gold Corporation (“Eldorado” or “the Company”) is a gold exploration, development, mining and production company. The Company has ongoing exploration and development projects in Brazil, China, Turkey and Greece. On July 1, 2006, the Company began production in Turkey, and on February 1, 2007, the Company began production in China. Production at the Kişladağ mine in Turkey was suspended in August 2007 as a result of a court injunction and the mine remained shut down throughout the rest of that year. The court injunction was removed in February 2008 and the mine restarted production on March 6, 2008. Production operations in Brazil ceased in the second quarter of 2007 and the São Bento mine (“São Bento”) was sold to AngloGold Ashanti on December 15, 2008. Significant accounting policies a. Basis of presentation and principles of consolidation These consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”) and presented in United States dollars. As disclosed in note 24, Canadian GAAP differs in certain material respects from accounting principles generally accepted in the United States (“US GAAP”). The consolidated financial statements include the wholly owned and partially owned subsidiaries of the Company, the most significant of which are presented below: Subsidiary Location Ownership interest Status Operations and development projects owned Qinghai Dachaidan Mining Ltd (QDML) Tüprag Metal Madencilik Sanayi ve Ticaret Anonim Şirketi Unamgen Mineração e Metalurgia S/A China 90% Consolidated TJS Gold Mine Turkey 100% Consolidated Brazil 100% Consolidated Kişladağ Gold Mine Efemcukuru Project Vila Nova Iron Ore Mine (75% owned) Thracean Gold Mining SA Greece 100% Consolidated Perama Hill Project All material inter-company balances and transactions have been eliminated. b. Use of estimates The preparation of financial statements in accordance with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant areas requiring the use of management estimates include assumptions and estimates relating to determining defined ore bodies, value beyond proven and probable reserves, fair values for purposes of impairment analysis and valuation of derivative contracts, reclamation obligations, non-cash stock-based compensation and warrants, pension benefits, valuation allowances for future income tax assets and future income tax liabilities. Actual results could differ from these estimates. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 02continued c. d. e. f. g. Cash and cash equivalents Cash and cash equivalents consist of cash and highly liquid investments having maturity dates of three months or less from the date of acquisition that are readily convertible to cash. Inventories i. Product inventory consists of stockpiled ore, ore on leach pads, crushed ore, in-circuit material at properties with milling or processing operations and doré awaiting refinement, all of which are valued at the lower of average cost and net realizable value. Product inventory costs consist of direct production costs including mining, crushing and processing; site administration costs; and allocated indirect costs, including depreciation, depletion and amortization of mining interests. Inventory costs are charged to operations on the basis of ounces of gold sold. The Company regularly evaluates and refines estimates used in determining the costs charged to operations and costs absorbed into inventory carrying values based upon actual gold recoveries and operating plans. ii. Materials and supplies inventory consists of consumables used in operations, such as fuel, chemicals, reagents and spare parts, which are valued at the lower of average cost and replacement cost and, where appropriate, less a provision for obsolescence. Investments On January 1, 2007, the Company adopted the new accounting standard related to financial instruments. Under the standard, investments classified as available for sale are reported at fair value with unrealized gains or losses excluded from earnings and reported as other comprehensive income or loss until such gains or losses are realized or an other than temporary decline in fair value has been determined to have occurred. Factors that contribute to an other than temporary decline include a significant and prolonged decline in fair value below its cost, and the existence of factors such as significant adverse changes in the market and economic environments in which the Company operates, which indicate the prospects for recovery in the fair value of the investment are compromised in the near term. Investments classified as held-for-trading are reported at fair value with unrealized gains or losses included in earnings. Marketable securities and investments in equity securities held for the purpose of trading are classified as held-for-trading and those that are not held for the purpose of trading are classified as available-for-sale. Deposits Deposits, such as those required by governmental authorities for possible environmental liabilities, are classified as held-for-trading. Financial instruments Fair value estimates are made at the balance sheet date, based on relevant market information and other information about the financial instruments. Derivative financial instruments are reported at fair value with unrealized gains or losses included in earnings. Fair values are determined directly by reference to published price quotations in an active market, when available, or by using a valuation technique that uses inputs observed from the markets. 2008 Annual Report 45 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 02continued h. Mining interests Mining interests include development expenditures and property, plant and equipment recorded at cost. Cost includes expenditures incurred on properties under development and the estimated fair value of any related asset retirement obligation at the time the obligation is originally recorded. Significant payments related to the acquisition of land and mineral rights are capitalized as incurred. Mineral properties, buildings, plant and equipment, and other assets whose estimated useful life is the same as the remaining life of the mine are depreciated, depleted and amortized over a mine’s estimated life using the units of production method calculated based on proven and probable reserves. Capitalized development costs related to a multi-pit operation are amortized on a pit-by-pit basis over the pit’s estimated life using the unit of production method calculated based on proven and probable reserves related to each pit. Furniture and fixtures, vehicles, computers and other assets whose estimated useful lives are less than the remaining life of the mine are depreciated on a straight-line basis over the estimated useful life of the assets. When events or changes in circumstances suggest impairment of long-lived assets, estimated undiscounted future net cash flows are calculated using estimated future gold prices, proven and probable reserves, value beyond proven and probable reserves, and estimated net proceeds from the disposition of assets on retirement less operating and sustaining capital and reclamation costs. If projected undiscounted future cash flows are less than the carrying value, the estimated fair value is calculated using discounted future net cash flows and the asset is written down to fair value with an impairment charge to operations. Management assesses the asset for impairment by comparing its fair value, determined using their best estimates of fair value based on the information available. i. Exploration and development Exploration costs are charged against operations as incurred until a mineral resource having economic potential is identified on a property, from which time a property is considered to be a development project and such expenditures are capitalized as development costs. Costs incurred after the property is placed into production that increase production volume or extend the life of the mine are capitalized. A mineral resource is considered to have economic potential when it is expected that proven and probable reserves can be economically developed considering long-term metal prices. Therefore, prior to capitalizing such costs, management determines that the following conditions have been met: i. There is a probable future benefit that will contribute to future cash inflows; ii. The Company can obtain the benefit and control access to it, and; iii. The transaction or event giving rise to the benefit has already occurred. j. Foreign currency translation Monetary assets and liabilities denominated in currencies other than the United States dollar are translated into United States dollars using rates of exchange in effect at the balance sheet date. Revenue and expense items denominated in foreign currencies are translated at average rates. Non-monetary items are translated at historical rates. Any gains and losses are reflected in earnings. 46 Eldorado Gold NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 02continued k. l. Capital lease obligations Leases that transfer substantially all of the benefits and risks of ownership to the Company are accounted for as capital leases. Assets recorded under capital leases are amortized on a straight-line basis over the term of the lease. Obligations recorded under capital leases are reduced by lease payments net of imputed interest. Asset retirement obligations Asset retirement obligations (“AROs”) represent the estimated discounted net present value of statutory, contractual or other legal obligations relating to site reclamation and restoration costs that the Company will incur on the retirement of assets and abandonment of mine and exploration sites. AROs are added to the carrying value of property, plant, equipment and mining interests as such expenditures are incurred and amortized against income over the useful life of the related asset. AROs are determined in compliance with recognized standards for site closure and mine reclamation established by government regulation. Over the life of the asset, imputed interest on the ARO liability is charged to operations as “accretion of asset retirement obligations” using the discount rate used to establish the ARO. The offset of accretion expense is added to the balance of the ARO. Where information becomes available that indicates a recorded ARO is not sufficient to meet, or exceeds, anticipated obligations, the obligation is adjusted accordingly and added to, or deducted from, the ARO. In the event that the adjustment occurs after the mine in question has closed, the adjustment is added to or deducted from earnings. m. Stock-based compensation Stock-based compensation is measured at the estimated fair value of the consideration received or the estimated fair value of the equity instruments issued or liabilities incurred, whichever estimate is more reliable. Compensation expense is recognized on the graded method over the stock option vesting period. The fair values attributable to unvested stock options that are forfeited are credited to earnings. Bonus cash award units are measured at the amount by which the quoted market value of the shares covered by the grant exceeds the option price. n. Income taxes Future income taxes are recognized for the future income tax consequences attributable to differences between the carrying values of assets and liabilities and their respective income tax bases. Future income tax assets and liabilities are measured using income tax rates expected to apply in the years in which temporary differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in rates is included in operations. A future income tax asset is recorded when the probability of the realization is more likely than not. o. Revenue recognition Revenue from the sale of bullion is recognized when persuasive evidence of an arrangement exists, the bullion has been shipped, title has passed to the purchaser, the price is fixed or determinable, and collection is reasonably assured. 