Growing the leading global gold producer Annual Report 2011 2011 Highlights (All amounts in the annual report are expressed in US dollars, unless otherwise stated) ● Profit attributable to shareholders of the Company increased to $318.7 million (2010: $221.0 million) ● Basic earnings per share increased 41% to $0.58 per share (2010: $0.41 per share) ● Generated $502.1 million in cash from operating activities before changes in non-cash working capital – an increase of 40% compared to $357.9 million in 2010 ● Produced 658,652 ounces of gold at a cash operating cost of $405 per ounce ● ● ● ● ● ● Sold gold for an average realized price of $1,581 per ounce, compared to $1,223 per ounce in 2010 Announced an improved formula for semi-annual dividends with additional step-ups as the average realized gold price increases. Dividend attributable to 2011 earnings: CDN$0.15 (2010: CDN$0.10) Commissioned Efemçukuru, our second gold mine in Turkey. Began mining during the third quarter and shipped approximately 20,000 contained ounces of gold in concentrate to Kis¸ladag˘, to be processed at the new concentrate treatment plant Continued construction activities at Eastern Dragon in China. Expect commissioning and production to start in the third quarter of 2012 Prepared our first annual Sustainability Report to comply with the requirements of the Global Reporting Initiative (GRI) guidelines Announced the Plan of Arrangement for European Goldfields on December 18, 2011. The transaction closed on February 24, 2012 Table of Contents 2011 Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Where we Operate . . . . . . . . . . . . . . . . . . . . . . . . .3 Letter to Shareholders . . . . . . . . . . . . . . . . . . . . . .4 Sustainability Report (GRI). . . . . . . . . . . . . . . . . . . .6 Mineral Reserves and Resources. . . . . . . . . . . . . .19 Gold Production Highlights. . . . . . . . . . . . . . . . . . .21 Financial Review . . . . . . . . . . . . . . . . . . . . . . . . . .22 MD&A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 Consolidated Financial Statements . . . . . . . . . . . 58 Notes to the Consolidated Financial Statements . . 63 Corporate Information . . . . . . . . . . . . . . . . . . . . .113 Shareholder Information . . . . . . . . . . . . . . . . . . .114 Cautionary Notes . . . . . . . . . . . . . . . . . . . . . . . .115 Where we Operate Eldorado Gold Corporation is a Canadian international gold producer with seven operating mines, three mines under construction, three development projects and an extensive exploration program. We operate in China, Turkey, Brazil, Greece and Romania. We are one of the lowest-cost gold producers, with young mines, robust margins and a strong balance sheet. We pay a semi-annual dividend based on the ounces of gold sold and the realized gold price and are well positioned to grow as we create and pursue new opportunities in gold and other resources. We expect to produce approximately 1.5 million ounces of gold annually by 2015. Cover Images 1 3 2 4 6 1. Kis¸ladag˘ 2. Efemçukuru 3. Jinfeng 4. Onsite Safety Meeting, White Mountain 5 7 5. Tanjianshan 6. White Mountain 7. Vila Nova iron ore Eldorado Gold 2011 Annual Report 3 lETTER TO ShAREhOlDERS Dear shareholders, I am pleased to report on another successful year of growth and development for Eldorado. Our achievements were many – the start-up of our mine at Efemçukuru, an expansion at our Kis¸ladag˘ mine and the acquisition of European Goldfields. In an environment of the strongest gold prices we’ve seen, Eldorado posted record earnings in 2011. The future also looks bright, and we are anticipating annualized production increases averaging 30% over the next four years, reaching 1.5 million ounces of gold by 2015. Strong Operating Performance We were very pleased with the operating performance of our gold mines in Turkey and China in 2011. These assets continue to perform exceptionally well. In 2011, we increased production for the sixth consecutive year to 658,652 ounces of gold at a cash operating cost of $405 per ounce and a total cash cost of $472 per ounce. And in Brazil, our iron ore mine marked its first full year of production, performing on target and increasing iron ore revenues by $48.5 million over 2010. Our strategic focus on being a low-cost operator of high-quality assets is paying off. In 2011, our per ounce margins increased to 70%, or $1,110 per ounce of gold, keeping us in the lowest quartile of costs when compared with other gold producers. With the successful commissioning of Efemçukuru in December 2011, we now operate two gold mines in Turkey. I would like to commend our technical team for bringing this project from initial discovery to an operating mine with expected annual production of 120,000 ounces of gold. At Kis¸ladag˘, we completed our Phase III expansion of the mine, which increased capacity by 25% to 12.5 million tonnes per year. We also announced our plans for a Phase IV expansion that will double production from current levels to 25 million tonnes per year by 2015. Our three operating mines in China also performed well over the year. At White Mountain, in particular, gold production was 31% higher than in 2010. We have three existing development projects under way, in Brazil, Greece and China. In 2011, we continued to advance these projects – from submitting the environmental impact assessment for the Tocantinzinho mine in Brazil to significant construction activity at Eastern Dragon in China, which we expect to commission in the third quarter of 2012. Finally, we are advancing numerous exploration projects in Turkey, China and Brazil. A Focus on Social Responsibility Social responsibility is an integral part of our business. We have always worked hard to protect the environment, invest in health and safety programs, develop infrastructure, and improve access to health care and education in the communities where we operate. This year we are publishing our first Sustainability Report to document our work in these areas and set a baseline for marking ongoing improvements. Some of the highlights of our sustainability initiatives in 2011 include: ● providing over 2,200 man-hours of health, safety and environmental training to our employees and contractors worldwide, ● achieving 566 days without a lost-time incident at our Kis¸ladag˘ mine in Turkey, ● ● reporting no significant environmental incidents at any of our operations, taking steps to certify our Kis¸ladag˘ mine to the ISO 14001 standard, ● preparing to become a signatory to the International Cyanide Management Code, and ● being a good corporate neighbour by investing in infrastructure, health care and education in local communities near our operations. 4 eldoradogold.com lETTER TO ShAREhOlDERS Efemçukuru Water quality testing, Efemçukuru Shovel, Kis¸ladag˘ Financial Performance Our solid operating performance translated into strong financial performance, supported by a gold price that remained at historic high levels throughout the year. This resulted in record earnings for Eldorado, with profit attributable to shareholders of the Company of $318.7 million compared to $221.0 million in 2010. Cash flow per share increased by 38% to $0.91 per share, and our earnings per share increased by 41% to $0.58. We have net cash of $368.1 million, up 84% from 2010. With our strong balance sheet, we are able to fund our development and exploration projects and accelerate repayment of debt. We also increased our dividend by 50% in 2011; CDN$0.15 per share was attributable to 2011 performance. Growth Ahead On February 24, 2012, we announced the completion of our acquisition of European Goldfields, a company with 10 million ounces of gold reserves in projects in Greece, Romania and Turkey. With this strategic acquisition, we have significantly increased our gold reserves, making us the leading intermediate gold producer in the world. There’s more growth ahead. With the assets acquired from European Goldfields – one mine and three development projects – and our own mines and development projects, we expect annualized production growth of 30% over the next four years, reaching 1.5 million ounces of gold per year by 2015. Eldorado is in a superb position going forward. We have a strong balance sheet, a diverse portfolio of high-quality and low-cost projects around the world, and the skills and expertise to deliver on our strategy. As always, I would like to thank all of our employees worldwide – we would not be where we are today without their significant contributions and remarkable efforts. And I would also once again like to thank our shareholders for their ongoing support as we continue to grow as a quality gold company. Sincerely, Paul N. Wright President & CEO Eldorado Gold Corporation March 21, 2012 Eldorado Gold 2011 Annual Report 5 Sustainability Report 2011 Jinfeng White Mountain fruit and vegetable project Local children near Jinfeng About this Report Welcome to Eldorado Gold’s first annual Sustainability Report. We are pleased to provide our health, safety, environmental and community performance for the 2011 calendar year. GRI Reporting This report includes performance indicators covering our five wholly or majority-owned gold mines, and one wholly owned iron ore mine. This data is as of year-end 2011 and does not include the European Goldfields’ assets, which we acquired on February 24, 2012. Many of the performance indicators do not yet apply to our exploration, development and construction projects. This report has been prepared to comply with the requirements of the Global Reporting Initiative (GRI) G3.1 Guidelines (www.globalreporting.org/ resourcelibrary/G3.1-Sustainability-Reporting- Guidelines.pdf). We have assessed this report internally and are confident that it meets the requirements for the GRI Application level C. The performance indicators contained in this report reflect issues that are relevant to our operations. The GRI Index and a glossary are found at the end of the report. Materiality This Sustainability Report includes information that we believe is material to our stakeholders and operations. Material issues are selected based on their relevance to our Corporate Responsibility 6 eldoradogold.com values, and their effects on employees, surrounding communities, investors and other interested parties. Exclusions Although our exploration and development projects are not yet at appropriate stages to be included in all aspects of this report, they are incorporated in the discussion and statistics when appropriate. Performance data from our Vancouver head office is not included unless indicated otherwise. Contact Please direct any questions about this report to: Nancy E. Woo Vice President, Investor Relations Eldorado Gold Corporation 1188 Bentall 5, 550 Burrard Street Vancouver, British Columbia, Canada, V6C 2B5 email: nancyw@eldoradogold.com Tel: 604.687.4018 / Fax: 604.687.4026 Table of Contents highlights for 2011 . . . . . . . . . . . . . . . . . .7 Goals for 2012 . . . . . . . . . . . . . . . . . . . . . .7 Employees . . . . . . . . . . . . . . . . . . . . . . . . .8 health & Safety . . . . . . . . . . . . . . . . . . . . .9 Environment . . . . . . . . . . . . . . . . . . . . . . 11 Community . . . . . . . . . . . . . . . . . . . . . . .14 Glossary . . . . . . . . . . . . . . . . . . . . . . . . .18 SuSTAINABIlITy REPORT 2011 Our Stakeholders We strive to be inclusive when engaging with stakeholders. Our stakeholders include employees, contractors, suppliers, investors, local community members around our operations, all levels of governments in the countries in which we operate and non-governmental organizations (NGOs). We have continuous dialogue with governments, local community members and indigenous peoples. Company employees, contractors and investors also have multiple modes of communication open to them to gain information and voice any potential concerns regarding corruption, environmental effects and safety. Eldorado also maintains a whistle-blowing policy that is open to all stakeholders. Goals for 2012 Health & Safety ● Zero fatalities ● Zero lost-time incidents ● To continue to improve the safety culture in all countries where we have operations ● To improve health, safety and environmental incident prevention through increased communication between all sites by standardizing the software used to collect data ● To improve and standardize tracking for non-lost- time incidents (medical aid, first aid and near misses). These will enable us to increase safety awareness and better target potential lTIs Environment ● No significant environmental incidents ● To become an International Cyanide Management Code signatory at all of our cyanide-using operations ● To become ISO 14001 certified for environmental management at Kis¸ladag˘ Communication ● To improve transparency by continuing to publish annual sustainability reports as per the GRI guidelines Eldorado Gold 2011 Annual Report 7 Tree planting, Kis¸ladag˘ Highlights for 2011 Environment ● We are in compliance with environmental standards at all of our operations ● None of our operations had significant environmental spills (meaning immediate recovery is not possible, there will be an eventual recovery from the effects, or the effects are permanent) ● We continue significant reclamation of the waste dump at Kis¸ladag˘ Employee Relations ● We continue to have excellent employee relations ● We had no employee strikes at any of our operations ● None of our operations reported incidents of discrimination Community ● Eldorado’s operations collectively provided over US$3 million in charitable donations, medical supplies, school supplies, and infrastructure in 2011 ● We aim to hire as many employees as possible from each operation’s region to support the local economies. 62.2% of our employees worldwide are from the same province or state ● We continue our work to create a sustainable, economic vineyard at our Efemçukuru mine ● We also support education in the communities around our operations by providing scholarships and inteinternships to local students SuSTAINABIlITy REPORT 2011 Employees Over 4,500 employees and contractors worldwide make Eldorado what it is today. Wherever possible, we hire from local communities. We pay competitive wages and help contribute to building lifelong skills, which provide social and economic benefits to the nearby area. Number of Employees at 2011 Year-End Site Male Female Contractors Total Efemçukuru Kis¸ladag˘ Eastern Dragon Jinfeng Tanjianshan White Mountain Vila Nova Perama hill Vancouver Total 283 590 71 717 375 383 39 8 28 2,494 19 29 21 74 80 70 4 3 16 316 Annual Employee Turnover Site Efemçukuru Kis¸ladag˘ Jinfeng Tanjianshan White Mountain Vila Nova Total 57 330 240 473 256 439 258 – – 359 949 332 1,264 711 892 301 11 44 2,053 4,863 % 2.98% 3.23% 7.59% 13.63% 7.51% 27.91% 7.59% Employee turnover is higher at Vila Nova due to the high number of short-term contracts in a region that culturally has a low rate of long-term, full-time positions Percentage of Employees Covered by Collective Bargaining Agreements (Not Including Contractors) Site Efemçukuru Kis¸ladag˘ Jinfeng Tanjianshan White Mountain Vila Nova Total % 0.0% 75.8% 100.0% 7.5% 100.0% 100.0% 67.2% Efemçukuru is currently in the process of formalizing collective bargaining agreements, which are expected to be complete by early 2012. 8 eldoradogold.com Average Hours of Training per Employee Site Efemçukuru Kis¸ladag˘ Jinfeng Tanjianshan White Mountain Eastern Dragon Vila Nova Average per employee Percentage of Employees Receiving Regular Performance Reviews (Not Including Contractors) Site Efemçukuru * Kis¸ladag˘ Jinfeng Tanjianshan White Mountain Eastern Dragon Vila Nova Total * Not representative due to the mine starting up mid-year. Ratio of Average Entry-Level Wage per Hour to Local Minimum Wage per Hour Site Efemçukuru Kis¸ladag˘ Jinfeng Tanjianshan White Mountain Vila Nova Publications Hours 140.1 38.3 16.6 31.8 21.0 40.0 9.2 38.93 % 2.7% 69.3% 100.0% 98.0% 89.1% 95.7% 0.0% 78.6% Ratio 1.3 2.7 2.4 2.1 1.5 1.5 Eldorado employees publish two internal magazines each quarter: one for our Turkish operations and one for our Chinese operations. Each magazine highlights various aspects of the operations, including community initiatives, employee profiles, and various achievements. SuSTAINABIlITy REPORT 2011 Health & Safety health and safety is our top priority. When an employee’s health is affected or they are injured, the effects extend from the employee to his or her family and community, as well as mine production. We have set ambitious objectives for health and safety standards, and we believe that by continuously improving our training and other safety initiatives, we can achieve a culture of safety with zero fatalities and lost-time incidents (lTIs). lTIs are any work-related incidents that require an employee to take time off work; the frequency rate (lTIFR) is the number of incidents per million man-hours worked. Occupational diseases result from workplace exposure to a chemical, physical or biological agent; examples include lead poisoning or heatstroke. The lost-day rate is the average number of work days lost per million man-hours worked. Working Towards our Safety Goals All lost-time incidents, occupational diseases and fatalities are preventable. We are deeply saddened by the death of a local contractor at our Jinfeng mine this year due to a rock fall. We have undertaken a rigorous investigation of the accident and are updating our safety procedures to prevent similar incidents. Eldorado’s goal remains to have zero fatalities, zero lost-time incidents and zero occupational diseases. In working toward this goal, all reported incidents are investigated, and the findings are shared between operations. Contractors pose an increased safety risk to our operations; to alleviate this risk, Eldorado checks their previous work records and includes them in safety training workshops with our employees. Safety Key Performance Indicators (Employees and Contractors) Site Efemçukuru Kis¸ladag˘ Jinfeng * Tanjianshan White Mountain Vila Nova LTIFR 3.08 1.85 1.49 1.76 2.09 7.00 Occupational Diseases Lost-Day Rate Fatalities 0 0 0 0 0 0 54.2 5.5 185.9 18.9 24.8 89.7 0 0 1 0 0 0 * Without the fatality, Jinfeng's lost-date rate would have been 120.4. Tocantinzinho employees Forest fire training,Efemçukuru Eldorado Gold 2011 Annual Report 9 SuSTAINABIlITy REPORT 2011 Emergency response training, White Mountain Emergency Training As part of our commitment to safety, we regularly conduct extensive emergency drills. Each operation has a rigorously trained emergency response team, emergency equipment and defined emergency procedures and protocols. Adjacent communities are also included in procedures, and nearby hospitals and fire and police departments are advised of potential emergency scenarios. Emergency training includes mine rescue drills, fire drills, CPR and first aid training, and training in hazardous materials suits and other safety equipment. Our teams are often first responders to emergencies in communities near our operations. Man-Hours of Health, Safety, and Environmental Training Site Efemçukuru Kis¸ladag˘ Jinfeng Tanjianshan White Mountain Vila Nova Total Hours 1,714 1,200 1,230 1,072 423 127 5,766 Eldorado’s health programs provide immunizations, check-ups and basic medical services for all staff. 