2008 Annual Report 47 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 02continued p. Earnings (loss) per share Basic earnings per share is computed by dividing net income or loss by the weighted average number of outstanding common shares for the year. The computation of diluted earnings per share reflects the dilutive effect of the exercise of stock options and warrants outstanding as at year-end using the treasury stock method. q. r. s. t. Capitalization of interest Where the Company has secured debt financing to finance the cost of specific projects, interest is capitalized on the related construction and development project until the project begins commercial operation or the development ceases. Stripping costs Stripping costs incurred during the production phase of a mine are considered production costs and are included in the cost of inventory produced during the period in which stripping costs are incurred. Pre-stripping costs incurred to prepare the ore body for extraction are capitalized as mine development costs. Production is deemed to have commenced when saleable minerals are extracted from an ore body. Mine standby and restructuring costs Mine standby costs and costs related to restructuring a mining operation are charged directly to expense in the period incurred. Examples of mine standby costs are labour, maintenance and mine support costs during temporary shutdowns of a mine. Examples of restructuring costs are severance payments to employees laid off as a result of outsourcing the mining function. Defined benefit pension plan Defined benefit pension plan obligations are based on actuarial determinations. The projected benefit method prorated on services is used to determine the accrued benefit obligation. Actuarial assumptions used to determine defined benefit pension plan liabilities are based upon our best estimates of expected plan performance, salary escalation rates and retirement dates of employees. The expected return on plan assets is estimated based on the fair value of plan assets, asset allocation and expected long-term returns on these components. Past service costs are amortized on a straight-line basis over the expected average remaining service period of active members at the time of the past service event. Differences between the actuarial liabilities and the amounts recorded in the financial statements will arise from changes in plan assumptions, changes in benefits or through experience as results differ from actuarial assumptions. Cumulative differences that are greater than 10% of either the fair value of the plan assets or the accrued benefit obligation, whichever is greater, are amortized over the expected average remaining service period of active members. Certain comparative figures have been reclassified to conform to the current year’s presentation. 48 Eldorado Gold NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 03 Changes in accounting policies and new accounting developments Capital Disclosures (Section 1535) Effective January 1, 2008, Eldorado adopted Section 1535, “Capital Disclosures”, which requires disclosure of qualitative and quantitative information that enables readers to evaluate the Company’s objectives, policies and processes for managing capital as well as the implications of non-compliance. Disclosures required by this standard are included in note 21. Inventories (Section 3031) Effective January 1, 2008, the Company adopted Section 3031, “Inventories”. This Section prescribes the accounting treatment for inventories and provides guidance on the determination of inventory cost and its subsequent recognition as an expense, including any writedown to net realizable value. It also provides guidance on the cost formulas used to assign costs to inventories. The adoption of this new accounting policy did not have any impact on the Company’s consolidated financial statements. Financial Instruments – Disclosures (Section 3862) and Presentation (Section 3863) Effective January 1, 2008, Eldorado adopted Section 3862, “Financial Instruments – Disclosures” and Section 3863 “Financial Instruments – Presentation”. These sections require entities to disclose quantitative and qualitative information in their financial statements that enables readers to evaluate (a) the significance of financial instruments for the entity’s financial position and performance; and (b) the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the balance sheet date, and management’s objectives, policies and procedures for managing such risks. Disclosures required by these standards are included in note 22. Income statement presentation of tax loss carryforward recognized following an unrealized gain recorded in other comprehensive income (EIC Abstract 172) In August 2008, the CICA issued EIC-172, “Income statement presentation of tax loss carryforward recognized following an unrealized gain recorded in other comprehensive income”. This new abstract provides guidance on whether the tax benefit from recognizing tax loss carryforwards consequent to the recording of unrealized gains in other comprehensive income, such as unrealized gains on available-for-sale financial assets, should be recognized in net income or in other comprehensive income. This abstract should be applied retrospectively, with restatement of prior periods from the date of adoption of Section 3855, “Financial Instruments”, for all interim and annual reporting periods ending on or after December 31, 2008. The adoption of this new accounting policy did not have any impact on the Company’s consolidated financial statements. Goodwill and Intangible Assets (Section 3064) In February 2008, the CICA issued Section 3064, “Goodwill and Intangible Assets”, which replaces Section 3062, “Goodwill and Other Intangible Assets”. This new standard provides guidance on recognizing, measuring, presenting and disclosing goodwill and intangible assets and is effective beginning January 1, 2009 and applies prospectively. Concurrent with the adoption of this standard, EIC-27, “Revenues and Expenditures in the Pre- operating Period”, will be withdrawn. This will result in a change to the Company’s accounting for the start-up of mining operations, as pre-commercial production costs will no longer be capitalized as an asset. The adoption of this new accounting policy will not have any material impact on Eldorado’s consolidated financial statements. 2008 Annual Report 49 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 03continued Business Combinations (Section 1582) In January 2009, the CICA issued Handbook Section 1582, “Business Combinations”, which requires that all assets and liabilities of an acquired business be recorded at fair value at acquisition. Obligations for contingent considerations and contingencies will also be recorded at fair value at the acquisition date. The standard also states that acquisition-related costs will be expensed as incurred and that restructuring charges will be expensed in the periods after the acquisition date. The Section applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period on or after January 1, 2011. Consolidations (Section 1601) and Non-Controlling Interest (Section 1602) In January 2009, the CICA issued Handbook Section 1601, “Consolidations” (“CICA 1601”), and Section 1602, “Non-Controlling Interests” (“CICA 1602”). CICA 1601 establishes standards for preparing consolidated financial statements and CICA 1602 establishes standards for accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. These standards apply to interim and annual consolidated financial statements relating to fiscal years beginning on or after January 1, 2011. The Company is currently assessing the impact of the new standard on its consolidated financial statements. Credit Risk and the Fair Value of Financial Assets and Financial Liabilities (EIC Abstract 173) In January 2009, the CICA issued EIC Abstract 173, “Credit Risk and the Fair Value of Financial Assets and Financial Liabilities”. The EIC requires the Company to take into account the Company’s own credit risk and the credit risk of the counterparty in determining the fair value of financial assets and financial liabilities, including derivative instruments. This abstract applies to interim and annual consolidated financial statements relating to fiscal years beginning on or after January 1, 2010. The Company is currently assessing the impact of the new standard on its consolidated financial statements. 50 Eldorado Gold NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 04 Acquisition of Frontier Pacific Mining Corporation Eldorado completed the acquisition of all of the issued and outstanding common shares of Frontier Pacific Mining Corporation (“Frontier”) on July 7, 2008. As a result, Eldorado acquired a 100% interest in the Perama Hill gold project in Greece and other exploration projects in Peru and Colombia. Under the terms of the offer, each Frontier common share was exchanged for 0.122 common shares of Eldorado, C$0.0001 in cash and one Exchange Receipt. Each Exchange Receipt entitles the holder to receive an additional 0.008 Eldorado common shares if, prior to July 1, 2009, a Joint Ministerial Resolution is issued in Greece by the Joint Ministerial Council (comprised of the ministries of the Environment, Agriculture, Development and Health), accepting the Environmental Terms of Reference drafted by the Ministry of Environment regarding the Perama Hill project. The Company issued 20,339,334 common shares and paid $16 in cash in connection with this transaction. No value was assigned to the Exchange Receipts as the Company considers it highly unlikely that the condition for their exchange into Eldorado shares will be met. Eldorado incurred acquisition costs of $3,935. As at the date of the transaction, Eldorado held 4,871,300 common shares of Frontier with a total cost of $3,412, net of the reversal of the unrealized gain of $153 included in comprehensive income. This transaction has been accounted for as an asset acquisition because Frontier was in the development stage. These consolidated financial statements include 100% of Frontier results from July 7, 2008 to December 31, 2008. The allocation of the purchase price of the shares of Frontier is as follows: Purchase price: Share consideration Cash consideration Cost of shares previously acquired Transaction costs Total purchase price Fair value of net assets acquired: Cash Accounts receivables and other Other assets Mining interests Liabilities Due to Eldorado Future income taxes payable $ 158,574 16 3,412 3,935 165,937 11,947 1,135 154 207,091 (2,434) (517) (51,439) 165,937 As at July 6, 2008, Frontier had borrowed $517 from the Company to fund ongoing administration costs. Amounts owing are eliminated on consolidation from July 7, 2008 forward. Eldorado received net cash proceeds from the Frontier transaction of $7,479, made up of an acquired cash balance of $11,947 less cash consideration of $16, transaction costs of $3,935 and intercompany debt outstanding of $517. 