10 eldoradogold.com We also take extensive preventative measures to combat endemic diseases at our operations. For example, to combat malaria in Brazil, we spray indoor and outdoor areas to inhibit the breeding of mosquitoes. Employees and contractors are trained in malaria prevention and in recognizing symptoms; they are given blood tests when symptoms occur to ensure early diagnosis and treatment for anyone who may have become infected. The local town, Porto Grande, carries out entomology work semi-annually to identify and eliminate probable breeding grounds for malaria-transmitting mosquitoes in areas close to our operations and nearby communities. Continuous Improvement Jinfeng and White Mountain have instituted a Continuous Improvement (CI) culture to emphasize that safety is the top priority. The CI culture is based on practicing the “Review, Plan, Do” concept before each action and encouraging all employees to get involved. A central aspect is the suggestion system: at Jinfeng alone, 1,446 suggestions for improvement were collected last year, and 1,044 were implemented. Once implemented, the suggestions improve health and safety, as well as productivity: already, employees’ suggestions have reduced expenditures on Jinfeng’s top 100 consumables by over uS$550,000 annually. Suggestion boxes are in place at all of our operations. The contents is reviewed regularly and approved recommendations are implemented. Environment Environmental issues are a key influence in Eldorado’s decision-making process. Employees and contractors for each project and operation are required to uphold the highest environmental standards through all stages of exploration, operation and closure. During development, we conduct extensive environmental testing and studies to determine firm baseline data and characteristics for air, water, soil and biodiversity. This becomes part of the Environmental Impact Assessment (EIA). All of Eldorado’s mines also have closure plans, which are created as part of the permitting process. Waste Most of the mining waste at our operations consists of overburden, waste rock and tailings. When overburden and rock can potentially pose toxicity risks, we carefully plan how and where it is placed. For example, at Kis¸ladag˘, sulphide waste is encapsulated within an oxide layer in a designed waste dump. In open pit mines, the topsoil will eventually be used during rehabilitation and decommissioning. It cannot be stored over two metres high or the seeds and active microbes in the soil are no longer viable when the material is placed on stockpiles or dam walls for revegetation. If required, tailings are stored on a lined pad, and during rehabilitation will be covered with soil to prevent any residual toxins from causing harmful environmental effects. Waste at Each Operation (Tonnes) Site Efemçukuru Kis¸ladag˘ Jinfeng Tanjianshan White Mountain Vila Nova Total Overburden 0 26,383 0 0 0 0 26,383 SuSTAINABIlITy REPORT 2011 Native plant, White Mountain Total Amount of Land Used at Each Operation Since Project Inception (Hectares) Site Efemçukuru Kis¸ladag˘ Jinfeng Tanjianshan White Mountain Vila Nova Total Hectares 33 461 285 277 205 108 1,369 Rock 224,772 18,338,610 2,092,372 2,858,299 1,081,022 1,983,384 26,578,459 Tailings and Sludges 102,915 0 1,544,965 1,087,086 708,883 82,897 3,526,746 Eldorado Gold 2011 Annual Report 11 SuSTAINABIlITy REPORT 2011 Water Water is emerging as an increasingly important global issue in our world. Eldorado has set goals to assure the quality of discharged water and to recycle water wherever possible. Jinfeng, White Mountain and Efemçukuru all have access to more water than they require, and have treatment plants for the excess water to be discharged. The Kis¸ladag˘ mine has built a rainwater catchment area as an additional water source. Surface water is drawn from lakes, rivers and areas where water naturally collects above ground. Groundwater is drawn from wells or from below ground. Rainwater is collected from rainfall in constructed collection areas. Reused water has already been used in operations, processes or offices and is recirculated. None of Eldorado’s operations use municipal water. Water Withdrawn at Each Operation by Source (Cubic Meters) White Mountain Surface Water Groundwater Rainwater Reused Water Total Withdrawn 158,238 863,386 0 0 1,281,046 18,288 2,320,958 m3/oz * 5.27 10.34 5.16 15.76 7.91 Site Efemçukuru Kis¸ladag˘ Jinfeng Tanjianshan White Mountain Vila Nova Total 0 0 1,837,785 593,040 0 36,843 2,467,668 Water Efficiency (Cubic Metres per Ounce of Gold) Site Efemçukuru Kis¸ladag˘ Jinfeng Tanjianshan White Mountain Total *Efemçukuru is not included due to the mid-year start of production. 12 eldoradogold.com 336,029 637,560 0 0 0 0 343,968 16,689,066 2,294,999 837,516 1,944,461 1,296,000 973,589 23,406,010 158,238 863,386 1,837,785 593,040 1,281,046 55,131 4,788,626 ISO 14001 Eldorado’s Kis¸ladag˘ mine is working toward meeting the International Organization for Standardization (ISO) standards for environmental management: ISO 14001. Kis¸ladag˘ has completed an environmental risk assessment for each workplace area, and has updated standard procedures and forms to meet the ISO requirements. Workforce training is ongoing to increase environmental awareness for all staff, and an internal audit was completed in December 2011. In early 2012, we plan to address any deficiencies found by the internal audit, and we will then apply for an external audit to gain certification. For more information regarding ISO 14001, please visit: www.iso.org/iso/iso_14000_essentials. SuSTAINABIlITy REPORT 2011 Energy Efficiency (Gigajoules per Ounce of Gold) Site Efemçukuru Kis¸ladag˘ Jinfeng Tanjianshan White Mountain Total GJ/oz * 0.85 3.49 2.43 2.40 2.03 *Efemçukuru is not included due to the mid-year start of production. Energy Eldorado’s operations are generally located in rural areas that have no access to renewable energy sources such as wind and solar power. Most of Eldorado’s direct energy comes from fossil fuels and electricity. We recognize that energy is one of the biggest cost factors for our operations and that how we use it impacts our environment. We continue to look for the most energy-efficient processes and strive to reduce energy requirements at each of our operations. Direct energy is used by us in the form of gasoline and diesel fuels for on-site equipment, and electricity for power-processing plants and buildings. Direct Energy Used per Operation (Gigajoules) GJ 46,886 240,647 620,059 279,555 195,027 7,976 1,390,150 Near Tanjianshan Site Efemçukuru Kis¸ladag˘ Jinfeng Tanjianshan White Mountain Vila Nova Total Materials Cyanide Gold generally occurs at concentrations of less than 0.001% (by mass) in ore. As gold is not soluble in water, cyanide is used to dissolve the gold so that it can be removed from the ore. Close to 1.1 million metric tonnes of hydrogen cyanide are produced globally each year, with only around 6% used in gold mining. Cyanide is used extensively in the nylon and plastics industries, as well as in fire retardants, food processing and cosmetics. Protective measures are taken at each site to ensure worker and environmental safety. For example, appropriate personal protective equipment must be worn in all areas in which cyanide is in use, and plastic balls cover ponds containing cyanide to deter birds. The International Cyanide Management Institute (ICMI) developed the Cyanide Code, which outlines best practices for cyanide from production to disposal. Eldorado has done preliminary audits of its operations and plans to apply for Code certification for all of its cyanide-using mines in 2012. By becoming Code signatories, we aim to ensure that all of our operations are using the world’s best practices in regard to cyanide use. For more information regarding the Cyanide Code, please visit: www.cyanidecode.org. For more information regarding the use of cyanide in mining, please visit: www.gold.org/about_gold/ sustainability/environmental. Eldorado Gold 2011 Annual Report 13 SuSTAINABIlITy REPORT 2011 Lime Sulphuric Acid lime is used in gold mining as an additive to the cyanide solution. This keeps the solution at a safe ph level. Contact with lime can cause irritation to the skin and eyes, and we apply the same safety precautions for lime as we do for cyanide. Carbon Activated carbon is used to extract the gold and cyanide compound from slurry. The gold is then stripped from the carbon, which is then recirculated. It does not pose risks to workers. Hydrochloric Acid After the gold is stripped from the carbon, diluted hydrochloric acid is used to remove impurities from the carbon before it is reused. hydrochloric acid is an irritant; personal protective equipment and training are required to protect workers from coming in contact with the acid. Materials Used at Each Operation (Tonnes) Sulphuric acid is used at Jinfeng to produce suitable conditions for bacteria to expose the gold contained in sulphide minerals for subsequent leaching. Sulphuric acid is produced at Tanjianshan by converting sulphur dioxide from the gas produced by the roaster, and is sold. This eliminates toxic air emissions that result as a byproduct of roasting. Personal protective equipment, training and stringent procedures are in place for employees who work with sulphuric acid. Sodium Hydroxide Sodium hydroxide is used as a ph modifier for stripping gold from carbon and electro-winning. At the Efemçukuru concentrate treatment plant, it is used as the ph modifier for leaching. Sodium hydroxide is an irritant; personal protective equipment and training are required to protect workers from coming in contact with the acid. Carbon Hydrochloric Acid Sulphuric Acid Sodium Hydroxide Site Efemçukuru Kis¸ladag˘ Jinfeng Tanjianshan White Mountain Total Cyanide 0 5,050 1,256 572 925 Lime 14 63,742 19,426 3,589 1,845 0 69 28 6 26 7,803 88,616 129 0 474 178 94 104 850 1 0 4,428 72,000* 0 4,429 0 1,598 177 29 674 2,478 *Sulphuric acid is produced at Tanjianshan and sold. It is not included in the total sulphuric acid used. Community Eldorado strives to maintain strong relations with its neighbours to earn and keep the social licence to operate in a given area. We seek to improve the standard of living through added economic activity in local areas, increased job availability, added infrastructure, enhanced medical and educational services, and by teaching skills to improve employability. Eldorado’s sites practise transparency by communicating with nearby communities about mine activities. 14 eldoradogold.com Improving villagers' health by teaching hygiene, Jinfeng Disputes Relating to Land Use, Customary Rights of Local Communities, and Indigenous Peoples Site Efemçukuru Kis¸ladag˘ Jinfeng Tanjianshan White Mountain Vila Nova Total Disputes 0 0 6 0 0 2 8 Land Use Disputes At Jinfeng, four separate road blockages were staged relating to land compensation and compensation for flood damage; all were resolved. Another dispute was raised over land encroachment by a contractor, and settlements are ongoing. There was also a dispute between local villagers and the county government over land compensation and water supply concerns. It began with road blockages at Jinfeng, and resulted in a temporary shutdown of underground production and processing. The government resolved the dispute with the villagers as it is responsible for land compensation payments. At Vila Nova, there were two disputes with settlers in the mine area regarding compensation for previous improvements. In 2011, we reached an agreement with one of the settlers; negotiations with the second are ongoing. Human Rights Eldorado holds itself to the highest human rights standards. China is considered at risk for forced and child labour, and Eldorado has set in place practices to prevent the use of forced or child labour at any of our operations. As the top reason of forced and child labour is poverty, Eldorado is committed to increasing direct and indirect economic contributions to local areas around all of our operations to reduce the need for forced or child labour. Economic Contribution local communities are benefiting from job, health and safety skills development, which will create employment opportunities well beyond the life of the mine. For example, Eldorado has provided training to community members employed in Efemçukuru’s vineyard and agricultural project to provide income for future generations. SuSTAINABIlITy REPORT 2011 Local farmer near Kis¸ladag˘ Eldorado’s direct economic contribution to local communities is extensive through: ● wages to local employees, ● charitable donations, and ● taxes and royalties to governments. In 2010, Tüprag, Eldorado’s wholly owned subsidiary operating Kis¸ladag˘ and Efemçukuru, was ranked the 30th highest corporate taxpayer in Turkey. Engagement & Communication Eldorado begins its formal communication with local communities during the pre-mining stage, when we conduct a social impact assessment. We continue to meet with locals to inform them about the mine, and to determine what initiatives would best serve the community’s needs. Regional students, teachers and government officials frequently tour our operations to gain a better understanding of our practices to keep workers, the environment and surrounding communities safe. Number of Households Resettled at Each Operation Since Project Inception Site Efemçukuru Kis¸ladag˘ Jinfeng Tanjianshan White Mountain Vila Nova Total Number 0 12 50 0 37 0 99 Eldorado Gold 2011 Annual Report 15 SuSTAINABIlITy REPORT 2011 Community Initiatives Efemçukuru The village of Efemçukuru is located two kilometres south of our newest gold mine in Turkey. As part of our commitment to the communities we operate in, we are excited to help create a new sustainable industry in the region: wine production. The area’s climate is ideal for grape cultivation, and locals have been growing table grapes for many years. We have retained experts who have suggested that the region’s conditions are also suitable for wine production. We have made a multi-year commitment to work in partnership with the local community and to provide resources to diversify land use. Following the purchase of land surrounding the mine, we employed villagers to cultivate the soil. Initially, the villagers planted 2.5 hectares with Cabernet Sauvignon, Merlot and Chardonnay vines. In phase two of the project, the villagers will plant an additional 2.5 hectares with Pinot Noir, Chardonnay and Sauvignon Blanc vines. In a few years, the project is expected to produce 40 tonnes of white and 25 tonnes of red wine. Kis¸ladag˘ Kis¸ladag˘ has multiple ongoing programs to improve the livelihood of locals living around the mine site. Many improvements focus on infrastructure such as paving roads and constructing water supply pipelines, sewage systems and buildings. We fund scholarships, donate buildings and supplies, and make charitable donations to teachers and students in the area, in addition to granting internships to mining students. Many teachers, students, local villagers and government members visit the site to learn about the industry. Eldorado funded a public health bus for the province of us¸ ak in 2004. The bus continues to travel around the province providing immunizations, basic medical check-ups, eye exams and x-rays to villagers: generally the elderly, women and children. “We were quite satisfied with the interest and attention shown by the company staff. They are perfect in terms of occupational safety and sensitivity to the environment. I would like to thank the company for its economic support to the surrounding villages and districts of Us¸ak, and I wish health and happiness.” – Celal Korkmaz, Teacher 16 eldoradogold.com Jinfeng Jinfeng has established a strong community development program, providing funds, training and supplies to improve the local education systems, infrastructure and health care. Jinfeng routinely sends its International SOS (ISOS) Clinic staff to surrounding communities to provide free check-ups, x-rays and medicine. Jinfeng has also provided relief to communities affected by natural disasters. Money and essential items were donated to victims of a large fire in lihuai village, and water was supplied to multiple villages for drought relief. Jinfeng also supports the local economies through hiring practices. For example, ● 38% of employees come from the local villages, ● the local community is given priority for small contracts (valued at uS$15,700 or less and that do not require specific expertise), and ● casual labour is always hired from the local communities. Jinfeng has entered a cooperation program for community development with the Zhenfeng County Government, the first program of its kind in China. It includes: ● inspection and guidance from the Provincial Safety Bureau, ● updates and project information provided to governments via newsletters and monthly reports, and enhanced by periodic visits, ● government assistance in promoting awareness and support for the mine, ● government assistance in providing power to the area and paving the mine access road, and ● a county work group. Tanjianshan Tanjianshan is in a very remote and isolated area of China. While there are no local communities surrounding it, we still make an effort to improve the communities throughout the province, despite the mine not having a direct impact on them. Each year, Eldorado sets aside uS$200,000 for donation to charity projects in the Qinghai province. This is part of a five-year charity agreement with the provincial government. SuSTAINABIlITy REPORT 2011 White Mountain also has community development projects to improve education and provide water supply to nearby towns, road access from major cities to the mine and surrounding areas, and medical care. We have also undertaken an agricultural project to create sustainable income for villagers beyond the life of the mine. We completed construction of five greenhouses in November, and engaged local university professors to select fruit and vegetable varieties. In the spring, a team of local villagers will be taught greenhouse farming skills, and the greenhouses will be given to their team to plant and harvest crops. Monetary Amount of Charitable Donations and Community Development Spending in 2011, by Site Site Efemçukuru Kis¸ladag˘ Jinfeng Tanjianshan White Mountain Vila Nova Total Donations (US $1,000) 557.4 1,270.3 801.1 134.3 327.6 355.3 3,446.0 Tanjianshan’s community initiatives are focused on education and medical improvements. We have donated money, school supplies, uniforms and computers, and have granted scholarships to students in the province. We upgraded the Mahai Village Medical Clinic and supplied medical equipment and training for the staff. In addition, we have donated food, water, cash, and other essential items to families in the province affected by natural disasters. After the 2010 Qinghai yushu earthquake, employees were encouraged to donate money for aid. The total sum collected was matched by the mine, in addition to the initial uS$100,000 cash donation. White Mountain White Mountain is located seven kilometres from the town of Baishan. Eldorado staff work closely with all levels of government in the area, who recognize the mine as a model operation. Government members frequently tour the mine site to monitor environmental and safety standards, speak with staff and stay up to date with the operation. Before we began mining, a community had to be relocated. White Mountain built a modern 37-home village for the community families. Residents from this and other local villages are given priority for employment, as well as for purchasing and project contracts. Free, Prior and Informed Consent Free, Prior and Informed Consent (FPIC) is a United Nations set of guidelines outlining the rights of locals and Indigenous Peoples. It is summarized by the UN as “information about and consultation on any proposed initiative and its likely impacts, with meaningful participation of indigenous peoples and representative institutions.” “Free” means without coercion, and “prior” means having sufficient time to allow for information-gathering and discussion before a project starts. A