2008 Annual Report 51 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 05 continued Sale of São Bento Gold Ltd. and São Bento Mineração S.A. Effective December 15, 2008, Eldorado sold its wholly owned Bermudian subsidiary, São Bento Gold Ltd. and its wholly owned Brazilian subsidiary São Bento Mineração S.A. to AngloGold Ashanti. The Company received $70,000 payable by the issuance of 2,701,660 common shares of AngloGold Ashanti. Costs of disposition totalled $426. There were no taxes payable as a result of the transaction. The gain on sale is calculated as follows: Assets Current assets Cash Accounts receivable Inventories Tax receivable Mining interest Total Assets Liabilities Current liabilities Account payable Contractual severance obligations Current portion of asset retirement obligations Asset retirement obligations Future income taxes Total Liabilities Consideration received – shares Costs of disposition Gain on disposition of subsidiary $ 104 341 733 1,653 2,831 6,611 9,442 4,453 526 1,603 6,582 4,489 1,252 12,323 (2,881) 70,000 (426) 72,455 06 Restricted cash Restricted cash represents short-term interest-bearing money market securities and funds held on deposit as collateral. As at December 31, 2008, the Company had repaid all the amounts drawn previously on its revolving credit facilities for Turkey and China. Collateral account against the HSBC bank loan – Turkey (note 13(a)) Collateral account against the HSBC bank loan – China (note 13(b)) Electricity deposit December 31, 2008 $ December 31, 2007 $ – – – – 55,000 10,500 210 65,710 52 Eldorado Gold NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 07 Marketable securities Marketable securities – Available for sale Marketable securities – Held for trading Warrants – Held for trading 08 Accounts receivable and other Value added and other taxes recoverable Other receivables and advances Prepaid expenses and deposits Inventories 09 Ore stockpiles In-process inventory including doré Materials and supplies December 31, 2008 $ 12,084 31,514 12 43,610 December 31, 2007 $ 1,615 – – 1,615 December 31, 2008 $ 8,454 20,535 7,120 36,109 December 31, 2007 $ 19,829 3,986 4,905 28,720 December 31, 2008 $ 24,199 43,825 18,942 86,966 December 31, 2007 $ 8,484 33,573 15,468 57,525 10 Derivative contract In December 2004, São Bento Mineração SA entered into an energy supply contract with Companhia Energetica de Minas Gerais (“CEMIG”). With the closure of São Bento in 2007, the energy contracted for 2007 and 2008 exceeded the estimated consumption for that period and, accordingly, this contract was accounted for as a derivative financial instrument, which is measured at fair value with unrealized gains or losses reported in earnings. In accordance with the transitional provision of the financial instrument standard, the asset fair value of this contract of $873 as at January 1, 2007 has been recorded with a credit directly to deficit. 2008 Annual Report 53 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 10continued The fair value as at December 31, 2007 was calculated based on a capital asset pricing model (“CAPM”) to estimate the forward price of Brazilian electricity for 2008, adjusted by the Brazilian real and US dollar forward exchange rates and then discounted for time value. CAPM estimates the risk-adjustment applied to spot electricity prices as a means to deriving a forward price. Assumptions used to calculate the fair value of this contract as at December 31, 2007 are as follows: Quantity of energy to purchase Set price per contract Spot price in Brazilian reals Forward price of energy (range) US treasury yield (range) 78,880.20 MWh $24.50/MWh R$502.45/MWh $111.78/MWh – $54.75/MWh 2.90% – 3.31% This resulted in a fair value of the asset of $2,956 and the recognition of an unrealized gain for the year ended December 31, 2007 of $2,083. As a result of the sale of the mine on December 15, 2008, the balance of the derivative contract at December 31, 2008 was nil. 11 Restricted assets and other Environmental guarantee deposit Restricted long-term asset – SERP (note 15) Accrued pension benefit asset Goodwill December 31, 2008 $ 2,495 3,505 111 2,238 8,349 December 31, 2007 $ 8,300 – – 2,238 10,538 The environmental guarantee deposit is held on account with a Turkish bank pursuant to environmental and pollution guarantees required by the Turkish Ministry of the Environment. The funds earn interest at prevailing bank rates, and the interest earned on these deposits is included in interest and other income. 54 Eldorado Gold NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 12 Mining interests Producing properties Properties under development Other mineral interests Producing properties Properties under development Other mineral interests December 31, 2008 Accumulated depreciation, depletion and amortization $ 60,086 494 60,580 – 60,580 December 31, 2007 Accumulated depreciation, depletion and amortization $ 32,961 – 32,961 – 32,961 Net book value $ 355,634 300,665 656,299 12,010 668,309 Net book value $ 334,030 43,675 377,705 – 377,705 Cost $ 415,720 301,159 716,879 12,010 728,889 Cost $ 366,991 43,675 410,666 – 410,666 Debt 13 Current: HSBC term revolving credit facility HSBC revolving credit facility due November 30, 2008 Sino Gold Limited loan Long-term: Sino Gold loan due December 31, 2009 December 31, 2008 $ December 31, 2007 $ – – 139 139 – – 55,000 10,062 360 65,422 139 139 a. HSBC term revolving credit facility HSBC has authorized advances of up to $65,000 to Tüprag Metal Madencilik Sanayi Ve Ticaret Limited Surketi (“Tüprag”), a wholly owned subsidiary of the Company, under the terms of a term revolving credit facility due February 28, 2010 (the “Credit Facility”). As at December 31, 2008, the Company has repaid all the amounts drawn previously on the facility. The Credit 2008 Annual Report 55 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 13continued Facility can be drawn down in minimum tranches of $1,000 plus multiples of $250. Each drawdown bears interest fixed at the prevailing LIBOR plus 0.50% on the date the tranche is drawn down. Under the terms of the Credit Facility, Eldorado is required to fully collateralize any HSBC advances to Tüprag with funds of an equal amount deposited on account with HSBC (note 6). b. HSBC revolving credit facility In November 2007, Qinghai Dachaidan Mining Limited (“QDML”), our 90% owned subsidiary, entered into a $15,000 revolving facility (“the Facility) with HSBC Bank (China). As at December 31, 2008, the Company has repaid all amounts previously drawn on the Facility. The Facility can be drawn down in minimum tranches of $100 or in integral multiples of $10. Each drawdown bears interest fixed at the prevailing lending rate stipulated by the People’s Bank of China with a 10% markdown. The Facility has a term of one year and is subject to annual review and renewal. In November 2008, the Facility was renewed for a second year and the interest rate is fixed at 1.2 times the prevailing lending rate stipulated by the People’s Bank of China. The facility is collateralized by way of irrevocable letter of credit drawn on HSBC Bank USA, National Association (“HSBC”). Eldorado should maintain at all times a security coverage ratio of 110% of the amounts drawn down. The letter of credit has an expiry date of December 1, 2009 and is collateralized by Eldorado’s funds held by HSBC as restricted cash. Subsequent to year-end, QDML drew down $5,000 under the Facility. c. Sino Gold loan The consideration paid for the Tanjianshan property in 2003 included a non-interest-bearing loan from Sino Gold Limited (the “Loan”). Imputed interest has been calculated using a discount rate of 8%. The Loan is repayable in equal annual instalments of $400 on December 31 of each year until 2008, with a final instalment of $150 due on December 31, 2009. Payment of the third annual instalment was made in December 2008, resulting in an outstanding balance at December 31, 2008 of $139 excluding imputed interest. Fair value of loan outstanding Less: imputed interest December 31, 2008 $ 150 11 139 December 31, 2007 $ 550 51 499 56 Eldorado Gold NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 14 Asset retirement obligations Balance at beginning of year Accretion during the year Revisions to estimate of final obligation Payments Disposal (see note 5) Balance at end of year Estimated undiscounted amount Balance at beginning of year Accretion during the year Revisions to estimate ARO liability paid Balance at end of year Less: current portion Long-term portion Estimated undiscounted amount Brazil $ 4,463 377 3,229 (1,225) (6,091) 753 1,350 Brazil $ 9,595 364 – (5,496) 4,463 509 3,954 5,149 December 31, 2008 Turkey China $ $ 3,118 1,218 187 68 (532) – – – – – 1,286 1,775 2,773 6,823 December 31, 2007 Turkey China $ $ 2,941 1,155 177 63 – – – – 3,118 – 3,118 1,218 – 1,218 1,775 Total $ 8,799 632 2,697 (1,225) (6,091) 4,812 9,948 Total $ 13,691 604 – (5,496) 8,799 509 8,290 5,919 12,843 The ARO estimates attributable to our mines have been determined with reference to independent studies obtained by the Company (Brazil – 2006, Turkey and China – 2007) that assumed a closure in 2014 in Brazil, 2017 in China and 2024 in Turkey. The net present values contemplate credit-adjusted risk-free interest rates of between 5% and 7%. Revision to estimate of final obligation in Brazil includes $2,476 related to São Bento and $753 related to the Vila Nova project (“Vila Nova”). ARO costs included in the Statement of Operations and Deficit include the São Bento revision of $2,476 and accretion during the year of $632. 2008 Annual Report 57 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 15 Defined benefit plans During the year ended December 31, 2008, the company implemented a defined benefit pension program with two components: a registered pension plan (“the Pension Plan”) and a non-registered supplementary pension plan (“the SERP”). These plans, which are only available to certain qualifying employees, provide benefits based on an employee’s years of service and final average earnings at retirement. There are no indexation features. Annual contributions to these plans are actuarially determined and made at or in excess of minimum requirements prescribed by legislation. The Company’s plans are actuarially evaluated for funding purposes on a three-year cycle. Both of the plans were last actuarially evaluated on January 1, 2008 for funding purposes and the next required valuation will be as of January 1, 2011. The measurement date used to determine all of the accrued benefit obligation and plan assets for accounting information was December 31, 2008. The SERP is designed to provide supplementary pension benefits to qualifying employees affected by the maximum pension limits under the Income Tax Act and the Company is not required to pre- fund any benefit obligation under the SERP. Total cash payments Total cash payments for pension benefits for 2008, including cash contributed to the Pension Plan and the SERP were $3,791. No cash payments were made directly to beneficiaries during the year. The Company expects to contribute $88 to the Pension Plan and $1,313 to the SERP in 2009 based on minimum funding requirements. The estimated future pension payments for the next five years and five years thereafter are as follows: 2009 $ 2010 $ 2011 $ 2012 $ 2013 $ 2014 and later $ Estimated future pension payments – – 61 450 450 2,429 58 Eldorado Gold NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 15continued The details of the Company’s benefit plans as at December 31, 2008 are as follows: December 31, 2008 Pension Plan $ Accrued benefit obligation Balance at beginning of year Current service cost Past service costs (net of qualifying transfer) Qualifying transfer Interest cost Benefits paid Actuarial gains Balance at end of year Plan assets Fair value at beginning of year Actual return on plan assets Employer's contribution (1) Qualifying transfer Benefit paid Fair value at end of year Funded status Fair value of plan assets Accrued benefit obligation Plan surplus (deficit) Unamortized actuarial gains Unamortized past service cost Net accrued benefit asset (liability) – 104 326 561 49 – (287) 753 – 17 270 561 – 848 848 753 95 (243) 259 111 SERP $ – 378 3,570 – 197 – (108) 4,037 – – – – – – – 4,037 (4,037) (108) 2,828 (1,317) (1) The Company has deposited $3,505 in an investment account to fund its SERP obligation. This amount is included in restricted assets and other (note 11) The accrued benefit asset (liability) is included in the Company’s balance sheet as follows: Restricted assets and other (note 11) Accounts payable and accrued liabilities Total December 31, 2008 Pension Plan $ 111 – 111 SERP $ – (1,317) (1,317) 2008 Annual Report 59 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 15continued The net expense recognized for the Company’s defined benefit plans is as follows: Current service cost Interest cost Expected gains on plan assets Amortization of past service costs Net pension expense December 31, 2008 Pension Plan $ 104 49 (45) 66 174 SERP $ 378 194 – 732 1,304 TOTAL $ 482 243 (45) 798 1,478 Plan assets The assets of the Pension Plan and the amounts deposited in the SERP account are managed by a major investment management company and are invested only in conformity with the investment requirements of applicable pension laws. The following table summarizes the defined benefit plans’ weighted average asset allocation percentages by asset category at December 31, 2008: Cash and equivalents Fixed income Equity Total Pension Plan 6% 94% 0% 100% SERP 5% 52% 43% 100% Combined 5% 55% 40% 100% Significant assumptions The significant assumptions used are as follows: Expected long term rate of return on plan assets Discount rate beginning of year Discount rate end of year Rate of salary escalation Average remaining service period of active employees expected to receive benefits December 31, 2008 Pension Plan 6.50% 5.25% 7.50% 4.50% 5 years SERP 6.50% 5.25% 7.50% 4.50% 5 years The assumptions for the expected long-term rate of return on plan assets for the purposes of the actuarial valuation are based on the asset mix of the portfolio, historical data from similar plans and the review of projected returns by asset class. 60 Eldorado Gold NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 16 Income taxes The significant components within the Company’s future tax liability are as follows: Future income tax assets Mining interest Loss carry forwards Other Liabilities Valuation allowance Future income tax liabilities Mining interest Unrealized gains on foreign exchange translation and other Net future income tax liabilities This is represented on the balance sheet as: Current future income tax assets Current future income tax liabilities Long-term future income tax liabilities December 31, 2008 $ December 31, 2007 $ 3,824 30,655 2,367 1,897 38,743 (35,946) 2,797 61,149 2,613 63,762 60,965 17,109 113,807 8,630 5,000 144,546 (137,919) 6,627 16,921 15,528 32,449 25,822 December 31, 2008 $ (175) 1,097 60,043 60,965 December 31, 2007 $ (959) – 26,781 25,822 Income tax expense differs from the amount that would result from applying the statutory Canadian federal and provincial tax rates to income before income taxes. These differences result from the following items: Net income before taxes Statutory tax rate 2008 $ 181,254 31.00% 2007 $ 57,505 34.12% 2006 $ 3,889 34.12% Tax expense at the statutory income tax rate 56,189 19,620 1,327 Tax effect of: Losses not recognized Difference in foreign tax rates Foreign exchange Sale of São Bento Change in Greek tax rate Future income tax assets not previously recognized Non-deductible expense and other items Income tax expense 4,249 (17,792) (3,364) (22,462) (10,287) – 5,966 12,499 6,265 (2,105) (2,738) – – 1,042 22,084 1,070 (1,895) 4,239 – (7,010) 2,858 589 2008 Annual Report 61 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 16continued The two major factors causing the effective tax rate to decline from 38.41% in 2007 to 6.90% in 2008 are the tax-free gain from the sale of São Bento and the reduction of the future income tax recorded on the Frontier acquisition due to a reduction in the Greek future income tax rates from 25% to 20%. At December 31, 2008, the Company had available losses for income tax purposes of approximately $51,943 in Canada and Greece expiring in various years from 2009 to 2028. In addition, the Company’s Brazilian subsidiaries have losses of $24,000 (December 31, 2007 – $268,000) that can be used to offset taxable income, and $24,000 (December 31, 2007 – $243,000) that can be used to offset income for social contribution tax. These losses have no expiry date and can be used to offset 30% of taxable income in any one year. The Brazilian losses declined this year due to the sale of São Bento, which at December 31, 2007 had $239,426 of losses to offset taxable income and $214,498 that could be used to offset income for social contribution tax (note 5). 17 Shareholders’ equity a. Authorized share capital The Company’s authorized share capital consists of an unlimited number of voting common shares without par value and an unlimited number of non-voting common shares without par value. At December 31, 2008 there were no non-voting common shares outstanding. Voting common shares Number of shares Amount $ Balance, January 1, 2006 302,577,378 573,721 Financing, February 2006, net of issue costs Shares issued upon exercise of share options, for cash Shares issued upon exercise of Afcan warrants, for cash Warrants reallocated to share capital upon exercise Estimated fair value of share options exercised 34,500,000 1,476,075 2,594,778 – – 154,406 4,234 5,496 902 1,302 Balance, December 31, 2006 341,148,231 740,061 Shares issued upon exercise of share options, for cash Estimated fair value of share options exercised 3,060,309 – 9,500 3,497 Balance, December 31, 2007 344,208,540 753,058 Shares issued upon exercise of share options, for cash Estimated fair value of share options exercised Shares issued for acquisition of Frontier 3,730,155 – 20,339,334 14,730 5,571 158,574 Balance, December 31, 2008 368,278,029 931,933 62 Eldorado Gold NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 17continued b. Contributed surplus The continuity of contributed surplus on the Consolidated Balance Sheet is as follows: Contributed surplus attributable to: Balance, January 1, 2006 Stock-based compensation $ 5,979 Other $ 1,996 Credited to share capital on Afcan warrants exercised after acquisition Non-cash stock-based compensation Options exercised, credited to share capital – (902) 3,542 (1,302) – – Total $ 7,975 (902) 3,542 (1,302) Balance, December 31, 2006 8,219 1,094 9,313 Non-cash stock-based compensation Options exercised, credited to share capital 7,267 (3,497) – – 7,267 (3,497) Balance, December 31, 2007 11,989 1,094 13,083 Non-cash stock-based compensation Options exercised, credited to share capital 11,866 (5,571) – – 11,866 (5,571) Balance, December 31, 2008 18,284 1,094 19,378 c. Accumulated other comprehensive income (loss) Accumulated other comprehensive income includes the following: Balance, beginning of period Unrealized gains (losses) on available-for-sale investment-net of taxes Other than temporary impairment charges Realized gains on sale of available-for-sale investment transferred to net income Reversal on acquisition of Frontier (note 4) Balance, end of period 2008 $ 214 (6,431) 460 (61) (153) (5,971) 2007 $ 275 209 – (270) – 214 2008 Annual Report 63 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 18 Stock-based compensation a. Share option plans The Company has two share option plans (“Plans”) approved by the shareholders under which share purchase options (“Options”) can be granted to directors, officers, employees and consultants. The Company’s Employee Plan, as amended from time to time, was established in 1994. Subject to a 10-year maximum, Employee Plan Options generally have a five-year term. Employee Plan Options vest at the discretion of the Board of Directors at the time an Option is granted, typically in three separate tranches over two years. As at December 31, 2008, a total of 662,701 Options (December 31, 2007 – 1,618,511) were available to grant to employees, consultants or advisors under the Employee Plan. The Company’s Directors and Officers Plan (“D&O Plan”) was established in 2003 and amended in 2005. Subject to a 10-year maximum, D&O Plan Options generally have a five-year term. D&O Options vest at the discretion of the Board of Directors at the time an Option is granted, typically in three separate tranches over two years. As at December 31, 2008, a total of 1,138,041 Options (December 31, 2007 – 2,999,850) were available to grant to directors and officers under the D&O Plan. The continuity of share purchase options outstanding is as follows: Weighted average exercise price Cdn$ 3.82 6.67 3.10 5.25 5.36 5.50 3.95 6.55 5.71 Number of options 7,276,463 4,108,125 (3,060,309) (100,000) 8,224,279 8,960,000 (3,730,155) (15,210) 13,438,914 Contractual weighted average remaining life (years) 2.8 3.1 3.9 Balance, December 31, 2006 Granted Exercised Cancelled Balance, December 31, 2007 Granted Exercised Cancelled Balance, December 31, 2008 At December 31, 2008, 6,119,729 share purchase options (December 31, 2007 – 5,064,193) with a weighted average exercise price of Cdn$5.69 (December 31, 2007 – Cdn$4.64) had vested and were exercisable. 