project can only begin once the process is fully completed and an agreement has been reached. Stakeholders participate throughout all stages of the project life cycle. Eldorado Gold is committed to following the principles of Free, Prior and Informed Consent, and we are beginning to introduce it at all of our sites. At Jinfeng, for example, a community relations team meets with the village elders to keep them informed and to give them an opportunity for input on project plans. These meetings began prior to any construction. At White Mountain, cooperation meetings are held between the government, university, community and mine staff. In addition to matters pertaining to the mine, discussions also include the local villages’ agriculture and livestock, and White Mountain’s greenhouse project. Eldorado’s Beijing office plans to implement cooperation programs based on this model at each of Eldorado’s Chinese operations. Jinfeng has already begun to coordinate similar meetings with the local Shaping township government. In Turkey, senior mine executives meet with locals in their traditional tea houses and discuss plans for the mines. Like the Chinese meetings, the plans are not limited to the mines: Eldorado staff use these opportunities to hear locals’ concerns about their infrastructure, labour, education and medical systems. Eldorado Gold 2011 Annual Report 17 GlOSSARy Absenteeism Rate The absenteeism rate is the average number of days taken off work per employee, including sick time and personal leave. The absenteeism rate does not include paid vacation time. Artisanal Mining Artisanal mining is small-scale, generally individual or family-run mining. Generally, artisanal mining is labour-intensive, with minimal capital expenditures, safety standards, and access to markets. Collective Bargaining Agreements Collective bargaining agreements are between the company and workers’ organizations, such as trade unions. Continuous Improvement (CI) Eldorado’s Jinfeng mine created the CI program, which has now been instituted at White Mountain. It is based on soliciting employee improvement suggestions, and reviewing and implementing these. A significant part of this program is focused on using employees' ideas to improve safety practices. Direct and Indirect Energy Direct energy is used by the company in fuel for on-site equipment and electricity for power processing and other direct applications. Indirect energy is the energy associated with business travel, product transportation and other applications where energy is not immediately consumed by the company. Discharged Water Discharged water is used by a mine, and is then collected, treated and released back into a water body. Endemic Diseases Endemic diseases are those that occur frequently in a given area, such as malaria in Brazil. Environmental Impact Assessment (EIA) An EIA is a study done on an intended project area in the pre-construction phase as part of the permitting process. The EIA extensively covers many environmental aspects, such as air, water, and dust quality, and flora and fauna in the area. This data is used throughout the mine life and rehabilitation to gauge the effect of the mine and the remedial measures on the environment. Free, Prior and Informed Consent (FPIC) FPIC is a set of united Nations guidelines outlining the rights of locals and indigenous peoples. It promotes the rights of locals to have input regarding 18 eldoradogold.com plans in all life-cycle stages, in a timely manner and free from coercion. Garimpeiros Garimpeiros are artisanal miners in Brazil. Global Reporting Initiative (GRI) The GRI is a widely used voluntary frame- work that seeks to improve transparency through sustainability reporting. The first set of guidelines was released in 2000; the current version is G3.1. Groundwater Groundwater is collected from underground sources, including wells and water pumped from underground mines. Incidents of Discrimination Eldorado defines incidents of discrim- ination as any treatment of a person in an unethical matter. It can include the promotion or denial of promotion or benefits for reasons other than personal merit, or the harassment of employees due to cultural differences. International Cyanide Management Institute (ICMI) and International Cyanide Management Code (ICMC) The ICMC covers best practices for managing cyanide in all stages of its life cycle, created specifically by the ICMI for the gold mining industry. Companies can become signatory as a company, or on a mine-by-mine basis. International Organization for Standardization (ISO); ISO 14001 ISO 14001 is a set of voluntary standards for environmental management best practices. International SOS (ISOS) Clinic ISOS is an organization providing medical and emergency care that meets international standards for expatriates. ISOS operates clinics at each of our Chinese operations. Lost-Day Rate The lost-day rate is the number of employee workdays lost due to lTIs per million man-hours worked. Lost-Time Incidents (LTIs) lTIs are workplace accidents in which employees sustain injuries that result in an inability to work. Lost-Time Incident Frequency Rate (LTIFR) The lTIFR is the number of lost-time incidents per million man-hours worked. Municipal Water Municipal water is drawn from a municipal source. Eldorado does not use municipal water at any of its operations. Occupational Diseases Occupational diseases are illnesses caused by workplace exposure to physical, chemical or mental agents. For example, occupational diseases can include stress-related diseases, illness due to prolonged proximity to toxic chemicals or heatstroke. Overburden Overburden is the waste rock stripped from an open pit mine above the ore body. Rainwater Rainwater is collected in specific catchment areas and used for various tasks. It does not include rainfall into leach pads and pregnant ponds. Recycled and Reused Water Recycled and reused water has been used in a task and is being re-circulated for use in other tasks. Recycled water has been treated before recirculation; reused water is not treated. We have reported recycled and reused water collectively as reused water. Significant Environmental Spill Eldorado defines a significant environmental spill as one that cannot be readily contained and remedied. A significant spill has medium- to long-term or permanent environmental effects. Social Impact Assessments (SIAs) SIAs are done in conjunction with environmental impact assessments prior to beginning construction in an area as part of the permitting process. Potentially affected communities are surveyed to determine the effects the mine could have on the local residents. Considerations include the population, current labour situation, local concerns and risk assessment. Surface Water Surface water is collected from any naturally occurring above-ground water source, such as oceans, lakes, rivers, and streams. Tailings and Sludges Tailings and sludges are waste residue that result from ore processing. Waste Rock Waste rock is material that is mined and stripped from the ore. Withdrawn Water Withdrawn water is the cumulative amount used from external sources. This includes surface, ground, rain and municipal water. Water efficiency is calculated from withdrawn water. As of December 31, 2011 Project Gold Kis¸ladag˘ Proven Probable Proven+Probable Efemçukuru Proven Probable Proven+Probable Perama Proven Probable Proven+Probable Tanjianshan Proven Probable Proven+Probable Jinfeng Proven Probable Proven+Probable White Mountain Proven Probable Proven+Probable Eastern Dragon Proven Probable Proven+Probable MINERAl RESERVES AND RESOuRCES Mineral Reserves Mineral Resources Tonnes (x1000) Grade Au g/t In-situ Gold Ounces (x1000) Tonnes (x1000) Grade Au g/t In-situ Gold Ounces (x1000) 114,955 344,915 459,870 1,016 4,007 5,023 2,477 7,220 9,697 4,299 1,229 5,528 8,671 8,661 17,332 3,776 2,072 5,848 837 2,253 3,090 0.91 0.64 0.71 12.42 8.30 9.13 4.44 2.68 3.13 3.19 3.07 3.16 3.74 3.75 3.75 3.70 3.65 3.68 11.07 6.46 7.71 3,368 Measured 7,148 Indicated 10,516 M+I Inferred 121,590 458,270 579,860 380,760 406 Measured 1,069 1,475 354 621 975 441 121 562 Indicated M+I Inferred Measured Indicated M+I Inferred Measured Indicated M+I Inferred 1,043 Measured 1,045 2,088 449 243 692 297 467 764 Indicated M+I Inferred Measured Indicated M+I Inferred Measured Indicated M+I Inferred 1,122 4,304 5,426 2,524 3,064 9,375 12,439 8,766 5,373 3,820 9,193 3,137 12,119 13,126 25,245 10,630 4,892 2,868 7,760 4,907 800 2,700 3,500 2,200 0.88 0.59 0.65 0.40 13.68 8.50 9.57 5.96 4.30 3.18 3.46 1.96 2.94 2.52 2.77 3.50 3.59 3.46 3.52 3.18 3.62 3.23 3.47 5.22 12.48 6.04 7.50 2.67 3,436 8,619 12,055 4,921 494 1,177 1,670 484 424 958 1,382 554 509 309 818 353 1,397 1,459 2,856 1,086 569 297 866 824 322 530 852 190 Continued on next page. Eldorado Gold 2011 Annual Report 19 MINERAl RESERVES AND RESOuRCES As of December 31, 2011 Project Mineral Reserves Mineral Resources Gold continued Tocantinzinho Proven Probable Proven+Probable Total Gold Proven Probable Proven+Probable Iron Vila Nova Proven Probable Proven+Probable Tonnes (x1000) Grade Au g/t In-situ Gold Ounces (x1000) Tonnes (x1000) Grade Au g/t In-situ Gold Ounces (x1000) 17,735 31,315 49,050 153,766 401,672 555,438 1.39 1.17 1.25 1.45 0.92 1.07 792 Measured 1,183 1,975 Indicated M+I Inferred 7,150 Measured 11,897 Indicated 19,047 M+I Inferred 19,777 50,457 70,234 6,950 168,737 544,920 713,657 419,874 1.29 0.97 1.06 0.66 1.47 0.85 1.00 0.63 Mineral Reserves Mineral Reserves Tonnes (x1000) 2,338 6,603 8,941 Grade Fe % 63.4 60.0 60.9 Measured Indicated M+I Inferred Tonnes (x1000) 2,338 7,295 9,633 2,022 820 1,574 2,394 147 7,971 14,923 22,893 8,559 Grade Fe % 63.4 60.9 61.5 61.2 Notes on Mineral Resources and Reserves: 1. Mineral reserves and mineral resources are as of December 31, 2011. 2. Mineral reserves are included in the mineral resources. 3. The Eastern Dragon project also contains economic concentrations of silver. The silver grade for the project’s Proven and Probable reserves averages 71 g/t Ag (7.0 million in-situ ounces) whereas the average silver grade in the Measured and Indicated resources equals 73 g/t Ag (8.3 million in-situ ounces). Mineral Reserve Notes: 1. Gold price used was $1250/oz, except for the Eastern Dragon and Tocantinzinho projects, which used $1000/oz and the Efemçukuru mine which used $825/oz. 2. Cut-off grades (gold g/t): Kis¸ladag˘: 0.20 g/t oxide, 0.31 g/t sulphide; Efemçukuru: 4.0 g/t; Perama: 0.8 g/t; Tanjianshan: 1.6 g/t, JLG sulphide, 1.3 g/t, JLG oxide/transition, 1.5 g/t 323 Pit; Jinfeng: 0.8 g/t open pit, 2.3 g/t underground; White Mountain: 1.5 g/t; Eastern Dragon: 1.0 g/t open pit, 1.7 g/t underground; Tocantinzinho: 0.49 g/t sulphide, 0.43 g/t oxide. 3. Qualified Persons: Richard Miller, P.Eng., Manager, Mining for the Company, is responsible for the Kis¸ladag˘, Tanjianshan, Jinfeng open pit and Perama reserves; Norm Pitcher, P.Geo., Chief Operating Officer for the Company, is responsible for the Jinfeng underground, White Mountain, Eastern Dragon and Efemçukuru reserves; Sean Gregersen, P.Eng., Business Development Manager for the Company, is responsible for the Tocantinzinho reserves; Roberto Costa, principal of Roberto Costa Engenharia Ltda, is responsible for the Vila Nova iron reserves. Mineral Resource Notes: 1. Cut-off grades (gold g/t): Kis¸ladag˘: 0.25 g/t; Efemçukuru: 3.0 g/t; Perama: 0.5 g/t; Jinfeng: 0.7 g/t open pit, 2.0 g/t underground; Tanjianshan: 1.0 g/t; White Mountain: 1.0 g/t; Eastern Dragon: 1.0 g/t; Tocantinzinho: 0.3 g/t. 2. Qualified Persons: Stephen Juras, Ph.D., P.Geo., Director, Technical Services for the Company, is responsible for the Kis¸ladag˘, Efemçukuru, Perama, Tanjianshan, Tocantinzinho, Jinfeng, White Mountain and Eastern Dragon resources. Roberto Costa, principal of Roberto Costa Engenharia Ltda, is responsible for the Vila Nova iron resources. 20 eldoradogold.com GOlD PRODuCTION hIGhlIGhTS First Quarter 2011 Second Quarter 2011 Third Quarter 2011 Fourth Quarter 2011 Fourth Quarter 2010 2011 2010 Gold Production Ounces Sold Ounces Produced 148,530 162,164 179,513 168,712 149,022 658,919 639,949 148,577 162,429 179,195 168,451 148,374 658,652 632,539 Cash Operating Cost ($/oz) 1,3 Total Cash Cost ($/oz) 2,3 410 462 397 477 397 463 418 486 418 460 405 472 382 423 Realized Price ($/oz – sold) 1,397 1,510 1,700 1,686 1,373 1,581 1,223 Kis¸ladag˘ Mine, Turkey Ounces Sold Ounces Produced Tonnes to Pad Grade (grams/tonne) Cash Operating Cost ($/oz) 3 Total Cash Cost ($/oz) 2,3 Tanjianshan Mine, China Ounces Sold Ounces Produced Tonnes Milled 50,832 50,833 66,392 66,688 87,121 86,788 80,572 80,339 59,741 284,917 279,025 59,815 284,648 274,592 2,341,635 3,194,051 3,520,220 3,374,541 2,021,057 12,430,447 10,372,719 1.04 386 408 0.92 389 411 0.90 377 401 0.97 353 379 1.00 382 354 0.95 374 398 1.06 329 339 28,493 28,493 31,977 31,977 26,935 26,935 27,564 27,567 30,710 114,969 116,765 30,710 114,972 113,864 238,070 264,698 218,330 284,138 244,867 1,005,236 1,049,952 Grade (grams/tonne) Cash Operating Cost ($/oz) 3 Total Cash Cost ($/oz) 2,3 3.90 402 515 4.23 343 596 4.25 353 541 3.56 415 616 4.59 349 459 3.96 377 567 4.19 383 485 Jinfeng Mine, China Ounces Sold Ounces Produced Tonnes Milled Grade (grams/tonne) Cash Operating Cost ($/oz) 3 Total Cash Cost ($/oz) 2,3 White Mountain Mine, China Ounces Sold Ounces Produced Tonnes Milled 48,518 48,564 46,381 46,350 44,187 44,202 38,672 38,641 38,282 177,758 182,026 37,560 177,757 181,950 384,400 397,987 379,352 383,226 387,710 1,544,965 1,557,199 4.32 430 482 4.05 401 457 4.26 424 509 3.63 525 596 3.81 486 585 4.06 442 507 4.24 425 480 20,687 20,687 17,414 17,414 21,270 21,270 21,904 21,904 20,289 20,289 81,275 81,275 62,133 62,133 140,211 192,558 191,157 184,956 169,669 708,882 622,418 Grade (grams/tonne) Cash Operating Cost ($/oz) 3 Total Cash Cost ($/oz) 2,3 5.71 438 475 3.71 518 564 4.15 475 519 4.29 472 519 4.06 498 536 4.37 474 517 3.98 487 522 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 Cash operating costs and total cash costs are non-IFRS measures. See the section “Non-IFRS Measures” of this annual report. Eldorado Gold 2011 Annual Report 21 Financial Review Kis¸ladag˘ open pit Table of Contents Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . 23 Management’s Responsibility for Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Independent Auditors’ Report of Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Consolidated Income Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Consolidated Statements of Changes in Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 22 eldoradogold.com MANAGEMENT’S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS For the year ended December 31, 2011 Throughout this MD&A, Eldorado, we, us, our and the Company mean Eldorado Gold Corporation. This year means 2011. All dollar amounts are in united States dollars unless stated otherwise. The information in this MD&A is as of February 23, 2012. you should also read our audited consolidated financial statements for the year ended December 31, 2011. We prepare our consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (“IASB”). The consolidated financial statements for the year ended December 31, 2011 are the Company’s first set of consolidated financial statements prepared in accordance with IFRS and IFRS 1 “First-Time Adoption of IFRS” has been applied. We file them with appropriate regulatory authorities in Canada and the united States. you can find more information about Eldorado, including our annual information form, on SEDAR at www.sedar.com. About Eldorado Based in Vancouver, Canada, Eldorado owns and operates mines around the world. Its activities involve all facets of the mining industry including exploration, development, production and reclamation. Operating gold mines: ● Kis¸ladag˘, in Turkey (100%) ● Tanjianshan, in China (90%) ● Jinfeng, in China (82%) ● White Mountain, in China (95%) ● Efemçukuru, in Turkey (100%) Development gold projects: ● Eastern Dragon, in China (95%) ● Tocantinzinho, in Brazil (100%) ● Perama hill, in Greece (100%) Iron ore mine: ● Vila Nova, in Brazil (100%) Eldorado is listed on the following exchanges: ● Toronto Stock Exchange (TSX) under the symbol ElD ● New york Stock Exchange (NySE) under the symbol EGO ElD is part of the S&P/TSX Global Gold Index. EGO is part of the AMEX Gold BuGS Index. Eldorado Chess Depositary Interests (CDIs) trade on the Australian Securities Exchange (ASX) under the symbol EAu. Eldorado Gold 2011 Annual Report 23 MANAGEMENT’S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS 2011 highlights, corporate developments ● Gold production increased 4% (658,652 ounces – 2011; 632,539 ounces – 2010). ● Gold revenues increased 33% ($1,042.1 million – 2011; $782.8 million – 2010). ● Basic earnings per share increased 41% ($0.58 per share – 2011; $0.41 per share – 2010). ● Cash generated from operating activities before changes in non-cash working capital increased 40% ($502.1 million – 2011; $357.9 million – 2010). This is a non-IFRS measure. See page 38 for more information. ● Paid dividends totalling CDN$0.11 per share compared to CDN$0.05 per share in 2010. ● Paid down debt of $92.4 million. ● Efemçukuru completed start up of operations during which it produced concentrate containing approximately 20,000 contained ounces of gold. ● The Company announced the results of a positive NI 43-101 compliant Technical Report for Tocantinzinho. ● The Company completed Kis¸ladag˘’s Phase III expansion which increased productive capacity at the mine by 25%, and announced the results of a study validating its intention to further double the mine capacity by the third quarter of 2014. Corporate developments – acquisitions and financings Completion of Revolving Credit Facility On October 12, 2011 the Company entered into a $280.0 million revolving credit facility with hSBC and a syndicate of four other banks (see page 40 for details related to the revolving credit facility). Acquisition of European Goldfields Limited On December 18, 2011 the Company announced that it had entered into a definitive agreement (the “Arrangement Agreement”) with European Goldfields limited (“European Goldfields”) (TSX: EGu, AIM: EGu) pursuant to which Eldorado agreed to acquire all of the issued and outstanding common shares of European Goldfields by way of a plan of arrangement (the “Arrangement”) under the Yukon Business Corporations Act. European Goldfields is a precious metals development company with attributable gold reserves of 9.2 million ounces and multi-stage assets located in Greece, Romania and Turkey. The company currently operates the 95% owned Stratoni mine in Greece and is developing the 95% owned Skouries and Olympias projects in Greece and the 80.1% owned Certej project in Romania. under the Arrangement, shareholders of European Goldfields will receive 0.85 Eldorado shares and CDN$0.0001 in cash per European Goldfields share (the “Exchange Ratio”). Each outstanding option of European Goldfields shall be exchanged for options of Eldorado that will entitle the holder to receive, upon the exercise thereof, Eldorado shares based upon the Exchange Ratio and otherwise on the same terms and conditions as in the original European Goldfields option. The total transaction value is approximately CDN$2.4 billion. The acquisition is estimated to result in an increase in the Company’s mineral interest of $2.6 billion, an increase in goodwill of $427.5 million, an increase in deferred income taxes of $477.7 million, and an increase in non-controlling interest of $144.8 million. These preliminary numbers are based on the September 30, 2011 interim balance sheet figures of European Goldfields and the Company’s share price on February 23, 2012 and are subject to change upon finalization of the purchase price allocation. The acquisition is expected to have a minimal impact on the financial performance of the Company in 2012, with the exception of the recognition of approximately $26.0 million in estimated transaction costs, which are immediately expensed under IFRS. 24 eldoradogold.com MANAGEMENT’S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS 2011 highlights, corporate developments continued Aside from the transaction costs mentioned above, the major impacts of the acquisition on the Company’s cash flows for the upcoming year are still to be determined as a result of development decisions to be made at a later date. The shareholders of both Eldorado and European Goldfields approved the transaction on February 21, 2012 and court approval was obtained on February 22, 2012. Investments in exploration companies During 2011 Eldorado invested in the following exploration companies: In September 2011 Eldorado entered into a share purchase agreement with Kopy Goldfields AB (“Kopy”), a company listed on the NASDAQ OMX First North exchange in Stockholm, Sweden, and acquired 1,700,000 ordinary shares of Kopy for $2.5 million. The Company acquired an additional 1,000,000 ordinary shares of Kopy for $1.8 million in October 2011 for a total investment of 2,700,000 ordinary shares. This represents a 28.9% interest in Kopy. Kopy holds seven exploration licences totalling 255 km2 located in the lena Goldfields north of Bodaibo in the Irkutsk Region of Russia. In December 2011, Eldorado acquired 44,595,920 ordinary shares of Glory Resources limited (“Glory”) (ASX: Gly) for $11.2 million. This represents a 19.9% interest in Glory. Glory acquired the Sappes Gold Project (“Sappes”) in north-eastern Greece in December 2011. Summarized Annual Financial Results ($ millions except as noted) Revenues 2 Gold sold (ounces) Average realized gold price ($/ounce) Average london spot gold price ($/ounce) Earnings from gold mining operations 3 Profit attributable to shareholders of the Company Earnings per share attributable to shareholders of the Company – Basic ($/share) Earnings per share attributable to shareholders of the Company – Diluted ($/share) Dividends paid – (CDN$/share) Cash flow from operating activities before changes in non-cash working capital 4 Cash and cash equivalents Total Assets Total long-term financial liabilities 5 2011 $1,098.9 658,919 $1,581 $1,572 $610.8 $318.7 $0.58 $0.58 $0.11 $502.1 $393.8 $3,960.4 $63.2 2010 $791.2 639,949 $1,223 $1,225 $400.7 $221.0 $0.41 $0.40 $0.05 $357.9 $314.3 $3,685.4 $113.4 20091 $358.5 360,226 $995 $972 $188.2 $102.4 $0.26 $0.26 – $147.0 $265.4 $3,436.1 $161.1 1 Financial results prepared in accordance with CGAAP. 