64 Eldorado Gold NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 18continued Options outstanding at December 31, 2008 are as follows: December 31, 2008 Total options outstanding Exercisable options Shares Weighted average remaining contractual life (years) Weighted average exercise price Cdn$ Shares 826,100 5,389,338 1,307,138 2,823,000 3,093,338 13,438,914 0.8 4.8 2.8 4.1 3.4 3.9 3.48 4.88 5.42 6.43 7.20 5.71 826,100 1,538,670 1,047,957 899,331 1,807,671 6,119,729 Weighted average exercise price Cdn$ 3.48 4.88 5.48 6.42 7.16 5.69 Range of exercise price Cdn$ $3.00 to $3.99 $4.00 to $4.99 $5.00 to $5.99 $6.00 to $6.99 $7.00 to $7.99 b. Stock-based compensation expense The exercise prices of all Options granted during the period were at or above the market price at the grant date. Stock-based compensation expense is calculated using a Black- Scholes option pricing model to determine the estimated fair values of all Options granted. The value determined on the date an Option is granted is recorded over the vesting period of each respective option. This expense has been included in the undernoted expenses in the Consolidated Statements of Operations as follows: Operating costs Exploration Administrative Total 2008 $ 1,526 1,401 8,939 11,866 2007 $ 1,504 1,009 4,754 7,267 2006 $ 359 170 3,013 3,542 The assumptions used to estimate the fair value of Options granted during the years ended December 31, 2008, 2007 and 2006 were: 2008 2007 2006 Risk-free interest rate (range) Expected volatility (range) Expected life (range) Expected dividends 2.39% – 3.48% 40% – 53% 3.4 years Nil 3.53% – 4.25% 42% – 53% 4 years Nil 4.0% – 4.5% 42% – 50% 4-5 years Nil c. Bonus Cash Award Units plan In August 2007, the directors adopted a Bonus Cash Award Units (“BCAU”) plan with an effective date of August 2, 2007. The plan provides for the Board of Directors (the “Directors”) to grant BCAUs to officers, employees and consultants subject to vesting and other conditions 2008 Annual Report 65 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 18continued 19 as determined by the Directors; however, the vesting period may not exceed five years from the grant date, but may be accelerated at the discretion of the Directors. The settlement of BCAUs must be made in cash and is calculated as the excess of trading price of Eldorado shares traded on the Toronto Stock Exchange (“TSX”) on the trading day on which the designated participant elects to exercise their BCAU over the trading price of Eldorado shares traded on the TSX on the grant day. As of December 31, 2008, 587,500 BCAUs with a vesting date of February 8, 2009 were outstanding. The carrying value of the BCAUs at December 31, 2008 was $2,059, and is reflected in accrued liabilities on the balance sheet. The Company paid $1,658 in bonus cash award units in the year 2008. The related cost in the amount of $3,473 is included in general and administrative expense in the Consolidated Statements of Operations. Supplementary cash flow information Changes in non-cash working capital Accounts receivable and prepaids Inventories Accounts payable and accrued liabilities Supplementary cash flow information Income taxes paid Interest paid Non-cash investing and financing activities 2008 $ 2007 $ 2006 $ 7,504 (26,057) 366 (18,187) 1,976 (16,900) 16,411 1,487 (2,129) (26,222) (1,857) (30,208) 3,952 24,971 2,887 4,078 434 2,566 Shares issued on acquisition of Frontier Shares received on sale of São Bento 158,574 70,000 – – – – 20 Commitments The Company’s contractual obligations, not disclosed on the balance sheet, at December 31, 2008, include: Operating leases and property expenditures Purchase obligations Totals 2009 $ 2010 $ 2011 $ 2012 $ 2,336 2,016 1,877 1,860 33,805 11,557 11,498 11,476 36,141 13,573 13,375 13,336 2013 and later $ 2,140 – 2,140 Purchase obligations from 2010 forward relate solely to Kişladağ operations, including the estimated commitments under the unhedged diesel fuel purchase commitments for 2010 through 2012. 66 Eldorado Gold NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 21 Capital disclosure Eldorado’s objectives when managing capital are to: a. b. c. safeguard our ability to continue as a going concern, have sufficient capital to develop our mining projects and take them into production, and meet external capital requirements on our credit facilities. The Company monitors capital based on the debt to adjusted capital ratio. Debt is defined as the total of current and long-term debt shown on the balance sheet. Adjusted capital includes all components of shareholders’ equity, which includes accumulated comprehensive income, share capital, contributed surplus and deficit. Eldorado’s strategy is to keep the debt to adjusted capital ratio below 40%. The debt to adjusted capital ratio at December 31, 2008 and December 31, 2007 was nil and 14.60% respectively. 22 Financial instruments a. Fair value The fair value of financial instruments at December 31, 2008 and December 31, 2007 is summarized as follows: Financial Assets Held for trading Cash and cash equivalents Restricted cash Marketable securities Accounts receivable and other Derivative contract Restricted asset and other Available for sale Marketable securities December 31, 2008 December 31, 2007 Carrying amount $ Fair value $ Carrying amount $ Fair value $ 61,851 – 31,526 27,655 – 6,000 61,851 – 31,526 27,655 – 6,000 46,014 65,710 – 8,891 2,956 8,300 46,014 65,710 – 8,891 2,956 8,300 12,084 12,084 1,615 1,615 Financial Liabilities Accounts payable and accrued liabilities Debt 41,342 139 41,342 139 40,452 65,561 40,452 65,561 Fair values are determined directly by reference to published price quotations in an active market, when available, or by using a valuation technique that uses inputs observed from relevant markets. 2008 Annual Report 67 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 22continued b. Financial risk management Eldorado’s activities expose it to a variety of financial risks, including credit risk, foreign exchange risk, interest rate risk, gold price risk and liquidity risk. Credit risk Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents, restricted cash and accounts receivable. Eldorado deposits its cash and cash equivalents, including restricted cash, with high credit quality financial institutions as determined by ratings agencies. As at December 31, 2008, approximately 55% of the Company’s cash and cash equivalents are held with one financial institution. The Company sells its gold bullion exclusively to large international financial institutions or on the Istanbul and Shanghai Gold Exchanges. Payment is normally in advance or within one week of receipt of shipment. The historical level of customer defaults is negligible which reduces the credit risk associated with trade receivables at December 31, 2008. Currency risk The Company operates principally in Canada, Turkey, China, Brazil and Greece, and is therefore exposed to foreign exchange risk arising from transactions denominated in foreign currencies. Eldorado’s cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are denominated in several currencies (mainly Canadian dollars, Turkish liras, Chinese renminbi and Brazilian real) and are therefore subject to fluctuation against the US dollar. As a result of the acquisitions of Afcan and Frontier assets in 2005 and 2008 respectively, the Company recorded $56,600 of future income tax liabilities on mining interests which are recorded in local currencies. The future income tax liabilities are monetary items that are revalued each period-end at current exchange rates, with the gain or loss recorded in net earnings in the period. The Company is exposed to currency risk through the following financial assets and liabilities, value added tax and other taxes recoverable and future income tax asset and liabilities denominated in currencies other than US dollars at December 31, 2008: 68 Eldorado Gold NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 22continued Cash and cash equivalents Canadian dollar Australian dollar Euro Turkish lira Chinese renminbi Brazilian real Peruvian sol 4,618 70 139 1,280 48,453 3,487 415 Marketable securities 14,804 – – – – – Accounts receivable and other Future income tax receivable Accounts payable and accrued liabilities Future income tax liabilities 1,902 78 357 12,733 44,426 830 – – – – 1,197 – – – – (8,549) – (153) (14,233) (155,879) (2,113) (165) – – (26,390) (15,302) (88,144) (2,826) – Net balance 12,775 148 (26,047) (15,522) (149,947) (622) 250 Equivalent in US dollars 10,489 103 (36,462) (10,140) (22,025) (277) 112 Based on the balances as at December 31, 2008, a 1% increase (decrease) in the exchange rates on that date would have resulted in a (decrease) increase of approximately $582 in earnings before income. There would be no effect in other comprehensive income. Our cash flows from our operations are exposed to foreign exchange risk, as commodity sales are set in US dollars and a certain amount of our operating expenses are in the currency of the country in which our mining operations take place. Interest rate risk Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate due to changes in market interest rates. Current financial assets and financial liabilities are generally not exposed to interest rate risk because of their short-term nature. Eldorado’s debt is not exposed to interest rate cash flow risk as the interest rate has been fixed at the time of each drawdown. The approximate average interest rate earned by the Company in 2008 on its cash and cash equivalents was 2.36% (2007 – 5.17%). A 10% increase or decrease in the interest earned from financial institutions on deposits and money market investments held at December 31, 2008 would result in a $0.1 million increase or decrease in the Company’s after-tax net earnings. Gold price risk and other price risk Eldorado is subject to price risk for fluctuations in the market price of gold. Gold prices are affected by numerous factors beyond our control, including central bank sales, producer hedging activities, the relative exchange rate of the US dollar with other major currencies, global and regional demand and political and economic conditions. Worldwide gold production levels also affect gold prices, and the price of gold is occasionally subject to rapid short-term changes due to speculative activities. We have elected not to actively manage our exposure to gold price risk at this time. From time to time, we may use commodity price contracts to manage our exposure to fluctuations in the price of gold. 2008 Annual Report 69 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 22continued Other price risk is the risk that the value of a financial instrument will fluctuate as a result of changes in market prices. Eldorado’s other price risk includes equity price risk, whereby the Company’s investments in marketable securities are subject to market price fluctuation. Liquidity risk Liquidity risk is the risk that an entity will encounter difficulty in raising funds to meet commitments associated with financial instruments. The Company manages liquidity by maintaining adequate cash and cash equivalent balances and by using its lines of credit as required. Our treasury department monitors and reviews both actual and forecasted cash flows, and also matches the maturity profile of financial assets and liabilities. 