2 Revenues include proceeds from the sale of iron ore produced by Vila Nova in the amount of $56.8 million in 2011 ($8.3 million – 2010; $nil – 2009). 3 Earnings from gold mining operations represent gross revenues less production costs and depreciation, depletion and amortization. This is a non-IFRS measure. Please see page 38 for discussion of non-IFRS measures. 4 Cash flow from operating activities before changes in non-cash working capital is a non-IRFS measure. Please see page 38 for discussion of non-IFRS measures. 5 Includes long-term debt net of deferred financing costs, defined benefit plans, and asset retirement obligations Eldorado Gold 2011 Annual Report 25 MANAGEMENT’S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS Review of Annual Financial Results Profit attributable to shareholders of the Company for the year ended December 31, 2011 increased to $318.7 million, or $0.58 per share, compared to $221.0 million, or $0.41 per share in 2010. The following main factors impacted our profit for the year as compared to 2010: ● Gold revenues increased $259.2 million, or 33% due to a 29% increase in the average realized gold price and a 3% increase in gold sales volume, while iron ore revenues increased $48.5 million reflecting the first full year of Vila Nova production; ● Production costs increased $68.5 million, or 25% due to a full year of production costs at Vila Nova ($30.3 million – 2011, $4.3 million – 2010), higher operating costs at Kis¸ladag˘, and higher production taxes at Tanjianshan and Jinfeng related to changes in laws governing mining taxation; ● Depreciation and amortization increased $15.3 million, or 14% mainly as a result of an increase in the depreciation rate at Jinfeng due to a reduction in reserves, higher depreciation at White Mountain related to higher sales volume, and higher depreciation at Vila Nova due to a full year of operation ($4.7 million – 2011, $1.0 million – 2010); ● Exploration expenses increased $8.3 million due to an increase in the Company’s worldwide exploration activities; ● General and administrative expenses increased $14.3 million, or 32% mainly as a result of the $11.3 million special bonus awarded to senior management in the first quarter of 2011; ● Income tax expense increased $78.6 million or 90% due to: 1) higher taxable income; 2) withholding taxes paid on dividends from the Company’s Turkish subsidiary, Tuprag; and 3) the impact of the weakening of the Turkish lira on the Company’s tax asset base in Turkey. The effective tax rate increased from 27% to 32% year over year as a result of the impacts of items 2 and 3 discussed above. Summarized Quarterly Financial Results 2011 ($ millions except as noted) Revenues Gold sold (ounces) Average realized gold price ($/ounce) Earnings from gold mining operations 1 Profit attributable to shareholders of the Company Earnings per share attributable to shareholders of the Company – Basic ($/share) Earnings per share attributable to shareholders of the Company – Diluted ($/share) Dividends paid– (CDN$/share) Cash flow from operating activities before changes in non-cash working capital Q1 Q2 Q3 Q4 2011 Total $218.1 $251.4 $326.1 $303.3 $1,098.9 148,530 162,164 179,513 168,712 658,919 $1,397 $107.8 $52.5 $1,510 $137.6 $74.9 $1,700 $193.2 $102.5 $1,686 $172.2 $88.8 $1,581 $610.8 $318.7 $0.10 $0.14 $0.19 $0.16 $0.58 $0.10 $0.05 $91.7 $0.14 $0.19 $0.16 $0.58 – $115.7 $0.06 $159.7 – $135.0 $0.11 $502.1 Continued on next page. 26 eldoradogold.com MANAGEMENT’S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS Summarized Quarterly Financial Results continued 2010 ($ millions except as noted) Revenues 2 Gold sold (ounces) Q1 Q2 Q3 Q4 2010 Total $181.5 $206.4 $190.3 $213.0 $791.2 163,446 172,826 154,655 149,022 639,949 Average realized gold price ($/ounce) Earnings from gold mining operations 1 $1,110 $91.8 $1,195 $105.0 $1,231 $94.5 $1,373 $109.4 $1,223 $400.7 Profit attributable to shareholders of the Company $50.5 $55.7 $69.6 $45.2 $221.0 Earnings per share attributable to shareholders of the Company – Basic ($/share) Earnings per share attributable to shareholders of the Company – Diluted ($/share) Dividends paid– (CDN$/share) Cash flow from operating activities before changes in non-cash working capital 3 $0.09 $0.10 $0.13 $0.08 $0.41 $0.09 – $80.9 $0.10 $0.05 $87.4 $0.13 $0.08 $0.40 – – $101.4 $88.2 $0.05 $357.9 1 Earnings from gold mining operations represent gross revenues less production costs and depreciation, depletion and amortization. This is a non-IFRS measure. 2 Revenues in Q4 include $8.3 million in iron ore sales. 3 Cash flow from operating activities before changes in non-cash working capital is a non-IRFS measure. Please see page 38 for discussion of non-IFRS measures. Review of Quarterly Results Profit attributable to shareholders of the Company for the quarter ended December 31, 2011 increased to $88.8 million, or $0.16 per share, compared to $45.2 million, or $0.08 per share for the same period in 2010. The following main factors impacted our profit as compared to the profit for the quarter ended December 31, 2010: ● Gold revenues increased $79.8 million, or 39% due to a 23% increase in the average realized gold price and a 13% increase in gold sales volume, while iron ore revenues increased $10.6 million reflecting increased sales prices and volumes of iron ore. Vila Nova started up operations during the fourth quarter of 2010; ● Production costs increased $22.0 million, or 30% due to a full quarter of production costs at Vila Nova ($12.4 million – 2011, $4.2 million – 2010), higher gold sales volumes, higher operating costs at Kis¸ladag˘, and higher production taxes at Tanjianshan and Jinfeng related to changes in laws governing mining taxation; ● Depreciation and amortization increased $4.5 million, or 17% mainly as a result of an increase in the depreciation rate at Jinfeng due to a reduction in reserves and higher sales volume at Vila Nova; ● Exploration expenses increased $3.9 million due to an increase in the Company’s worldwide exploration activities; ● General and administrative expenses decreased $3.7 million, or 22% mainly as a result of a one-time charge of $3.3 million recorded in the fourth quarter of 2010 related to withholding taxes on employee options in China; ● Income tax expense increased $16.8 million or 59% due to higher taxable income. The effective tax rate decreased from 36% to 32% quarter over quarter as a result of the greater impact of the weakening of the Turkish lira on the Company’s tax asset base in the last quarter of 2010 as compared to 2011. Eldorado Gold 2011 Annual Report 27 MANAGEMENT’S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS Operations highlights, outlook, and annual updates Operating highlights and outlook 1 2010 2011 2012 outlook3 632,539 382 184.2 658,652 730,000 to 775,000 405 241.9 430 to 450 335.0 274,592 284,648 285,000 to 295,000 329 54.9 374 53.1 385 to 395 175.0 113,864 114,972 100,000 to 110,000 383 17.1 377 8.9 445 to 460 10.0 181,950 177,757 120,000 to 125,000 425 15.1 442 32.2 675 to 695 50.0 62,133 81,275 75,000 to 80,000 487 16.4 n/a n/a 69.0 n/a n/a 10.9 474 17.2 n/a n/a 103.8 n/a n/a 24.3 535 to 550 15.0 125,000 to 135,000 330 to 350 30.0 25,000 to 30,000 65 to 80 45.0 182,808 537,958 560,000 to 600,000 41 0.8 64 2.4 65 to 75 10.0 Total Gold ounces produced Cash operating costs ($ per ounce) 1 Capital expenditure ($ millions) Kis¸ladag˘ Gold ounces produced Cash operating costs ($ per ounce) 1 Capital expenditure ($ millions) Tanjianshan Gold ounces produced Cash operating costs ($ per ounce) 1 Capital expenditure ($ millions) Jinfeng Gold ounces produced Cash operating costs ($ per ounce) 1 Capital expenditure ($ millions) White Mountain Gold ounces produced Cash operating costs ($ per ounce) 1 Capital expenditure ($ millions) Efemçukuru Gold ounces produced Cash operating costs ($ per ounce) 1 Capital expenditure ($ millions) Eastern Dragon Gold ounces produced Cash operating costs ($ per ounce) 1, 2 Capital expenditure ($ millions) Vila Nova Iron ore tonnes produced Cash operating costs ($ per tonne sold) 1 Capital expenditure ($ millions) 1 Cash operating costs is a non-IFRS measure. See page 38 for more information. 2 Eastern Dragon cash operating costs are net of silver by-product credits. 3 Outlook uses the following assumptions: Gold price: Iron ore price: Silver price: Oil price: $1,700 per ounce $100 per tonne $35 per ounce $100 per barrel Exchange Rates RMB vs USD 6.20 Euro vs USD 1.40 YTL vs USD 1.70 Real vs USD 1.60 28 eldoradogold.com MANAGEMENT’S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS Annual updates – Operations Kis¸ladag˘ Operating Data Tonnes placed on pad Average treated head grade (g/t) Gold (ounces) Produced Sold Cash operating costs (per ounce) Total cash costs (per ounce) Financial Data (millions) Revenues Depreciation and Depletion Earnings from Operations Expenditure on Mining Interests 2011 12,430,447 0.95 2010 10,372,719 1.06 284,648 284,917 $374 $398 $455.3 $11.0 $327.2 $53.1 274,592 279,025 $329 $339 $339.1 $14.1 $226.9 $54.9 Gold production for 2011 of 284,648 ounces was 4%, or 10,056 ounces higher than 2010. Total tonnes placed on the leach pad per quarter increased after the first quarter of 2011 as a result of the completion of the Phase III upgrade of the crushing circuit to 12.5 million tonnes per year. The increase in quarterly gold production due to higher throughput was partially offset by lower grade ore placed on the leach pad as compared with 2010. Gold inventory levels on the leach pad decreased by 38,940 ounces in 2011 as a result of intermediate leaching, begun in 2010. During 2011 a study was completed confirming the Company’s expectation that the average recovery rate of all sulphide ore placed on the leach pad was higher than the feasibility study rate of 60% used in the leach pad inventory estimates since the mine began production. As a result, an adjustment was made to increase the estimated recoverable ounces remaining on the leach pad by 19,495 ounces using an average recovery rate of 62% for all sulphide ore. The combination of higher operating costs and lower grade resulted in a higher average cash operating cost per ounce compared with 2010. Operating costs were higher than 2010 due to higher electricity, reagent, and maintenance costs associated with the higher throughput. Capital expenditures at Kis¸ladag˘ in 2011 included costs related to the completion of the Phase III crushing and screening circuit expansion as well as capitalized waste stripping and ongoing sustaining capital. In 2011 a study was completed validating the Company’s intention to double the mine capacity by the third quarter of 2014 to 25.0 million tonnes per year as a result of Kis¸ladag˘'s increasing reserves. The expansion would include construction of additional process facilities as well as expansions to the leach pad and waste dumps to handle the higher plant throughput as well as an average of 8.0 million tonnes per year of low grade ore that would be transported directly from the pit to a dedicated run-of-mine (ROM) leach pad. Equipment sizing in the mining fleet would be increased to accommodate the additional ore and waste handling. Subject to receipt of required government permits, completion of the expansion is anticipated by the third quarter of 2014, at an estimated capital cost of $354.0 million. Eldorado Gold 2011 Annual Report 29 MANAGEMENT’S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS Tanjianshan Operating Data Tonnes Milled Average Treated head Grade (g/t) Average Recovery Rate Gold (ounces) Produced Sold Cash operating costs (per ounce) Total cash costs (per ounce) Financial Data (millions) Revenues Depreciation and Depletion Earnings from Operations Expenditure on Mining Interests Total 2011 1,005,236 3.96 82.1% 114,972 114,969 $377 $567 $181.0 $30.0 $84.6 $8.9 Total 2010 1,049,952 4.19 80.9% 113,864 116,765 $383 $485 $144.0 $25.5 $59.6 $17.1 Gold production for 2011 of 114,972 ounces was 1%, or 1,108 ounces higher than 2010 while tonnes milled and grade were lower than 2010 respectively. Extra tanks were installed during 2011 to increase the retention time of part of the leach circuit, which in turn improved the average recovery rate year over year from 80.9% to 82.1%. Additionally, flotation concentrate produced in prior years from ore mined from the Qinlongtan pit between 2007 and 2008 was added to the roaster feed; and, “scats”, or partially milled “reject” stockpile material reclaimed by using a specialized crusher was added to the flotation circuits. These two stockpiled materials were responsible for approximately 10,000 ounces of extra production. For the year, cash operating costs per ounce were 1.6% or $6 per ounce lower than 2010 reflecting higher silver credits as a result of higher silver prices as compared with 2010. Total cash costs per ounce in 2011 were 17% higher than 2010 mainly due to the effect of higher gold prices on royalties, and the imposition of a new tax (ecological compensation fee) levied at a rate of 40RMB per tonne mined. Capital expenditures for the year included process plant upgrades, capitalized exploration costs and sustaining capital. 30 eldoradogold.com MANAGEMENT’S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS Jinfeng Operating Data Tonnes Milled Average Treated head Grade (g/t) Average Recovery Rate Gold (ounces) Produced Sold Cash operating costs (per ounce) Total cash costs (per ounce) Financial Data (millions) Revenues Depreciation and Depletion Earnings from Operations Expenditure on Mining Interests Total 2011 1,544,965 4.06 87.3% 177,757 177,758 $442 $507 $277.9 $50.0 $137.8 $32.2 Total 2010 1,557,199 4.24 86.4% 181,950 182,026 $425 $480 $222.0 $45.4 $88.3 $15.1 Gold production for 2011 of 177,757 ounces was 2%, or 4,193 ounces lower than 2010. This was mainly due to lower throughput and head grade. These two were partially offset by an improvement in recovery. Recovery was reduced in the fourth quarter of 2011 as increasing amounts of low grade stockpiled material were fed to the plant due to the completion of mining of the current phase of the open pit. Cash Costs were 4% higher in 2011 or $17 per ounce reflecting the impact of the decrease in treated head grade and the slightly lower throughput. Total cash costs increased 6% due to the effect of higher gold prices on royalties and production taxes. A total of 689,737 tonnes of ore was mined from the open pit in 2011 (2010 - 1,432,278 tonnes). Mining of the open pit stopped in the second quarter pending completion of the acquisition of land required for a planned cutback. It is expected that the land purchase will be completed in 2012. A total of 494,422 tonnes of ore was mined from the underground (2010 - 405,015 tonnes). Additionally, a total of 360,806 tonnes of stockpiled ore was fed to the plant. Capital expenditures for the year included capitalized underground development, process plant upgrades and sustaining capital. Eldorado Gold 2011 Annual Report 31 MANAGEMENT’S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS White Mountain Operating Data Tonnes Milled Average Treated head Grade (g/t) Average Recovery Rate Gold (ounces) Produced Sold Cash operating costs (per ounce) Total cash costs (per ounce) Financial Data (millions) Revenues Depreciation and Depletion Earnings from Operations Expenditure on Mining Interests Total 2011 708,882 4.37 81.8% 81,275 81,275 $474 $517 $127.8 $24.2 $61.3 $17.2 Total 2010 622,418 3.98 77.5% 62,133 62,133 $487 $522 $77.8 $19.0 $25.9 $16.4 Gold production for 2011 of 81,275 ounces was 31%, or 19,142 ounces higher than 2010 due to higher throughput and average grade, as well as increased recovery rates. The increase in tonnes was due to an increase in underground working faces as a result of increased mine development. Recovery at White Mountain is a function of the ore type that is being treated. Approximately 15% of the current orebody is sulphide material and recoveries are significantly lower in this material. During 2011, a caustic pre-treatment system was commissioned that provides significantly better recoveries in the sulphide material and slightly better recoveries in the oxide material. The system was commissioned in the fourth quarter. Cash operating costs per ounce were 3% lower in 2011 or $13 per ounce as the effect of the increase in head grade and recovery rates was partially offset by higher stope development and backfill costs. Capital expenditures for the year included capitalized underground development, construction of the caustic pre-treatment facility and sustaining capital. 32 eldoradogold.com MANAGEMENT’S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS Efemçukuru Operating Data Tonnes Milled Average Treated head Grade (g/t) Average Recovery Rate (to Concentrate) Gold (ounces) Produced Sold Average Realized Gold Price Cash operating costs (per ounce) Total cash costs (per ounce) Financial Data (millions) Revenues Depreciation and Depletion Earnings from Operations Expenditure on Mining Interests Total 2011 112,612 8.21 89.5% – – – – – – – Total 2010 – – – – – – – – – – $103.8 $69.0 Efemçukuru began commissioning operations in June 2011 and treated 112,612 tonnes of ore at 8.21 g/t by year end. The operation encountered a number of challenges during commissioning that delayed the transition to commercial production until December 2011. Mining operations were impacted by voids encountered as a result of unanticipated prior mine workings. The mine development plan was modified and accelerated during the second half of the year to develop extra working areas to increase ore production. During commissioning of the processing facilities at Efemçukuru modifications were made to the tailings handling systems to reach design capacity. Approximately 20,000 ounces of contained gold in concentrate was produced during the year and shipped to Kis¸ladag˘ for treatment at a plant constructed in the second half of 2011 to process Efemçukuru concentrate. The Kis¸ladag˘ plant began commissioning at the end of 2011 and is expected to treat the concentrate accumulated during commissioning along with normal production so that no stockpile remains at the end of 2012. Eldorado Gold 2011 Annual Report 33 MANAGEMENT’S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS Vila Nova Operating Data Tonnes Processed Iron Ore Produced Average Grade (% Fe) Iron Ore Tonnes Sold Average Realized Iron Ore Price Cash Costs (per tonne produced) Financial Data (millions) Revenues Depreciation and Depletion Earnings from Operations Expenditure on Mining Interests Total 2011 Total 2010 623,684 537,958 63.9% 473,387 $120 $64 $56.9 $4.6 $21.8 $2.4 213,705 182,808 64.1% 89,074 $94 $46 $8.3 $1.0 $3.0 $0.8 Vila Nova produced 537,958 wet metric tonnes of iron ore at an average grade of 63.9% Fe during 2011. A total of 473,387 dry metric tonnes of iron ore in the form of lump and sinter feed was all sold on the spot market during 2011 at an average price of $120 per dry metric tonne. The project commenced operations in 2010 but only recorded sales of iron ore during the fourth quarter of 2010 as a result of production and shipping difficulties. Production during 2011 reflected a full year of production and matched Company production targets. 34 eldoradogold.com MANAGEMENT’S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS Annual updates – Development projects Tocantinzinho A total of $3.4 million was spent on engineering and permitting activities related to completion of a positive prefeasibility study for Tocantinzinho in 2011. The study was based on a 4.4 million tonne per year open pit operation using a combination of flotation and cyanide leach to recover gold from the granite hosted orebody. Capital costs are estimated at $383.5 million, including the infrastructure required to support the project. The average production rate is projected to be 159,000 ounces per year at an average cash cost of $559/ounce. In addition to the work carried out on the engineering studies, preparations were completed for the Environmental Impact Assessment (EIA) study, which was submitted to the state government in July 2011. Processing of the EIA application within the Brazilian government was delayed during the year due to a jurisdictional dispute between the state and federal governments over responsibility for permitting in the project area. By year end the jurisdictional dispute was resolved in favour of the state government. Perama Hill During 2011 the Company worked closely with the Greek government to advance the processing of the Preliminary Environmental Impact Assessment study (PEIA). Progress was made during the year to move the permitting process forward with the recognition of Perama hill as a key development project by the government. The Company received PEIA approval in February 2012, and plans to submit the EIA report during 2012 to address outstanding technical issues, followed by an application to begin construction of the mine. The Company’s public relations efforts continued during 2011, with a focus on maintaining and strengthening relations with the local villages as well developing relations with the local and state politicians. Capital expenditures totalling $2.9 million included costs related to engineering and permitting activities, public relations activities and project management. Eastern Dragon A total of $24.3 million was spent on construction at the Eastern Dragon project in 2011. During the year site buildings were enclosed and major mechanical and electrical phases of the plant were completed. In November construction was suspended pending receipt of permitting required to complete development of the mine. This includes construction on the tailings handling and storage facilities as well as the open pit and rock dump areas which are now scheduled for completion in 2012, corresponding with final completion of construction and commissioning of the plant. Eldorado Gold 2011 Annual Report 35 MANAGEMENT’S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS Annual updates – Exploration A total of $56.9 million was spent on exploration activities during 2011, including $26.1 million in capitalized exploration costs. Exploration drilling in 2011 totalled approximately 120,000 metres at seventeen exploration projects in Turkey, China, Brazil, and Nevada. Turkey Kis¸ladag˘ At Kis¸ladag˘, over 10,700 metres of diamond drilling were completed in 2011. The drilling focused on planned infrastructure sites for the Phase IV expansion, areas along the periphery of the known deposit, and previously untested conceptual targets. No significant new zones of mineralization were intersected. Comprehensive soil sampling and a three dimensional induced polarization survey were completed over an area of approximately 20 square kilometres surrounding the deposit, extending the existing survey data that were collected early in the exploration history of the deposit. Results of these programs are being integrated with lithological, alteration, and structural data to define drill targets for potential satellite ore bodies to be tested during 2012. Efemçukuru At Efemçukuru, approximately 9,500 metres of exploration drilling were completed during the year on the Kestane Beleni Northwest Extension and the Kokarpinar vein targets. The Kestane Beleni Northwest Extension target underlies a strong gold-in-soil anomaly along strike from the North, Middle, and South ore shoot resources. The 2011 drilling tested this target area over a strike length of approximately 750 metres to a depth of about 250 metres, and identified a new shallow zone of gold mineralization that remains open downdip. At the Kokarpinar vein, gold values were reported in four out of six drillholes targeting previously untested segments of the vein along strike from and below ore-grade surface samples. Reconnaissance programs Drilling campaigns were completed in 2011 at the AS gold-copper porphyry prospect (760 metres), the Malatya- hasancelebi IOCG prospect (1,500 metres), the Sayacik porphyry Au prospect (1,770 metres),and the Sizma sediment-hosted gold prospect (3,450 metres). Multiple targets were tested at the AS, Sayacik, and Mh projects, but results failed to improve on those from previous drilling campaigns; no further work is planned for these projects. At the Sizma project, the 2011 drilling program outlined a tabular, stratiform zone of anomalous to low-grade gold mineralization within a foliated sandstone/siltstone/mudstone sequence. Mapping, geochemical sampling, and magnetic survey programs were completed during 2011 at early-stage projects in the Pontide Belt (Dolek and Sebin projects) and at the Atalan project in western Turkey. This work has defined drill targets at all of these projects, which will be tested during 2012. China Tanjianshan The 2011 exploration program at Tanjianshan focused on resource conversion of the 323 Deposit, with approximately 10,300 metres drilled. The drilling confirmed and expanded the previously defined mineralized zones, and will support application for a mining license covering the deposit. Drilling was also completed at the Qinlongtan deeps and Zhongxinshang targets, and reconnaissance sampling and mapping programs were completed in the several areas of the Tanjianshan exploration licences. 36 eldoradogold.com MANAGEMENT’S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS Jinfeng During 2011, drilling was completed on exploration targets in the Jinfeng district at the Jinluo, Qiaojiang, Da’ao, and Jinfeng 42 licence areas, and at the Jinfeng mine proper. Minesite drilling included surface and underground programs that targeted step-outs along the known major mineralized fault zones (F2, F3, F6), infilled gaps in the existing resource model, and tested conceptual targets developed during the year through a detailed reinterpretation of structural controls on mineralization. This program is ongoing, and is supported by positive results to date. Exploration elsewhere in the district tested soil and outcrop geochemical anomalies associated with mineralized fault zones for Jinfeng-style mineralization (Jinluo, Qiaojiang, Jinfeng 42 licence areas), and broad antiformal folds for stratiform mineralization similar to that present at the nearby Shuiyindong gold deposit (Da’ao licence). The best results were obtained from mineralized fault zones at the Qiaojiang licence area and at the Weiruo prospect in the Jinluo licence areas. White Mountain Infill and stepout drilling of the White Mountain deposit was completed during the year from both surface and underground drill stations. The surface drilling program expanded the deep ore lens discovered in late 2010 at the northern end of the deposit with two new high grade intercepts. underground exploration drilling was successful in filling in gaps in the existing resource, and targeted areas of Inferred Resources along the margins of the main deposit. Elsewhere in the White Mountain district, drilling was completed at the Xiaoshiren and Zhenzhumen prospects. Both prospects represent similar structural/stratigraphic settings to that characterizing the White Mountain deposit. At Xiaoshiren, 4,500 metres of drilling tested targets along strike and down dip from high-grade surface trenches and 2010 drillhole intersections. At the previously undrilled Zhenzhumen prospect, one of the four drillholes completed (1,300 metres total) intersected a high grade, near-surface baritic breccia zone that is texturally and mineralogically similar to the White Mountain orebody, yet occurs at a deeper stratigraphic level. Eastern Dragon No significant exploration activities were conducted during 2011 at the Eastern Dragon project. Brazil Tocantinzinho At the Tocantinzinho project, the 2011 exploration program tested targets peripheral to the known deposit defined by soil geochemistry surveys, geophysical surveys (induced polarization, magnetic), and surface exposures of mineralized material. Grid-based auger drilling was employed to further define targets within broad gold-in-soil anomalies prior to drilling. Approximately 17,500 metres were drilled during the year. The best gold intercepts in the program consisted of narrow but high grade zones associated with fault zones or quartz+sulphide veins. Along the Tocantinzinho Trend southeast of the deposit and beneath garimpo workings south of the deposit. Also in 2011, existing soil surveys were extended into areas west, east, and north of the main deposit. The surveys identified several new targets to be tested in 2012. Eldorado Gold 2011 Annual Report 37 MANAGEMENT’S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS Reconnaissance At the Agua Branca project, 1,532 metres of drilling tested targets at the Carlinho and Camarao hill zones. At Camarao hill, drillhole AB46 intersected an interval of 154 metres grading 1.1 g/t Au and extended known mineralization 250 metres to the northeast of previous drilling. Based on the results of this drillhole and the exploration potential of the surrounding area, Eldorado exercised its option to earn 100% of the Agua Branca project through a $1.9 million payment to the owner. West of Tocantinzinho at the Piranhas project, exploration activities completed in 2011 included extending the existing area of soil sampling, and employing grid-based auger drilling to define diamond drilling targets within a broad gold-in-soil anomaly. Nevada At the Buffalo Canyon project, reverse circulation and diamond drilling completed in 2011 (3,700 metres) targeted several different styles of mineralization exposed at surface. No significant mineralization was intersected, and Eldorado’s option on the project was dropped. Non-IFRS measures Throughout this document, we have provided measures prepared in accordance with IFRS, as well as some non- IFRS performance measures as additional information for investors who also use them to evaluate our performance. Since there is no standard method for calculating non-IFRS measures, they are not a reliable way to compare us against other companies. Non-IFRS measures should be used with other performance measures prepared in accordance with IFRS. We have defined our non-IFRS measures below and reconciled them with the IFRS measures we report. Cash operating cost The table below reconciles cash operating cost to operating costs. We calculate costs according to the Gold Institute Standard. 2011 316.2 (5.2) 311.0 (43.9) 267.1 658,919 472 405 2010 273.7 (2.8) 270.9 (26.7) 244.2 639,949 423 382 $ millions (except for gold ounces sold and per ounce amounts) Production costs – excluding Vila Nova (from consolidated income statements) Less: By-product credits Total cash cost Less: Royalty expense and production taxes Cash operating cost Gold ounces sold Total cash cost per ounce Cash operating cost per ounce 38 eldoradogold.com MANAGEMENT’S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS Non-IFRS measures continued Cash flow from operations before changes in non-cash working capital We use cash flow from operations (or operating activities) before changes in non-cash working capital to supplement our consolidated financial statements, and calculate it by not including the period to period movement of non-cash working capital items, like accounts receivable, advances and deposits, inventory, accounts payable and accrued liabilities. We believe this provides a better indication of our cash flow from operations and may be meaningful in evaluating our past performance or future prospects. It is not meant to be a substitute for cash flow from operations (or operating activities), which we calculate according to IFRS. Financial condition Operating activities before changes in non-cash working capital generated $502.1 million in cash this year, compared to $357.9 million in 2010. Capital expenditures We invested $272.8 million in capital expenditures, mine development, mining licences and other assets this year. Mine development and capitalized exploration expenditures totalled $146.1 million: ● $103.8 million at Efemçukuru ● $24.3 million at Eastern Dragon ● $15.1 million at Tocantinzinho ● $2.9 million at Perama hill. Spending at our producing mines (including capitalized exploration) totalled $113.8 million: ● $53.1 million at Kis¸ladag˘, mostly related to the Phase III expansion ● $32.2 million at Jinfeng, mostly related to tailings dam construction and underground mine development ● $17.2 million at White Mountain, mainly related to underground mine development exclude Xiaoshiren ● $8.9 million at Tanjianshan, mainly related to processing plant upgrades ● $2.4 milliion at Vila Nova, mainly related to processing plant upgrades. We also spent $9.9 million on land acquisitions in Turkey. The remaining $3.0 million related to fixed assets for our corporate offices in Canada, Brazil, Turkey and China. Eldorado Gold 2011 Annual Report 39 MANAGEMENT’S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS Capital resources $ millions Cash and cash equivalents Working capital Restricted collateralized accounts Debt – current and long-term 2011 393.8 408.8 55.4 81.0 2010 314.3 320.3 52.4 166.7 Chinese regulations governing cash movements require that our existing debt only be paid from cash flows generated from our Chinese operations that are party to the loan. Cash and cash equivalents of $290.1 million are held by the Company’s operating entities in China and Turkey, where the cash was generated. No income tax liability has been recognized for the potential repatriation of these funds. If the cash held in these entities is repatriated by way of dividends to the parent company, withholding taxes would be due on the amounts at the rate of 10% for Turkey, and 5% to 10% for China. Management believes that the working capital at December 31, 2011, together with future cash flows from operations, is sufficient to support our planned and foreseeable commitments. Contractual obligations As at December 31, 2011 $ millions Debt Capital leases Operating leases Purchase obligations Totals 2012 81.7 0.1 10.3 81.8 173.9 2013 2014 2015 and beyond – 0.1 3.6 5.1 8.8 – – 3.5 1.1 4.6 – – 1.9 0.6 2.5 Total 81.7 0.2 19.3 88.6 189.8 Purchase obligations in 2012 relate primarily to mine expansion projects at Kis¸ladag˘, mine development projects at Tocantinzinho and Eastern Dragon as well as operating and maintenance supply contracts at our operating mines. The table does not include interest on debt. Debt Revolving Credit Facility On October 12, 2011 the Company entered into a $280 million revolving credit facility with hSBC and a syndicate of four other banks. The credit facility matures on October 12, 2015 and is secured by the shares of SG Resources and Tuprag Metal SA, wholly owned subsidiaries of the Company that own the Company’s assets in Turkey. loan interest is set at the lesser of lIBOR plus an interest rate margin, or Prime rate plus an interest rate margin dependent on a leverage ratio pricing grid. At the Company’s current leverage ratio interest charges and fees are lIBOR plus a margin of 1.75%, and an annual undrawn standby fee of 0.40%. The credit facility contains covenants that restrict, among other things, the ability of the Company to incur additional indebtedness exceeding $200.0 million, make distributions in certain circumstances, sell material assets and carry on a business other than one related to the mining business. Significant financial covenants include a maximum debt to Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”) ratio of 3.5:1 and a minimum EBITDA to interest of 3:1. The credit facility is intended to be used for growth opportunities and for general corporate purposes. No 40 eldoradogold.com MANAGEMENT’S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS amounts were drawn down under the revolving credit facility as at December 31, 2011. Eastern Dragon Standby line of credit In January 2010, Rock Mining Industry Development Company limited (“Eastern Dragon”), our 95% owned subsidiary, entered into a RMB 320.0 million ($50.8 million) standby letter of credit loan with CMB. This loan has a one year term and is subject to a floating interest rate adjusted quarterly at 90% of the prevailing lending rate stipulated by the People’s Bank of China for working capital loans. This loan is collateralized by way of a restricted cash deposit for $52.2 million as funding of the irrevocable letter of credit issued by Sino Gold to CMB. The interest rate on this loan as at December 31, 2011 was 5.90%. This loan is subject to an annual management fee of 10% of the interest accrued on the drawn down and outstanding amount. This management fee is paid in advance quarterly. On February 5, 2010, Eastern Dragon made a drawdown on this loan which was used to repay its letter of credit loan with CCB. Subsequent to December 31, 2011, this loan was extended for a second year term to January 2013 and the annual management