23 Segmented information During the period ended December 31, 2008, Eldorado had four reporting segments. The Brazil reporting segment includes the development activities of Vila Nova and exploration activities in Brazil. The Turkey reporting segment includes the operations of the Kişladağ mine, development activities of the Efemçukuru project and exploration activities in Turkey. The China reporting segment includes the operations of the Tanjianshan mine and exploration activities in China. The Greece reporting segment includes development activities on the Perama Hill project. The other reporting segment includes the operations of the Company’s corporate office and exploration activities in other countries. Net mining interests Producing properties Properties under development Other mineral interests Turkey $ China $ December 31, 2008 Greece $ Brazil $ Other $ Total $ 190,881 163,157 – 106 1,490 355,634 54,378 – 38,986 207,301 – 300,665 4,151 – 249,410 163,157 7,359 – 46,345 207,407 500 12,010 1,990 668,309 Net mining interests Producing properties Properties under development December 31, 2007 Turkey $ China $ 175,888 149,267 38,358 – Brazil $ 7,919 5,317 Other $ Total $ 956 334,030 – 43,675 214,246 149,267 13,236 956 377,705 70 Eldorado Gold NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 23continued Operations Revenue Gold sales Interest and other income Expenses except the undernoted Depletion, depreciation and amortization Exploration Loss (gain) on disposal of assets 2008 Turkey $ China $ Brazil $ Greece $ Other $ Total $ 161,442 116,281 387 162,207 116,668 765 – 7,661 7,661 – – – – 277,723 1,695 10,508 1,695 288,231 63,506 47,652 13,399 (4,543) 19,426 139,440 8,190 17,201 206 5,865 1,897 1,235 – 1,665 (72,455) – – – 398 25,995 3,319 12,316 16 (70,774) Income (loss) before tax Income tax recovery (expense) Non-controlling interest 84,646 (17,866) – 48,253 (10,311) (5,099) 65,276 5,473 – 4,543 (21,464) 181,254 (12,499) (83) (5,099) – 10,288 – Net income (loss) 66,780 32,843 70,749 14,831 (21,547) 163,656 Revenue Gold sales Interest and other income Expenses except the undernoted Depletion, depreciation and amortization Exploration Turkey $ 94,219 1,869 96,088 China $ 78,176 137 78,313 2007 Brazil $ 6,907 2,639 9,546 Corporate $ Total $ – 4,752 4,752 179,302 9,397 188,699 39,630 45,399 (1,286) 15,776 99,519 4,248 15,502 – 291 20,041 6,500 102 3,588 1,444 11,634 Income (loss) before tax Income tax recovery (expense) Net income (loss) 45,710 (9,325) 36,385 17,310 (7,941) 9,369 7,244 (4,786) 2,458 (12,759) (32) (12,791) 57,505 (22,084) 35,421 2008 Annual Report 71 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 23continued Revenue Gold sales Interest and other income Expenses except the undernoted Depletion, depreciation and amortization Exploration Income (loss) before tax Income tax recovery (expense) Net income (loss) Turkey $ 39,232 310 39,542 19,248 1,489 4,845 13,960 2,113 16,073 China $ – 82 82 465 39 172 (594) – (594) 2006 Brazil $ 38,409 1,154 39,563 Corporate $ Total $ – 5,502 5,502 77,641 7,048 84,689 36,514 10,091 66,318 – 235 1,763 7,702 (4,653) (2,636) (7,289) – 12,719 (4,824) (66) (4,890) 3,889 (589) 3,300 72 Eldorado Gold NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 24 Differences between Canadian and United States GAAP These consolidated financial statements have been prepared in accordance with Canadian GAAP. The material differences between Canadian GAAP and US GAAP affecting the Company are summarized below: 2008 $ 2007 $ 2006 $ 163,656 35,421 3,300 Statement of operations Net income reported under Canadian GAAP Add (deduct) items subject to US GAAP Exploration costs (a) Capitalized interest expense (g) Depreciation on capitalized interest (g) Bonus cash award units (h) Deferred start-up costs and revenues (b) Depreciation related to start-up period (b) Unrealized gain (loss) on derivative contracts (c) Future income taxes (d) Net income Other comprehensive income (loss) for the year under Canadian GAAP Add (deduct) items subject to US GAAP Pension plans (i) (1,361) 1,368 (440) 187 (2,172) 175 – 3,280 164,693 (6,185) (7,585) 2,009 (198) (385) 2,172 (1,401) 873 654 31,560 (61) (2,736) – Comprehensive income under US GAAP 155,772 31,499 Basic and diluted earnings per share - US GAAP 0.46 0.09 Accumulated other comprehensive income (loss) under US GAAP Beginning of year Net unrealized gain (loss) on investments (f) Pension plans (i) End of year 2008 $ 2007 $ 214 (6,185) (2,736) (8,707) 275 (61) – 214 (4,662) 1,586 – – – – 607 831 228 – 1,059 0.00 2008 Annual Report 73 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 24continued Assets Total assets reported under Canadian GAAP Exploration costs (a) Future income taxes (d) Deferred start-up costs and revenues (b) Depreciation related to start-up period (b) Unrealized gain (loss) on investments (f) Capitalized interest expense – net (g) 2008 $ 2007 $ 905,369 (30,132) 4,541 – (1,226) – 4,325 591,742 (28,771) 1,261 2,172 (1,401) – 3,397 Total assets under US GAAP 882,877 568,400 Liabilities Total liabilities reported under Canadian GAAP Pension plans (i) Bonus cash award units (h) Total liabilities under US GAAP 2008 $ 2007 $ 108,750 2,736 198 142,563 – 385 111,684 142,948 Non-controlling interest under Canadian and US GAAP 4,799 – Shareholders’ equity Shareholders’ equity reported under Canadian GAAP Cumulative adjustments to shareholders’ equity Exploration costs (a) Future income taxes (d) Deferred start-up costs and revenues (b) Depreciation related to start-up period (b) Accumulated other comprehensive income - pension plans (i) Bonus cash award units (h) Unrealized gain on investments (f) Interest expense capitalized – net (g) 791,820 449,179 (30,132) 4,541 – (1,226) (2,736) (198) – 4,325 (28,771) 1,261 2,172 (1,401) – (385) – 3,397 Shareholders’ equity under US GAAP 766,394 425,452 74 Eldorado Gold NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 24continued Cash flows (used in) generated from: Operating activities under Canadian GAAP Exploration costs (a) Deferred start-up costs and revenues (b) Capitalized interest expense (g) 2008 $ 105,544 (1,361) – 1,368 2007 $ 69,805 (7,585) 5,159 2,009 2006 $ (22,508) (4,662) – 1,586 Operating activities under US GAAP 105,551 69,388 (25,584) Investing activities under Canadian GAAP Exploration costs (a) Deferred start-up costs and revenues (b) Capitalized interest expense (g) (38,258) 1,361 – (1,368) (91,757) 7,585 (5,159) (2,009) (130,454) 4,662 – (1,586) Investing activities under US GAAP (38,265) (91,340) (127,378) Financing activities under Canadian and US GAAP Net increase (decrease) in cash and cash equivalents for Canadian and US purposes (51,449) 7,999 179,103 15,837 (13,953) 26,141 Cash and cash equivalents – beginning of year 46,014 59,967 33,826 Cash and cash equivalents – end of year 61,851 46,014 59,967 A description of US GAAP that results in differences from Canadian GAAP is as follows: a. b. c. Exploration costs Exploration costs are accounted for in accordance with Canadian GAAP as disclosed in note 2(i). For US GAAP purposes, exploration costs relating to unproven mineral properties are expensed as incurred until completion of an economic feasibility study, after which exploration and development costs are capitalized. Deferred start-up costs and revenues US GAAP requires that operating profits and losses from newly commissioned operations be recorded at the time the first product is shipped. Canadian GAAP records operating profits and losses from the date commercial production commences. Under Canadian GAAP, deferred start-up costs and revenues are amortized over the life of the project. Derivative contracts Under US GAAP, SFAS 133 requires that all derivatives be recorded on the balance sheet as either assets or liabilities at their fair value. Changes in the fair value of derivatives are recognized in income unless specific hedge accounting criteria are met. Commencing January 1, 2007, under Canadian GAAP, the Company adopted the new Financial Instrument Standards as disclosed in note 2. As a result of this, there are no continuing differences with respect to derivatives. 2008 Annual Report 75 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 24continued d. e. Future income taxes Under US GAAP, the Company would record an increase of $3,280 (2007 – $654) in future income tax recovery related to the reconciliation items described under items (a), (b) and (g) of this note. FASB Interpretation No. 48 – Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (Accounting for Income Taxes) (FIN 48) In June 2006, the Financial Accounting Standard Board (FASB) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), which supplements SFAS No. 109, “Accounting for Income Taxes” (SFAS No. 109), by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. FIN 48 requires that the tax effect(s) of a position be recognized only if it is “more likely than not” to be sustained based solely on its technical merits as of the reporting date. The more likely than not threshold represents a positive assertion by management that a company is entitled to the economic benefits of a tax position. If a tax position is not considered more likely than not to be sustained based solely on its technical merits, no benefits of the tax position are to be recognized. The more likely than not threshold must continue to be met in each reporting period to support continued recognition of a benefit. With the adoption of FIN 48, companies are required to adjust their financial statements to reflect only those tax positions that are more likely than not to be sustained. The Company adopted FIN 48 as of January 1, 2007. As a result of this adoption, the Company did not recognize any further increases or decreases in the liability for unrecognized tax benefits. A reconciliation of the beginning and ending amount of the unrecognized tax benefits is as follows: Balance at January 1, Additions based on tax positions related to the current year Reductions based on tax positions related to the current year Additions for tax positions of prior years Reductions for tax positions of prior years Balance at December 31, 2008 $ 10,034 – (294) – (2,810) 6,930 2007 $ 8,537 1,343 – 154 – 10,034 As at December 31, 2008, the Company has $6,930 unrecognized tax benefits (2007 – $10,034). If recognized, none of the unrecognized tax benefit would affect the effective tax rate. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income taxes. During the years ended December 31, 2008, 2007 and 2006, the Company recognized approximately $nil, $236 and $562 in interest and penalties. The Company had approximately $nil and $908 for paying interest and penalties accrued at December 31, 2008 and 2007 respectively. The Company is subject to taxes in Canada, Brazil, China and Turkey. The tax years that remain subject to examination as of December 31, 2008 for these jurisdictions are: Canada Brazil China Turkey 2001 to the present 2004 to the present 2007 to the present 2004 to the present 76 Eldorado Gold NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 24continued f. Investments Under US GAAP, marketable securities are classified as “held to maturity”, “held for trading”, or “available for sale” in accordance with FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities (“FAS 115”). Certain securities held by the Company would be classified as “available for sale” under FAS 115 and would be recorded at market value, with any unrealized gain or loss recorded in other comprehensive income. Under Canadian GAAP prior to January 1, 2007, the Company carried its investments in public companies at cost, less provision for other than temporary declines in value. Effective January 1, 2007, with the adoption of the financial instrument standard, the Company carries these investments at fair value with unrealized gains or losses recorded in other comprehensive income. As a result there is no longer a difference. g. h. i. Interest expense Under Canadian GAAP, where the Company has secured debt financing to finance the cost of specific projects, interest is capitalized on the related construction and development project until the project begins commercial operation or development ceases, at which time the interest is charged to operations. Under US GAAP, interest is capitalized on an interest avoidance basis. Under this method, regardless of the application of the loan proceeds, any interest incurred is capitalized to the cost of any development or construction project to the extent of the lesser of the interest cost incurred or the amount that can be attributed to the cost of any capital development or construction costs and any uncapitalized interest is charged to operations. Bonus cash award units Under Canadian GAAP, bonus cash award units are measured at the amount by which the quoted market value of the shares covered by the grant exceeds the option price. Under US GAAP, Statement 123 (R) requires that awards classified as liabilities be measured at fair value at each reporting date. The fair value is estimated using an option pricing model. Pension plans For