fee of 10% of the interest accrued on the outstanding amount paid quarterly was removed. In addition, the floating interest rate is now adjusted monthly at the prevailing lending rate. The collateral by way of a restricted cash deposit has been increased to $56.5 million. This loan is to be repaid when Eastern Dragon obtains the required project approval that will allow it to complete the first drawdown on its project-financing loan. Project financing loan In 2009, Eastern Dragon entered into a RMB 450.0 million ($71.4 million) project financing loan with China Merchants Bank (“CMB”). The loan has three components: ● a long-term loan of RMB 320.0 million ($50.8 million), with a five-year term, to replace the standby letter of credit with China Construction Bank ● a fixed asset loan of RMB 100.0 million ($15.9 million) with a four-year term ● a working capital loan of RMB 30.0 million ($4.8 million) with a one-year term The project-financing loan is subject to a floating interest rate adjusted quarterly to 90% of the prevailing lending rate stipulated by the People’s Bank of China for similar loans. The project-financing loan is secured by an irrevocable letter of Guarantee issued by Sino Gold. under the terms of the agreement, the following conditions are required to be met before the first drawdown: ● Obtain project approval from the heilongjiang Provincial Development and Reform Commission; ● Sino Gold to open an offshore banking business bank account with CMB and deposit $40.0 million; ● The aggregate of the amount deposited in the offshore account, Eastern Dragon registered capital and shareholder loan is at least $84.7 million (this threshold has been reached as at December 31, 2009). In addition, before the drawdown on the fixed asset loan, Eastern Dragon should obtain the gold operation permit. The working capital loan can be drawn down once the following conditions are satisfied: ● The project obtains the mining license; ● The project has been developed and in production; ● The gold operation permit has been granted; and ● The safety production permit and environmental protection permit have been granted. The project-financing loan requires Eastern Dragon to maintain a liability to asset ratio of 70% or lower, excluding share-holder loan and total banking debt cannot exceed RMB 550.0 million ($87.3 million) and it is subject to an Eldorado Gold 2011 Annual Report 41 MANAGEMENT’S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS annual management fee of 10% of the annual interest on the drawn down amount. No amounts were drawn down under the project-financing loan as at December 31, 2011. HSBC revolving loan facility In May 2010, Eastern Dragon entered into a RMB 80.0 million ($12.7) revolving facility (“the Facility”) with hSBC Bank (China). The Facility can be drawn down in minimum tranches of RMB 1.0 million ($0.2 million) or its multiples. Each drawdown bears interest fixed at the prevailing lending rate stipulated by the People’s Bank of China on the date of draw-down. The Facility has a term of up to one year. Subsequent to December 31, 2011, the Facility was reviewed by the bank and was extended to November 30, 2012. The interest rate on this loan as at December 31, 2011 was 6.71%. In December 2011, Eastern Dragon repaid RMB12.5 million ($2.0 million) on the Facility. As at December 31, 2011, RMB 65.0 million ($10.3 million) was outstanding. The Facility is secured by a letter of guarantee issued by Eldorado. Eldorado must maintain at all times a security coverage ratio of 110% of the amounts drawn down. As at December 31, 2011, the security coverage is $11.3 million. This Facility is to be repaid in full when Eastern Dragon obtains the required project approval that will allow it to complete the second drawdown on the project-financing loan. Entrusted loan In November 2010, Eastern Dragon, hSBC Bank (China) and QDMl, entered into a RMB 12.0 million ($1.9 million) entrusted loan agreement, which was subsequently increased to RMB 180.0 million ($28.6 million) in June 2011. under the terms of the entrusted loan, QDMl with its own funds entrusts hSBC Bank (China) to provide a loan facility in the name of QDMl to Eastern Dragon. The entrusted loan can be drawn down in tranches. Each drawdown bears interest fixed at the prevailing lending rate stipulated by the People’s Bank of China on the date of drawdown. Each draw down has a term of three months and can be rolled forward at the discretion of QDMl. The interest rate on this loan as at December 31, 2011 was 4.59%. As at December 31, 2011, RMB 119.0 million ($18.9 million) had been drawn under the entrusted loan. Subsequent to December 31, 2011, RMB 15.0 million ($2.4 million) was drawdown on this loan. The entrusted loan has been recorded on a net settlement basis. Jinfeng Construction loan In 2009, Guizhou Jinfeng Mining ltd. (“Jinfeng”), our 82% owned subsidiary entered into a RMB 680.0 million ($107.9 million) construction loan facility (“the construction loan”) with China Construction Bank (“CCB”). The construction loan has a term of 6 years commencing from February 27, 2009 and is subject to a floating interest rate adjusted annually at 95% of the prevailing lending rate stipulated by the People’s Bank of China for similar loans. The applicable interest as at December 31, 2011 is 6.27% (after 5% discount). The construction loan is secured as following: ● Sino Gold corporate guarantee; ● pledge of all shares held by Sino Gold in Jinfeng; ● mortgage on all fixed assets of Jinfeng with a value above $0.1 million; ● mortgage on Jinfeng mining license and exploration license; and ● mortgage on land use right. While the construction loan is outstanding, Jinfeng is required to obtain written consent from CCB before transferring funds to Sino Gold or any of its subsidiaries and must have a leverage ratio of 64% or lower in order to distribute dividends to its shareholders. 42 eldoradogold.com MANAGEMENT’S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS Principal repayment of this loan is as follows: for the years 2011, 2012 and 2013 – quarterly payments of RMB 35.0 million ($5.6 million); for the year 2014 – quarterly payments of RMB 32.5 million ($5.2 million); and for the year 2015 a final payment of RMB 130.0 million ($20.6 million). Any prepayments are applied to reduce future payments starting from the final payment. During 2010, Jinfeng prepaid RMB 180.0 million ($28.6 million) on the outstanding balance of this loan and during 2011 it made scheduled quarterly payments of RMB 35.0 million ($5.6 million) each. Additionally, during 2011 Jinfeng prepaid RMB 230.0 million ($36.5 million) on the outstanding balance of this loan, leaving a balance owing of RMB 130.0 million ($20.6 million) at December 31, 2011. Net deferred financing costs in the amount of $0.7 million have been included as an offset in the balance of the loan in the financial statements and are being amortized using the effective interest method. Working capital loan In 2010, Jinfeng entered into a RMB 85.0 million ($12.5 million) working capital loan with CCB. The working capital loan has a term of 3 years and was due on August 17, 2012. This loan was subject to a floating interest rate adjusted annually at 95% of the prevailing lending rate stipulated by the People’s Bank of China for similar loans. While the working capital loan was outstanding, Jinfeng was required to obtain written consent from CCB before transferring funds to Sino Gold or any of its subsidiaries and was required to have a leverage ratio of 64% or lower in order to distribute dividends to its shareholders. In 2010, Jinfeng prepaid the full amount on this loan. White Mountain Project loan In 2008, Sino Gold Jilin BMZ Mining limited (“White Mountain”), our 95% owned subsidiary, entered into a project loan (“project loan”) with CCB. The project loan has two components: ● A fixed asset loan of RMB 190.1 million ($30.2 million) with final payment due on September 2013 (fully paid); and ● A working capital project loan of RMB 40.9 million ($6.2 million) due on November 2010 (fully paid). The interest rate on the project loan is the prevailing lending rate stipulated by the People’s Bank of China, adjusted annually for the fixed asset loan and twice a year for the working capital loan. The project loan was secured by a Sino Gold corporate guarantee and White Mountain’s fixed assets with a value above $100. The security was released in October, 2011. During 2011, White Mountain completed its scheduled payment of RMB 14.5 million ($2.3 million) and made additional pre-payments of RMB 150.8 million ($23.9 million). As at December 31, 2011 this loan has been paid in full. Working capital loan In 2010, White Mountain entered into a RMB 50.0 million ($7.5 million) working capital loan with CMB. The working capital loan had a term of one year and was due on September 1, 2011. In January 2011, White Mountain prepaid the full amount of this loan. Eldorado Gold 2011 Annual Report 43 MANAGEMENT’S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS Defined benefit plans We have a defined benefit pension program with two components: a registered pension plan and a non-registered supplementary pension plan (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. Our annual contributions are actuarially determined, and are at or above the minimum requirements prescribed by legislation. We are not required to pre-fund any benefit obligation under the SERP. Total cash payments for pension benefits for 2011, including cash contributed to the pension plan and cash invested in respect of the SERP, were $7.5 million (2010 – nil). Based on minimum funding requirements the Company expects to contribute $0.1 million to the Pension Plan and $0.2 million to the SERP investments in 2012. Cash payments totaling $0.2 million were made directly to beneficiaries during the year (2010 - $0.2 million). Equity This year we received net proceeds of $31.6 million for issuing 3,495,725 common shares related to stock options and warrants being exercised. We may make minor accounting adjustments to these figures before they are presented in future consolidated financial statements. Common shares outstanding as of February 22, 2012 as of December 31, 2011 Share purchase options - as of February 22, 2012 (Weighted average exercise price per share: CDN$12.60) Managing risk 551,682,917 551,682,917 8,616,113 This section describes the types of risks we are exposed to and our objectives and policies for managing them (please read the Company’s Annual Information Form for additional information). We manage risk using our risk management review process. Management prepares a risk assessment report every quarter outlining our operational and financial risks. The Board reviews the report to evaluate and assess the risks we are exposed to in various markets, and discusses the steps management takes to protect the company against them. Financial risk Liquidity risk liquidity risk is the risk that we cannot meet our financial obligations. We use a rigorous planning, budgeting and forecasting process to help determine the funds we will need to support our ongoing operations and our expansion plans. We believe that expected cash flows from operations and the cash and cash equivalent balance at December 31, 2011 will provide enough cash to meet our financial obligations in 2012 and beyond. Credit risk Credit risk is the risk that the counterparty to a financial instrument will not meet its obligations and will cause the Company to incur a financial loss. To mitigate exposure to credit risk on financial assets, we have policies that require counterparties demonstrate minimum creditworthiness, and ensure liquidity of available funds. We also monitor our concentrations of credit risk and closely monitor our financial assets. 44 eldoradogold.com MANAGEMENT’S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS The Company sells its gold bullion exclusively to large international financial institutions or on the Istanbul and Shanghai Gold Exchanges and its doré exclusively to refineries. 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, 2011. We invest our cash and cash equivalents in major financial institutions and in government issuances, according to our short-term investment policy. The credit risk associated with these investments is considered to be low, but many financial institutions have gone into bankruptcy or been rescued by government authorities over the past few years. That makes us subject to the risk of loss of the deposits we have with financial institutions. As at December 31, 2011, approximately 37% of our cash and cash equivalents, including restricted cash, were with one financial institution. Currency risk We sell gold in uS dollars, but our costs are mainly in uS dollars, Canadian dollars, Turkish lira, Brazilian real and Chinese renminbi. An increase in the value of any of these currencies against the uS dollar can increase our production costs and capital expenditures, which can affect future cash flows. The table below shows our assets and liabilities and debt denominated in currencies other than the uS dollar at December 31, 2011. We recognized a loss of $5.4 million on foreign exchange this year, compared to loss of $2.7 million in 2010. $ thousands Cash and cash equivalents Marketable securities Accounts receivable and other Accounts payable and accrued liabilities Debt Net balance Equivalent in uS dollars Canadian dollar Australian dollar 20,837 2,686 2,353 (12,424) – 13,452 13,227 1,308 – – (12) – 1,296 1,318 Euro 61 – 499 (38) – 522 675 Turkish lira 65,989 – Chinese renminbi 855,214 – Brazilian real 7,097 – 8,560 90,695 25,189 (59,520) (672,734) (12,740) – (510,568) 15,029 (237,393) 7,956 (37,676) – 19,546 10,433 Accounts receivable and other current and long-term assets relate to goods and services taxes, income taxes, value- added taxes and insurance receivables. Based on the balances at December 31, 2011, a 10% increase/decrease in the exchange rates on that date would have resulted in a decrease/increase of approximately $0.4 million in profit before taxes. Interest rate risk Interest rates determine how much interest we pay on our debt, and how much we earn on our cash and cash equivalents, which can affect future cash flows. Much of our debt has a floating interest rate. The average interest rate on our debt at December 31, 2011 was 6.09%, compared to 5.94% at the end of 2010. We earned an average of approximately 1.01% in interest on our cash and cash equivalents this year, compared to 0.51% in 2010. We don’t actively manage our exposure to changes in interest rates. Eldorado Gold 2011 Annual Report 45 MANAGEMENT’S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS Price risk Our profitability depends on the price of gold, which is affected by many things, including the sale or purchase of gold by 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. We don’t hedge against changes in the price of gold. ● The cost of production, development and exploration varies depending on the market prices of certain mining consumables, including diesel fuel and electricity. We are evaluating a hedge against changes in the price of diesel fuel. ● Electricity is regionally priced in Turkey and China and semi-regulated by the federal governments of those countries, which reduces the risk of price fluctuations. We do not hedge against changes in the price of electricity. Sensitivity analysis for key variables Currency values against the uS dollar Price of gold (based on the expectations and assumptions we used in our 2012 outlook) Interest rate on debt Interest earned on cash and cash equivalents Price of diesel fuel Other risks and uncertainties Exploration and development A change of Would change our after-tax net earnings by 10% 10% 10% 10% 10% $0.3 million $88.0 million $0.3 million $0.3 million $5.0 million The cost and results of our exploration and development programs affect our profitability and value. The life of a mine is fixed based on its mineral reserves, so we actively seek to replace and expand our reserves, mainly through exploration, acquisition and the development of our existing operations. Exploring for minerals involves many risks and may not lead to new economically viable mining operations or yield new reserves to replace and expand current reserves. Our reserve estimates are based on certain assumptions and are affected by the inherent 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 that we have, or are seeking, an interest in. Although we take every precaution to ensure that legal title to our properties is properly recorded in our name, there can be no assurance we will ultimately secure title on every property. legal title to our properties depends on the laws in the countries we operate in, and their appropriate and consistent application. Operations The business of gold mining involves many operational risks and hazards. We work to reduce the risks associated with our projects by setting high operational standards, hiring and training appropriately skilled personnel, and making improvements to our operations. We maintain adequate insurance to cover normal business risk. We rely on a number of key employees. Our success depends on attracting and retaining qualified personnel in a competitive labour environment. 