US GAAP purposes, the Company is required to report the overfunded asset or underfunded liability of its defined benefit pension plans on the balance sheet. Changes in the funded status are recorded through other comprehensive income. The information set out below should be read in conjunction with the information disclosed under Canadian GAAP requirements for pension plans provided in note 15. The funded status at the end of the year and the related amounts recognized on the statement of financial position for US GAAP purposes are as follows: 2008 Annual Report 77 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 24continued 78 Eldorado Gold Funded status as at December 31, 2008 Fair value of plan assets Benefit obligations Funded status Amounts recognized in the balance sheet Non current assets Current liabilities Non current liabilities Funded status Amounts recognized in other comprehensive income Net actuarial loss (gain) Past service cost (credit) Pension Plan $ 848 753 95 95 – – 95 (243) 259 16 SERP $ – 4,037 (4,037) – – 4,037 (4,037) (108) 2,828 2,720 The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with an accumulated benefit obligation in excess of plan assets at December 31, 2008 are as follows: Accumulated benefit obligation in excess of plan assets Projected benefit obligation at end of year Accumulated benefit obligation at end of year Fair value of plan assets at end of year 2008 $ 4,145 4,037 – The Company has deposited $3,505 in an investment account to fund its SERP obligation. This amount is included in restricted asset and other (note 11). The estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost in 2009 are as follows: Net actuarial loss (gain) Past service cost (credit) Total Pension Plan $ (46) 67 21 SERP $ – 741 741 j. Adoption of new United States accounting pronouncements i. Fair value measurements In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157), which provides a consistent definition of fair value that focuses on exit price and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. SFAS No. 157 requires expanded disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 24continued years. The provisions of SFAS No. 157 were applied prospectively. The Company adopted the provisions of SFAS No. 157 on January 1, 2008, which did not have any effect on its overall financial condition and results of operations. Fair values as of December 31, 2008 were calculated as follows: Balance at December 31, 2008 $ Quoted Prices in Active Markets for Identical Assets $ Significant Other Observable Inputs Significant unobservable inputs $ $ (Level 1) (Level 2) (Level 3) Financial Assets Held for trading Cash and cash equivalents Marketable securities Accounts receivable and other Restricted asset and other Available for sale Marketable securities Financial Liabilities Debt 61,851 31,526 27,655 6,000 61,851 31,526 16,231 6,000 12,084 12,084 139 – – – – – – – – – 11,424 – – 139 SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under SFAS No. 157 are described below: Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical unrestricted assets or liabilities. Level 2 – Inputs that are observable, either directly or indirectly, but do not qualify as Level 1 inputs (i.e., quoted prices for similar assets or liabilities). Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). ii. Fair value option for financial assets and financial liabilities In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – including an Amendment of SFAS No. 115” (SFAS No. 159), which permits an entity to measure certain financial assets and financial liabilities at fair value that are not currently required to be measured at fair value. Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option may be elected on an instrument-by- instrument basis, with few exceptions. The Statement also establishes presentation and disclosure requirements to help financial statement users understand the effect of the 2008 Annual Report 79 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 24continued election. SFAS No. 159 is effective as of the beginning of the first fiscal year beginning after November 15, 2007 and therefore became effective for the Company as of January 1, 2008. The Company has not elected to measure any eligible items at fair value. Accordingly, the adoption of this standard has not impacted the Company’s financial condition and results of operations. k. Recent United States accounting pronouncements i. Hierarchy of generally accepted accounting principles In May 2008, the FASB issued FASB Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used when preparing financial statements of non-governmental entities that are presented in conformity with generally accepted accounting principles in the United States. This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”. The Company does not expect any material impact on its financial position and results of operation with the adoption of this statement. ii. Derivatives In March 2008, the FASB issued Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities – An Amendment of FASB Statement No. 133” (“FAS No. 161”). FAS No. 161 enhances the disclosure requirements under FAS No. 133 pertaining to how and why an entity uses derivative instruments, how derivative instruments and related hedge items are accounted for under FAS No. 133, and how derivative instruments and related hedge items affect an entity’s financial position, financial performance and cash flows. FAS No. 161 is effective for fiscal years, and interim periods within those fiscal years, beginning after November 15, 2008. The Company is currently evaluating the potential impact of adopting this statement on the Company’s derivative instrument disclosures. iii. Effective Date of FASB Statement No. 157 In February 2008, the FASB issued Staff Position No. 157-2, “Effective Date of FASB Statement No. 157”. FSP FAS 157-2 delayed the effective date of FAS No. 157 by one year (until fiscal years beginning after November 15, 2008) for non-financial assets and non-financial liabilities that are recognized or disclosed at fair value in the financial statements on a non-recurring basis. The Company is currently evaluating the potential impact of adopting this statement. iv. Business combinations In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”, which retained the underlying concepts of SFAS No. 141 in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting. However, SFAS No. 141(R) changed the method of applying the acquisition method in a number of significant aspects. 80 Eldorado Gold NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2008 and 2007 (expressed in thousands of U.S. dollars, unless otherwise stated) NOTE 24continued SFAS No. 141(R) will require that: (1) for all business combinations, the acquirer records all assets and liabilities of the acquired business, including goodwill, generally at their fair values; (2) certain contingent assets and liabilities acquired be recognized at their fair values on the acquisition date; (3) contingent consideration be recognized at its fair value on the acquisition date and, for certain arrangements, changes in fair value will be recognized in earnings until settled; (4) acquisition-related transaction and restructuring costs be expensed rather than treated as part of the cost of the acquisition and included in the amount recorded for assets acquired; (5) in step acquisitions, previous equity interests in an acquiree held prior to obtaining control be re-measured to their acquisition- date fair values, with any gain or loss recognized in earnings; and (6) when making adjustments to finalize initial accounting, companies revise any previously issued post- acquisition financial information in future financial statements to reflect any adjustments as if they had been recorded on the acquisition date. SFAS No. 141(R) is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. SFAS No. 141(R) amends SFAS No. 109 such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of this statement should also apply the provisions of SFAS No. 141(R). This standard will be applied to all future business combinations for US GAAP purposes. v. Non-controlling interests in consolidated financial statements In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements, an Amendment of ARB 51” (SFAS No. 160), which amends ARB 51 to establish new standards that will govern the accounting for and reporting of non-controlling interests in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Also, SFAS No. 160 requires that: (1) non-controlling interest, previously referred to as minority interest, be reported as part of equity in the consolidated financial statements; (2) losses be allocated to the non-controlling interest even when such allocation might result in a deficit balance, reducing the losses attributed to the controlling interest; (3) changes in ownership interests be treated as equity transactions if control is maintained; and, (4) upon a loss of control, any gain or loss on the interest sold be recognized in earnings. SFAS No. 160 is effective on a prospective basis for all fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, except for the presentation and disclosure requirements, which will be applied retrospectively. The Company is currently evaluating the effects, if any, that SFAS No. 160 may have on its financial condition and results of operations. 2008 Annual Report 81 CONSOLIDATED FINANCIAL INFORMATION Five-Year Summary (Expressed in thousands of U.S. dollars, except per share and per ounce amounts) 2008 2007 2006 2005 2004 Balance Sheet Net working capital Mining interests Other non-current assets and restricted cash Non-current liabilities Non-controlling interest Net assets 184,816 668,309 8,349 (64,855) (4,799) 97,625 377,705 10,538 (36,689) – 102,164 311,080 60,538 (77,877) – 30,456 209,936 59,088 (74,553) – 144,017 75,013 1,224 (13,293) – 791,820 449,179 395,905 224,927 206,961 Share capital Contributed surplus Accumulated Other comprehensive income (loss) Deficit Net equity 931,933 19,378 (5,971) (153,520) 791,820 753,058 13,083 214 (317,176) 449,179 740,061 9,314 – (353,470) 395,905 573,721 7,976 – (356,770) 224,927 508,373 6,232 – (307,644) 206,961 Operations Revenues Gold revenues Interest and other Operating Depreciation, depletion and amortization General and administrative Exploration Mine stand-by costs Accretion of asset retirement obligation Net operating income (loss) before the undernoted (Gain) loss on disposal of assets (Gain) loss on marketable securities held for trading Interest and financing expense Foreign exchange (gains) losses Unrealized (gain) on derivative contracts Non-controlling interest Writedown of assets Income tax (expense) recovery Net income (loss) 277,723 10,508 288,231 92,004 25,995 38,299 12,316 2,432 3,108 114,077 (70,774) (2,475) 2,940 176 (2,956) (5,099) – (12,499) 163,656 179,302 9,397 188,699 72,691 20,041 26,798 11,634 6,575 604 50,356 (3,602) (221) 3,415 (4,658) 2,083 – – (22,084) 35,421 77,641 7,048 84,689 45,850 1,763 19,030 12,719 – 661 4,666 (41) (904) 1,586 (2,050) – – 2,186 (589) 3,300 29,680 4,117 33,797 35,378 9,798 14,937 7,386 – 484 (34,186) (227) 662 88 547 – – 13,375 (495) (49,126) 33,153 2,762 35,915 33,109 4,431 8,425 4,312 – 430 (14,792) 7 (37) 25 (196) – – – 649 (13,942) 82 Eldorado Gold CONSOLIDATED FINANCIAL INFORMATION Five-Year Summary (Expressed in thousands of U.S. dollars, except per share and per ounce amounts) Cash flows generated from (used in) Operating activities Operations before stock-based compensation Stock-based compensation Non-cash working capital changes Investing activities Net mining interest investment Restricted cash Other Financing activities Debt proceeds, net of repayments Common shares, net of issuance costs 2008 2007 2006 2005 2004 111,865 11,866 123,731 (18,187) 105,544 61,051 7,267 68,318 1,487 69,805 5,618 3,542 9,160 (31,668) (22,508) (17,390) 2,426 (14,964) 4,478 (10,486) (7,630) 3,720 (3,910) (6,955) (10,865) (109,773) 71,515 – (38,258) (97,297) 5,540 – (91,757) (100,904) (29,550) – (130,454) (97,940) (50,000) 664 (147,276) (22,988) – 70 (22,918) (66,179) 14,730 (51,449) (1,501) 9,500 7,999 14,967 164,136 179,103 49,014 7,184 56,198 – 63,708 63,708 Net cash generated (used) Cash – beginning of year Cash – end of year 15,837 46,014 61,851 (13,953) 59,967 46,014 26,141 33,826 59,967 (101,564) 135,390 33,826 29,925 105,465 135,390 Mining Operations Production: Gold (oz.) Ounces production Ounces sold Average selling price realized ($/oz.) – sold Total cash cost ($/oz.) 308,802 316,919 281,135 266,012 135,653 127,552 64,298 66,804 82,024 81,913 876 289 674 263 609 330 444 416 409 302 2008 Annual Report 83 CORPORATE INFORMATION DIRECTORS Hugh C. Morris (1) (3) Delta, BC, Canada Non-executive Chairman of the Board (Independent Director) John S. Auston (2) (3) West Vancouver, BC, Canada (Independent Director) K. Ross Cory (1) (3) Vancouver, BC, Canada (Independent Director) Robert R. Gilmore (1) (2) Denver, CO, USA Geoffrey Handley (2) (3) Dover Heights, NSW, Australia (Independent Director) Wayne D. Lenton (2) Tucson, AZ, USA (Independent Director) Donald Shumka (1) Vancouver, BC, Canada (Independent Director) Paul N. Wright Vancouver, BC, Canada President & Chief Executive Officer Eldorado Gold Corporation Committees of the Board of Directors (1) Audit Committee (2) Compensation Committee (3) Corporate Governance and Nominating Committee OFFICERS Paul N. Wright President & Chief Executive Officer Earl W. Price Chief Financial Officer Norman S. Pitcher Chief Operating Officer Dawn L. Moss VP, Administration and Corporate Secretary SENIOR MANAGEMENT Dale L. Churcher VP, Engineering Eduardo E. Moura VP, Corporate Development Paul J. Skayman VP, Operations Nancy E. Woo VP, Investor Relations Brazil Operations Lincoln Silva General Manager and Director Unamgen Mineração e Metalurgia S/A Sergio Martins Director, Exploration & Geology Unamgen Mineração e Metalurgia S/A Turkey Operations David A. Bickford Chairman of the Board of Directors and General Manager Tüprag Metal Madencilik Sanayi ve Ticaret Anonim Şirketi M. Umit Akdur Vice Chairman of the Board of Directors Tüprag Metal Madencilik Sanayi ve Ticaret Anonim Şirketi Mehmet Yilmaz Director Tüprag Metal Madencilik Sanayi ve Ticaret Anonim Şirketi William R. Crabtree General Manager Kişladağ Mine China Operations Mark Platts General Manager Tanjianshan Gold Mine Richard Li General Manager of Eldorado Gold Corp., Beijing and Director, Qinghai Dachaidan Mining Ltd. Alex Zhang Manager, Exploration, China, Beijing Greece Operations George Markopoulos General Manager and Director Thracean Gold Mining SA George Falakis Chief Geologist Perama Project OFFICES Canada Eldorado Gold Corporation Head Office 1188 Bentall 5 550 Burrard Street Vancouver, BC, Canada V6C 2B5 Tel: 604-687-4018 Fax: 604-687-4026 Toll Free: 1-888-353-8166 Brazil Unamgen Mineração e Metalurgia S/A Avenida Olegário Maciel, 1846 - Santo Agostinho Belo Horizonte, MG, Brazil, CEP 30180-112 Tel: 55-31-3292-1617 Turkey Tüprag Metal Madencilik Sanayi ve Ticaret Anonim Şirketi Iran Caddesi Turan Emeksiz Sok. No. 1 06700 Gaziosmanpasa, Ankara, Turkey Tel: 90-312-468-4536 Fax: 90-312-468-2646 Kişladağ Mine Kişladağ Altin Madeni Gumuskol Koyu Ovacik Mevkii 64900 Ulubey, Usak, Turkey Efemçukuru Project Cumhuriyet Meydanı Cumhuriyet Apt. No: 12 1001-1002 Alsancak, Izmir, Turkey China Eldorado Gold Corporation Room 1101 - 11th Floor, Tower B, Wanda Plaza No. 93 Jianguo Road, Chaoyang District Beijing, China 100022 Tel: 86-10-5820-5477 Fax: 86-10-5820-5476 84 Eldorado Gold CORPORATE INFORMATION Stock Exchange The Toronto Stock Exchange Stock Symbol: ELD The New York Stock Exchange Amex Stock Symbol: EGO Sources of Shareholder Information This Annual Report is one of several sources of information for shareholders of Eldorado Gold Corporation. Other sources include: The audited comparative financial statements published annually. The comparative interim financial statements published quarterly. The Management Proxy Circular describing the matters to be considered at the Annual Meeting of Shareholders. The Annual Information Form, Form 40F and other corporate and continuous disclosure documents available on the Company’s website, CDS SEDAR website (www.sedar.com) and the US Securities and Exchange Commission EDGAR website (www.edgar-online.com). Website Address: www.eldoradogold.com Investor Relations Email: info@eldoradogold.com Qinghai Dachaidan Mining Ltd. Room 501, Huizhi Business Building No: 16 Wusi West Road Xining, Qinghai, PRC 81008 Tanjianshan Mine Dachaidan County Haixi District Qinghai Province, PRC Greece Thracean Gold Mining SA 27, Omirou Street Athens, Greece, 10672 Tel: 30-210-3633930 Fax: 30-210-3633383 Alexandroupolis Office 51, Venizelou Street 68100 Alexandroupolis, Greece Tel: 30-25510-81887 30-25510-80987 Fax: 30-25510-35613 LEGAL COUNSEL Fasken Martineau DuMoulin LLP Vancouver, BC, Canada Dorsey & Whitney LLP Denver, CO, USA AUDITORS PricewaterhouseCoopers, LLP Chartered Accountants Vancouver, BC, Canada SHAREHOLDER INFORMATION Transfer Agent Valiant Trust Company 600-750 Cambie Street Vancouver, BC, Canada V6B 0A2 Shareholder Inquiries Line (Toll Free): 1-866-313-1872 2008 Annual Report 85 FORWARD-LOOKING STATEMENTS Certain statements and information in this Annual Report, including all statements that are not historical facts, contain forward-looking statements and forward-looking information within the meaning of applicable US and Canadian securities laws. Such forward-looking statements or information include, but are not limited to, statements or information with respect to financial disclosure, estimates of future production the future price of gold, estimation of mineral reserves and resources and estimates of exploration and development capital expenditures, permitting and our goals and strategies. Often, these statements include words such as “plans”, “expects” or “does not expect”, “is expected”, “budget”, “scheduled”, “estimates”, “forecasts”, “intends”, “anticipates” or “does not anticipate” or “believes” or variations of such words and phrases or statements that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved. With respect to forward-looking statements and information included in this report, we have made numerous assumptions including among other things, assumptions about the price of gold, anticipated costs and expenditures and our ability to achieve our goals. Even though our management believes that the assumptions made and the expectations represented by such statements or information are reasonable, there can be no assurance that the forward-looking statement or information will prove to be accurate. By their nature, forward-looking statements and information are based on assumptions and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements or information. Such risks, uncertainties and other factors include among other things the following: gold price volatility; discrepancies between actual and estimated production and mineral reserves and resources; the speculative nature of gold exploration; mining operational and development risk; ability to obtain financing; currency fluctuations; environmental risks; global economic climate; ability to complete acquisitions; share price volatility; and community and non-governmental actions and regulatory risks. See our Annual Information Form and our quarterly and annual MD&A for additional information on risks, uncertainties and other factors relating to the forward-looking statements and information. Although we have attempted to identify factors that would cause actual actions, events or results to differ materially from those disclosed in the forward-looking statements or information, there may be other factors that cause actual results, performances, achievements or events not to be anticipated, estimated or intended. Also, many of the factors are beyond our control. Accordingly, readers should not place undue reliance on forward-looking statements or information. We undertake no obligation to reissue or update forward- looking statements or information as a result of new information or events after the date of this report except as may be required by law. All forward-looking statements and information made in this document are qualified by this cautionary statement. The terms “mineral reserve,” “proven mineral reserve” and “probable mineral reserve” are Canadian mining terms as defined in accordance with National Instrument 43-101 – Standards of Disclosure for Mineral Projects (“NI 43-101”) under the guidelines set out in the Canadian Institute of Mining, Metallurgy and Petroleum (the “CIM”) CIM Standards on Mineral Resources and Mineral Reserves, adopted by the CIM Council as may be amended from time to time by the CIM. 86 Eldorado Gold The definitions of proven and probable reserves used in NI 43-101 differ from the definitions in the United States Securities and Exchange Commission ("SEC") Industry Guide 7. Under SEC Industry Guide 7 stan- dards, a "Final" or "Bankable" feasibility study is required to report reserves, the three-year history average price is used in any reserve or cash flow analysis to designate reserves and the primary environmental analysis or report must be filed with the appropriate governmental authority. In addition, the terms "mineral resource", "measured mineral resource", "indicated mineral resource" and "inferred mineral resource" are defined in and disclosed in accordance with the requirements of NI 43-101; however, these terms are not defined terms under SEC Industry Guide 7 and normally are not permitted to be used in reports and registration statements filed with the SEC. Investors are cautioned not to assume that any part or all of the mineral deposits in these categories will ever be converted into reserves. "In- ferred mineral resources" have a great amount of uncertainty as to their existence, and great uncertainty as to their economic and legal feasibility. It cannot be assumed that all or any part of an inferred mineral resource will ever be upgraded to a higher category. Under Canadian rules, estimates of inferred mineral resources may not form the basis of feasibility or prefeasibility studies, except in rare cases. Accordingly, information contained in this report and the documents incorporated by reference herein con- taining descriptions of our mineral deposits may not be comparable to similar information made public by US companies subject to the reporting and disclosure requirements under US federal securities laws and the rules and regulations thereunder. 2008 Annual Report 87 E L D O R A D O G O L D C O R P O R A T I O N 2 0 0 8 A N N U A L R E P O R T Corporate Office: 1188 - 550 Burrard Street, Bentall 5, Vancouver, BC, Canada V6C 2B5 Telephone: (604) 687-4018 Fax: (604) 687-4026 Email: info@eldoradogold.com TSX: ELD NYSE-A: EGO www.eldoradogold.com 

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