46 eldoradogold.com MANAGEMENT’S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS Environment There may be environmental hazards at our mines or projects that we are unaware of. We may be liable for any associated losses, or be forced to do extensive remedial cleanup or pay for governmental remedial cleanup, even if the hazards were caused by previous or existing owners or operators of the property, past or present owners of adjacent properties or by natural conditions. The costs of any cleanup could have a material and adverse effect on our operations and profitability. Laws, regulations and permits 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 government permits and provide associated financial assurance to conduct certain activities. We are also subject to various conditions related to reclamation that are imposed under federal, state or provincial air, water quality and mine reclamation rules and permits. We have budgeted for future capital and operating expenditures to obtain such permits and maintain compliance with these environmental, health and safety laws; however, any changes to these laws in the future could have an adverse effect on our financial condition, liquidity or results of operations and could delay our ability to obtain such permits. If these laws are not complied with, we may face injunctions, damages and penalties, or our permits could be suspended or revoked. There is no assurance that we have been, or will be, in compliance with environmental, health and safety laws at all times, that our compliance will not be challenged, or that the cost of complying with current or future laws will not have a material and adverse effect on our future cash flow, results of operations and financial condition. Litigation All industries, including the mining industry, are subject to legal claims that are with and without merit. We are currently involved in various routine legal and regulatory proceedings. It is unlikely that the final outcome of these routine proceedings will have a material and adverse effect on our financial condition or results of operations; however, defense and settlement costs can be substantial, even for claims that are without merit. Due to the inherent uncertainty of the litigation process and dealings with regulatory bodies, there is no assurance that any legal or regulatory proceeding will be resolved in a manner that will not have a material and adverse effect on our future cash flow, results of operations or financial condition. Political risk We operate in four countries outside of North America: Turkey, China, Brazil and Greece. Our operations in these countries may be subject to political, economic and other risks that may affect our future operations and financial position. Eldorado Gold 2011 Annual Report 47 MANAGEMENT’S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS Other information Critical accounting policies and estimates We are required to make estimates that affect the amount of assets, liabilities, contingent liabilities revenue and expenses we report. We have identified the following critical accounting policies and estimates. you can find all of our significant accounting policies in Note 3 of our 2011 consolidated financial statements. Inventories We value finished goods, work-in-process, heap leach ore and stockpiled ore at the average production cost or its net realizable value – whichever is lower. We consider ore stacked on our leach pads and in process at our mines as work-in-process inventory and record its value in earnings, and include it in the cost of sales based on ounces of gold recovered, using the following assumptions in our estimates: ● ● ● ● the amount of gold we estimate is in the ore stacked on the leach pads the amount of gold we expect to recover from the stacks the amount of gold in the mill circuits the gold price we expect to realize when the gold is recovered. If our estimates or assumptions are inaccurate, we could be required to write down the value we have recorded on our work-in-process inventories, which would reduce our earnings and working capital. At December 31, 2011, the average cost of inventory was significantly below its net realizable value. Reserves and resources Our estimates for Kis¸ladag˘, Efemçukuru, Tanjianshan, Jinfeng, White Mountain, Perama, Tocantinzinho, Eastern Dragon, and Vila Nova are based on the definitions adopted by the Canadian Institute of Mining, Metallurgy and Petroleum, and in compliance with Canadian National Instrument 43-101 – Standards of Disclosure for Mineral Projects (NI 43-101), developed by the Canadian Securities Administrators. you will not be able to compare the mineral reserve and resources information in this report with similar information from u.S. companies. The united States Securities & Exchange Commission (SEC) defines a mineral reserve as the part of a mineral deposit that can be economically and legally extracted or produced. It does not recognize the terms measured, indicated and inferred mineral resources (mining terms under NI 43-101), and does not accept them in reports and registration statements. you should not assume that: ● ● ● the mineral reserves defined in this report qualify as reserves under SEC standards the measured and indicated mineral resources in this report will ever be converted to reserves the inferred mineral resources in this report are economically mineable, or will ever be upgraded to a higher category. Value beyond proven and probable reserves On acquisition of a mineral property, we prepare an estimate of the fair value of the exploration potential of that property and record this amount as an asset, called value beyond proven and probable (VBPP), as at the date of acquisition. As part of our annual business cycle, we prepare estimates of proven and probable reserves for each mineral property. The change in reserves, net of production, is used to determine the amount to be converted from VBPP to proven and probable reserves subject to amortization. 48 eldoradogold.com MANAGEMENT’S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS Mining interests We depreciate most of our mining properties, plant and equipment using the unit-of-production method, where the value of property is reduced as reserves are depleted. We base this on mining rates and our estimates of reserves. If these change, 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. At the end of every year, we assess whether there has been an impairment of our capitalized mining properties, plant and equipment. If there were an impairment, we would be required to write down the recorded value of our mining properties, plant and equipment, which would reduce our earnings and net assets. For producing properties, we base our assessment on the future net cash flows we expect the property will generate. There will be an impairment if metal prices are lower, production costs have increased, or metal recoveries are lower than previously estimated. For non-producing properties, we base our assessment on whether there are factors that might indicate the need for a writedown. There will be an impairment if we believe current economics or permitting issues will prevent us from recovering the costs we have deferred for the property. At December 31, 2011, based on an average projected gold price for 2012 of $1,700 per ounce decreasing to a long-term price of $1,300 per ounce by 2016, the estimated undiscounted net cash flow from our mining properties, plant and equipment exceeded their carrying values. Goodwill and impairment testing We account for business combinations using the purchase method of accounting. We record the fair market value of assets acquired and liabilities assumed as of the date of acquisition, and record any excess of the purchase price over fair value as goodwill. When the excess is negative it is recognized immediately in income. The assumptions underlying fair value estimates are subject to significant risks and uncertainties. We review and evaluate the carrying amount of goodwill every year by comparing the fair value of our reporting units to their carrying amounts. If a reporting unit’s carrying value exceeds its fair value, we compare its carrying value to the implied fair value of its goodwill, and charge the amount the carrying value exceeds fair value to operations. At December 31, 2011, our consolidated balance sheet included $365.9 million in goodwill related to Sino Gold ($363.7 million) and Tanjianshan ($2.2 million). We used a discount rate of 7% to calculate the net present value of cash flows from Tanjianshan to estimate its implied fair value. We used a discount rate of between 7% and 9% to calculate the net present value of cash flows from Sino Gold mines in order to estimate their fair values. There was no impairment of goodwill for either unit. Operating costs We calculate cash operating costs according to the Gold Institute Standard. Future operating costs include estimates of foreign currency exchange and inflation trends. Stock-based compensation We use the Black-Scholes Model to calculate the fair value of stock options that have been given to employees, officers and directors. This model uses assumptions of share price, volatility and expected life of options. Asset retirement obligations We estimate the mine closure date, the credit-adjusted risk-free rate, the inflation rate and the timing reclamation costs to determine the carrying value of an asset retirement obligation. Eldorado Gold 2011 Annual Report 49 MANAGEMENT’S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS Income taxes We record income taxes using income tax rates we expect to apply in the years we estimate the various temporary differences will be recovered or settled. Where the tax laws and regulations are unclear or subject to varying interpretations, these estimates could change, and materially affect the amount of income tax liabilities recorded at the balance sheet date. Pension plans We use various actuarial assumptions to estimate our obligations and expenses, 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. December 31, 2011 December 31, 2010 Key assumptions – 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 Pension plan 6.5% 5.5% 4.5% 3.0% 6.5% 5.5% 4.5% 3.0% Average remaining service period of active employees expected to receive benefits 6.7 years 6.7 years SERP Pension plan 6.5% 6.0% 5.5% 4.50% 5 years SERP 6.5% 6.0% 5.5% 4.5% 5 years Changes in accounting policies The following standards and amendments to existing standards have been published and are mandatory for Eldorado’s annual accounting periods beginning January 1, 2013, or later periods: ● IFRS 9 ‘Financial Instruments: Classification and Measurement’ – This is the first part of a new standard on classification and measurement of financial assets that will replace IAS 39, ‘Financial Instruments: Recognition and Measurement’. IFRS 9 has two measurement categories: amortized cost and fair value. All equity instruments are measured at fair value. A debt instrument is recorded at amortized cost only if the entity is holding it to collect contractual cash flows and the cash flows represent principal and interest. Otherwise it is measured at fair value with changes in fair value through profit or loss. In addition, this new standard has been updated to include guidance on financial liabilities and derecognition of financial instruments. This standard is effective for years beginning on/after January 1, 2015. The extent of the impact of adoption of IFRS 9 has not yet been determined. ● IFRS 11 ‘Joint Arrangements’ – This standard replaces the guidance in IAS 31 'Interests in Joint Ventures'. under IFRS 11, joint arrangements are classified as either joint operations or joint ventures. These joint venture entities must now use the equity method. ● upon application of IFRS 11, entities that had previously accounted for joint ventures using proportionate consolidation shall collapse the proportionately consolidated net asset value into a single investment balance at the beginning of the earliest period presented. The investment’s opening balance is tested for impairment in accordance with IAS 28 and IAS 36 ‘Impairment of Assets’. Any impairment losses are recognized as an adjustment to opening retained earnings at the beginning of the earliest period presented. ● The Company intends to adopt IFRS 11 in its financial statements for the annual period beginning on January 1, 2013. The Company does not expect IFRS 11 to have a material impact on the consolidated financial statements. 50 eldoradogold.com MANAGEMENT’S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS ● ● ● IFRS 12 ‘Disclosure of Interests in Other Entities’ – This IFRS shall be applied by companies with an interest in subsidiaries, joint arrangements, associates or unconsolidated structured entities. The application of this standard intends to enable users of the financial statements to evaluate the nature of and risks associated with its interests in other entities, and the effects of those interests on its financial position, financial performance and cash flows. Companies will be required to disclose information about significant judgments and assumptions made in determining the control of another entity, the joint control of an arrangement or significant influence over another entity and the type of joint arrangement when the arrangement has been structured through a separate vehicle. This standard is effective for years beginning on or after January 1, 2013. The Company does not expect IFRS 12 to have a material impact on the consolidated financial statements. IFRS 13, ‘Fair value measurement’, aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRS. The requirements do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRS. The Company is yet to assess IFRS 13’s full impact and intends to adopt IFRS 13 no later than the accounting period beginning on or after January 1, 2013. IFRIC 20 ‘Stripping costs in the production phase of a surface mine’ – This interpretation applies to waste removal costs that are incurred in open pit mining activity during the production phase of the mine. Recognition of a stripping activity asset requires the asset to be related to an identifiable component of the ore body. Stripping costs that relate to inventory produced should be accounted for as a current production cost in accordance with IAS 2, ‘Inventories’. Stripping costs that generate a benefit of improved access and meet the definition of an asset should be accounted for as an addition to an existing asset. Existing stripping costs on the balance sheet at transition that do not relate to a specific ore body should be written off to opening retained earnings. The stripping activity asset shall be depreciated on a systematic basis, over the expected useful life of the identified component of the ore body that becomes more accessible as a result of the stripping activity. This interpretation is effective for years beginning on or after January 1, 2013. The Company does not expect IFRIC 20 to have a material impact on the consolidated financial statements as the Company currently applies comparable principles to those found in this interpretation. ● There are no other IFRS or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Company. International financial reporting standards (IFRS) The Company prepares its financial statements in accordance with Canadian generally accepted accounting principles as set out in the handbook of the Canadian Institute of Chartered Accountants (“CICA handbook”). In 2010, the CICA handbook was revised to incorporate International Financial Reporting Standards (“IFRS”), and require publicly accountable enterprises to apply such standards effective for years beginning on or after January 1, 2011. Accordingly the Company has commenced reporting on this basis in its consolidated financial statements. In the financial statements, the term “Canadian GAAP” refers to Canadian GAAP before the adoption of IFRS. Eldorado Gold 2011 Annual Report 51 MANAGEMENT’S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS Significant accounting differences The following are areas where the accounting differences between Canadian GAAP and existing IFRS have impacted our consolidated financial statements. Impairment of assets Canadian GAAP generally uses a two-step approach to impairment testing: ● first, compare asset carrying values with undiscounted future cash flows to determine whether there is an impairment ● if so, measure it by comparing asset carrying values with fair values. International Accounting Standard (IAS) 36, Impairment of Assets, uses a one-step approach for both testing for and measuring impairment: ● compare asset carrying values directly with the higher of fair value less costs to sell and value in use (which uses discounted future cash flows). This can result in more write-downs if the carrying values of assets were previously supported under Canadian GAAP on an undiscounted cash flow basis but could not be supported on a discounted cash flow basis. IAS 36 also requires any previous impairment losses to be reversed if circumstances change and the impairments are reduced. Canadian GAAP does not allow impairment losses to be reserved. Provision for reclamation and rehabilitation The key areas of difference between IFRS and Canadian GAAP include: ● ● ● the discount rate used the re-measurement requirements the constructive obligation concept. under IFRS, a liability must be recognized at the time the entity becomes legally or constructively obliged to rehabilitate disturbance resulting from mining activities. under Canadian GAAP, a liability is only recognized when the entity is legally bound. Discount rates should reflect the risks specific to the decommissioning provision. unlike IFRS, discount rates for asset retirement obligations under Canadian GAAP are based on the entity’s credit-adjusted risk-free rate. IFRS requires re-measurement of the liability at each reporting date, whereas Canadian GAAP requires re-measurement of the liability in the event of changes in the amount or timing of cash flows required to settle the obligation. The use of the current discount rate for all changes in estimates combined with the requirement to re-measure the liability at each reporting date under IFRS, will significantly simplify the process required to measure any restoration liabilities because there will no longer be a need to record separate layers for the original liability and each subsequent upward revision in estimated cash flows. under IFRS, accretion must be presented as an interest expense and included in Interest and financing costs on the statement of earnings. There is no prescribed presentation for asset retirement obligation accretion under Canadian GAAP. Business combinations There are certain differences between IFRS and Canadian GAAP when accounting for business combinations. Canadian GAAP requires share-based consideration to be valued based on the announcement date share price. under IFRS, share-based consideration must be valued based on its fair value at the acquisition date. under IFRS, restructuring costs and other transactions costs are expensed on acquisition. They are included in the purchase consideration under Canadian GAAP. 52 eldoradogold.com MANAGEMENT’S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS under Canadian GAAP, after a business combination, we record non-controlling interest at the historical carrying value of the assets and liabilities of the acquired entity. under IFRS, we record non-controlling interest based on its share of the fair value of the assets and liabilities of the acquired entity. Income taxes Existing IFRS requires the recognition of deferred taxes in situations not required under Canadian GAAP. Specifically, a deferred tax liability (asset) is recognized for exchange gains and losses relating to foreign non- monetary assets and liabilities that are re-measured into the functional currency using historical exchange rates. Similar timing differences are also recognized for the difference in tax bases between jurisdictions as a result of intra-group transfer of assets. Future tax liabilities for temporary tax differences on asset acquisitions are not recognized. Property, plant and equipment Separate accounting for components of property, plant and equipment is more rigorously applied and broader under IFRS. Costs are allocated to significant parts of an asset if the useful lives differ, and each part is then separately depreciated. Full disclosure of the Company’s accounting policies in accordance with IFRS can be found in Notes 2 and 3 to the financial statements. The financial statements also include reconciliations of the previously disclosed comparative period’s financial statements prepared in accordance with Canadian generally accepted accounting principles to IFRS as set out in Note 32. 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 CEO and CFO, as appropriate to allow for timely decisions about public disclosure. Management, including the CEO and CFO, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as at December 31, 2011, as defined in the rules of the u.S. Securities and Exchange Commission and Canadian Securities Administration. Based on this evaluation, they concluded that our disclosure controls and procedures are effective in providing reasonable assurance that the information required to be disclosed in reports we filed or submitted under united States and Canadian securities legislation was recorded, processed, summarized and reported within the time periods specified in those rules. Internal controls over financial reporting Management, including the CEO and CFO, is responsible for establishing and maintaining adequate internal control over financial reporting, and used the framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to evaluate the effectiveness of our controls in 2011. Based on this evaluation, management concluded that our internal control over financial reporting was effective as at December 31, 2011 and provided a reasonable assurance of the reliability of our financial reporting and preparation of the financial statements. No matter how well it’s designed, however, any system of internal control has inherent limitations. Even systems determined to be effective can provide only reasonable assurance of the reliability of financial statement preparation and presentation. KPMG llP, an independent registered public accounting firm, has audited management’s assessment of the effectiveness of internal control over financial reporting, and has expressed their opinion in their report included with our annual consolidated financial statements in Form 40-F. Eldorado Gold 2011 Annual Report 53 MANAGEMENT’S DISCuSSION AND ANAlySIS OF FINANCIAl CONDITION AND RESulTS OF OPERATIONS Changes in internal control over financial reporting There have been no changes in our internal control over financial reporting during the year ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except for the following: we implemented a new ERP system in at our Chinese operations. Management used appropriate procedures to ensure internal controls were in place during and after the implementation. Qualified person Except as otherwise noted, Norman Pitcher, P. Geo., the Company’s Chief Operating Officer, is the Qualified Person under NI 43-101 who approved the scientific or technical information contained in this MD&A and has verified the technical data disclosed in this document. Forward-looking information and risks This MD&A includes statements and information about what we expect to happen in the future. When we discuss our strategy, plans and future financial and operating performance, or other things that have not yet happened in this review, we are making statements considered to be forward-looking information or forward-looking statements under Canadian and united States securities laws. We refer to them in this document as forward-looking information. Key things to understand about the forward-looking information in this document: ● It typically includes words and phrases about the future, such as: plan, expect, forecast, intend, anticipate, estimate, budget, scheduled, may, could, would, might, will. ● Although it represents our current views, which we consider to be reasonable, we can give no assurance that the forward-looking information will prove to be accurate. ● ● It is based on a number of assumptions, including things like the future price of gold, anticipated costs and spending, and our ability to achieve our goals. It is also subject to the risks associated with our business, including ■ the changing price of gold and currencies, ■ actual and estimated production and mineral reserves and resources, ■ the speculative nature of gold exploration, ■ risks associated with mining operations and development, ■ regulatory and permitting risks, ■ acquisition risks, and ■ other risks that are set out in our Annual Information Form and our Management Information Circular filed in respect of the European Goldfields acquisition. ● If our assumptions prove to be incorrect or the risks materialize, our actual results and events may vary materially from what we currently expect. We recommend that you review our annual information form, which include a more detailed discussion of material risks that could cause actual results to differ significantly from our current expectations. Forward-looking information is designed to help you understand management’s current views of our near and longer term prospects, and it may not be appropriate for other purposes. We will not necessarily update this information unless we are required to by securities laws. 54 eldoradogold.com 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 International Financial Reporting Standards as issued by the International Accounting Standards Board. 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, 2011, 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. KPMG, 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, 2011 has also been audited by KPMG, and their opinion is included in their report. Paul N. Wright President and Chief Executive Officer Fabiana E. Chubbs Chief Financial Officer February 23, 2012 Vancouver, British Columbia, Canada Eldorado Gold 2011 Annual Report 55 INDEPENDENT AuDITORS’ REPORT OF REGISTERED PuBlIC ACCOuNTING FIRM To the Shareholders and Board of Directors of Eldorado Gold Corporation We have audited the accompanying consolidated financial statements of Eldorado Gold Corporation, which comprise the consolidated balance sheets as at December 31, 2011, December 31, 2010 and January 1, 2010, the consolidated income statements, statements of comprehensive income, changes in equity and cash flows for the years ended December 31, 2011 and December 31, 2010, and notes, comprising a summary of significant accounting policies and other explanatory information. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits 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 comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Eldorado Gold Corporation as at December 31, 2011, December 31, 2010 and January 1, 2010, and its consolidated financial performance and its consolidated cash flows for the years ended December 31, 2011 and December 31, 2010, in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. Other Matter We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (united States), Eldorado Gold Corporation’s internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 23, 2012 expressed an unqualified opinion on the effectiveness of Eldorado Gold Corporation’s internal control over financial reporting. Chartered Accountants Vancouver, Canada February 23, 2012 56 eldoradogold.com REPORT OF INDEPENDENT REGISTERED PuBlIC ACCOuNTING FIRM To the Board of Directors and Shareholders of Eldorado Gold Corporation We have audited Eldorado Gold Corporation’s (the Company) internal control over financial reporting as of December 31, 2011, 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 accompanying Management’s Report on Controls and Procedures. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit 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. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered 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 (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that 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 (3) 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 of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (united States), the consolidated balance sheets of the Company as of December 31, 2011, December 31, 2010 and January 1, 2010 and the related consolidated income statements, statements of comprehensive income, changes in equity and cash flows for the years ended December 31, 2011 and December 31, 2010, and our report dated February 23, 2012 expressed an unqualified opinion on those consolidated financial statements. Chartered Accountants Vancouver, Canada February 23, 2012 Eldorado Gold 2011 Annual Report 57 CONSOlIDATED BAlANCE ShEETS December 31, 2011 and 2010 (expressed in thousands of US dollars) Assets Current assets Cash and cash equivalents Restricted cash Marketable securities Accounts receivable and other Inventories Non-current inventories Investments in significantly influenced companies Deferred income tax assets Restricted assets and other Property, plant and equipment Goodwill Liabilities & equity Current liabilities Accounts payable and accrued liabilities Current debt Debt Asset retirement obligations Defined benefit plan Deferred income tax liabilities Equity Share capital Treasury stock Contributed surplus Accumulated other comprehensive (loss) income Retained earnings (deficit) Note December 31, 2011 December 31, 2010 January 1, 2010 5 6, 15 7 8 9 9 10 18 11 12 13 14 15 15 16 17 18 393,763 314,344 265,369 55,390 2,640 42,309 164,057 658,159 26,911 18,808 4,259 38,430 52,425 8,027 42,437 147,263 564,496 29,627 6,202 – 50,000 13,951 26,434 129,197 484,951 31,534 – – 19,328 13,759 2,847,910 2,699,787 2,527,567 365,928 365,928 324,935 3,960,405 3,685,368 3,382,746 168,367 81,031 249,398 – 43,213 19,969 336,579 649,159 145,695 98,523 244,218 68,140 33,228 12,019 330,512 688,117 153,036 56,499 209,535 134,533 26,995 7,811 355,425 734,299 19 2,855,689 2,814,679 2,671,634 (4,018) 30,441 (10,069) 382,716 – 22,967 (1,637) 125,221 – 17,865 2,227 (69,423) Total equity attributable to shareholders of the Company 3,254,759 2,961,230 2,622,303 Attributable to non-controlling interests 56,487 3,311,246 3,960,405 36,021 2,997,251 3,685,368 26,144 2,648,447 3,382,746 The accompanying notes are an integral part of these consolidated financial statements. Approved on behalf of the Board of Directors Robert R. Gilmore Director 58 eldoradogold.com Paul N. Wright Director Date of approval: February 23, 2012 CONSOlIDATED INCOME STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars) For the year ended December 31 Note 2011 2010 Revenue Metal sales Cost of sales Production costs Depreciation and amortization Total cost of sales Gross profit Exploration expenses Mine standby costs General and administrative expenses Defined benefit plan expense Share based payments Foreign exchange loss Operating profit Gain on disposal of assets Gain on marketable securities loss on investments in significantly influenced companies Other income Asset retirement obligation accretion Interest and financing costs Profit before income tax Income tax expense Profit for the year Attributable to: Shareholders of the Company Non-controlling interests Profit for the year 27 17 20 16 28 18 Weighted average number of shares outstanding 29 Basic Diluted Earnings per share attributable to shareholders of the Company: 29 Basic earnings per share Diluted earnings per share The accompanying notes are an integral part of these consolidated financial statements. 1,098,933 791,175 346,484 122,414 468,898 630,035 30,773 – 59,239 2,088 19,722 5,367 277,974 107,157 385,131 406,044 22,501 1,335 44,935 1,337 17,112 2,712 512,846 316,112 (2,729) (664) 4,225 (7,673) 1,546 5,331 512,810 165,587 347,223 318,662 28,561 347,223 549,791 551,625 0.58 0.58 (592) (6,572) 531 (13,468) 2,727 8,089 325,397 86,939 238,458 221,001 17,457 238,458 542,861 545,850 0.41 0.40 Eldorado Gold 2011 Annual Report 59 CONSOlIDATED STATEMENTS OF COMPREhENSIVE INCOME December 31, 2011 and 2010 (expressed in thousands of US dollars) Note 2011 2010 347,223 238,458 (989) 12 13,480 (40) – (11,424) (794) (3,245) (6,661) (8,432) (2,635) (3,864) 338,791 234,594 310,230 28,561 338,791 217,137 17,457 234,594 For the year ended December 31 Profit for the year Other comprehensive income (loss): Change in fair value of available-for-sale financial assets Income tax on items taken to equity Reversal of unrealized gains on available-for-sale investments on acquisition of subsidiary Realized gains on disposal of available-for-sale financial assets transferred to net income Actuarial losses on defined benefit pension plans 17 Total other comprehensive (loss) income for the year Total comprehensive income for the year Attributable to: Shareholders of the Company Non-controlling interests Total comprehensive income for the year The accompanying notes are an integral part of these consolidated financial statements. 60 eldoradogold.com CONSOlIDATED STATEMENTS OF CASh FlOWS December 31, 2011 and 2010 (expressed in thousands of US dollars) Note 2011 2010 For the year ended December 31 Cash flows generated from (used in): Operating activities Profit for the year Items not affecting cash Asset retirement obligation accretion Depreciation and amortization unrealized foreign exchange loss Deferred income tax expense (recovery) Gain on disposal of assets loss on investment in significantly influenced companies Gain on marketable securities Share based payments Defined benefit plan expense Changes in non-cash working capital 21 Investing activities Acquisition of subsidiaries net of cash received Purchase of property, plant and equipment Proceeds from the sale of property, plant and equipment Purchase of marketable securities Proceeds from the sale of marketable securities Non-registered supplemental retirement plan investments, net Investments in significantly influenced companies Increase in restricted cash Increase in restricted assets and other Financing activities Issuance of common shares for cash Dividend paid to non-controlling interests Dividend paid to shareholders Purchase of treasury stock long-term and bank debt proceeds long-term and bank debt repayments loan financing costs Net increase in cash and cash equivalents Cash and cash equivalents - beginning of year Cash and cash equivalents - end of year The accompanying notes are an integral part of these consolidated financial statements. 347,223 238,458 1,546 122,414 6,500 1,804 (2,729) 4,225 (664) 19,722 2,088 2,727 107,157 5,802 (8,083) (592) 531 (6,572) 17,112 1,337 502,129 357,877 9,948 512,077 (59,509) 298,368 – (6,083) (272,818) (226,296) 147 (1,823) 8,154 (7,045) (16,830) (2,957) – 23,756 (11,983) 15,611 – (6,727) (2,463) (7,007) (293,172) (221,192) 31,600 (8,095) (61,167) (6,438) 5,782 (98,169) (2,999) (139,486) 79,419 314,344 393,763 35,907 (7,580) (26,357) – 59,839 (90,010) – (28,201) 48,975 265,369 314,344 Eldorado Gold 2011 Annual Report 61 CONSOlIDATED STATEMENTS OF ChANGES IN EQuITy December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) For the year ended December 31 Share capital Balance, beginning of year Shares issued upon exercise of share options, for cash Transfer of contributed surplus on exercise of options Shares issued in consideration for interests acquired Shares issued upon exercise of warrants, for cash Balance, end of year Treasury stock Balance, beginning of year Purchase of treasury stock Shares redeemed upon exercise of restricted share units Balance, end of year Contributed surplus Balance, beginning of year Share based payments Share based payments on Brazauro warrants and options converted Shares redeemed upon exercise of restricted share units Transfer to share capital on exercise of options Balance, end of year Accumulated other comprehensive (loss) income Balance, beginning of year Other comprehensive (loss) income for the year Balance, end of year Retained earnings (deficit) Balance, beginning of year Dividends paid Profit attributable to shareholders of the Company Balance, end of year 2011 $ 2010 $ 2,814,679 2,671,634 30,115 9,410 – 1,485 35,895 12,020 95,118 12 2,855,689 2,814,679 – (6,438) 2,420 (4,018) 22,967 19,304 – (2,420) (9,410) 30,441 (1,637) (8,432) (10,069) 125,221 (61,167) 318,662 382,716 – – – – 17,865 16,557 565 – (12,020) 22,967 2,227 (3,864) (1,637) (69,423) (26,357) 221,001 125,221 Total equity attributable to shareholders of the Company 3,254,759 2,961,230 Non-controlling interests Balance, beginning of year Profit attributable to non-controlling interests Dividends paid Balance, end of year Total equity The accompanying notes are an integral part of these consolidated financial statements. 36,021 28,561 (8,095) 56,487 26,144 17,457 (7,580) 36,021 3,311,246 2,997,251 62 eldoradogold.com NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 1. General Information 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 Turkey, China, Greece and Brazil. The Company acquired control of Sino Gold Mining ltd. (“Sino Gold”) in December 2009, including its two producing mines, Jinfeng and White Mountain, as well as the Eastern Dragon development project. It also completed in July 2010 the acquisition of Brazauro Resources Corporation (“Brazauro”), whose main asset is the Tocantinzinho exploration and development project in Tapajós, Brazil. Eldorado is a public company which is listed on the Toronto Stock Exchange, New york Stock Exchange and the Australian Stock Exchange and is incorporated and domiciled in Canada. 2. Basis of preparation and first-time adoption of IFRS The Company prepares its financial statements in accordance with Canadian generally accepted accounting principles as set out in the handbook of the Canadian Institute of Chartered Accountants (“CICA handbook”). In 2010, the CICA handbook was revised to incorporate International Financial Reporting Standards (“IFRS”), and require publicly accountable enterprises to apply such standards effective for years beginning on or after January 1, 2011. Accordingly the Company has commenced reporting on this basis in these consolidated financial statements. In the financial statements, the term “Canadian GAAP” refers to Canadian GAAP before the adoption of IFRS. These consolidated financial statements have been prepared in accordance with IFRS as issued by the International Accounting Standards Board. These are the Company’s first consolidated financial statements prepared in accordance with IFRS and IFRS 1 ‘First-time Adoption of International Financial Reporting Standards’ (“IFRS 1”) has been applied. Subject to certain IFRS 1 transition elections disclosed in Note 32, the Company has consistently applied the same accounting policies in its opening IFRS balance sheet as at January 1, 2010 and throughout all years presented, as if these policies had always been in effect. Note 32 discloses the impact of the transition to IFRS on the Company’s reported balance sheet and comprehensive income, including the nature and effect of significant changes in accounting policies from those used in the Company’s consolidated financial statements for the year ended December 31, 2010. The consolidated financial statements were authorized for issue by the Board of Directors on February 23, 2012. Upcoming changes in accounting standards The following standards and amendments to existing standards have been published and are mandatory for Eldorado’s annual accounting periods beginning January 1, 2013, or later periods: ● IFRS 9 ‘Financial Instruments: Classification and Measurement’ – This is the first part of a new standard on classification and measurement of financial assets that will replace IAS 39, ‘Financial Instruments: Recognition and Measurement’. IFRS 9 has two measurement categories: amortized cost and fair value. All equity instruments are measured at fair value. A debt instrument is recorded at amortized cost only if the entity is holding it to collect contractual cash flows and the cash flows represent principal and interest. Otherwise it is measured at fair value with changes in fair value through profit or loss. In addition, this new standard has been updated to include guidance on financial liabilities and derecognition of financial instruments. This standard is effective for years beginning on or after January 1, 2015. The extent of the impact of adoption of IFRS 9 has not yet been determined. Eldorado Gold 2011 Annual Report 63 NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 2. Basis of preparation continued ● IFRS 11 ‘Joint Arrangements’ – This standard replaces the guidance in IAS 31 Interests in Joint Ventures. under IFRS 11, joint arrangements are classified as either joint operations or joint ventures. Joint venture entities are now accounted for using the equity method. ● ● ● upon application of IFRS 11, entities which had previously accounted for joint ventures using proportionate consolidation shall collapse the proportionately consolidated net asset value into a single investment balance at the beginning of the earliest period presented. The investment’s opening balance is tested for impairment in accordance with IAS 28 and IAS 36 ‘Impairment of Assets’. Any impairment losses are recognized as an adjustment to opening retained earnings at the beginning of the earliest period presented. The Company intends to adopt IFRS 11 in its financial statements for the annual period beginning on January 1, 2013. The Company does not expect IFRS 11 to have a material impact on the consolidated financial statements. IFRS 12 ‘Disclosure of Interests in Other Entities’ – This IFRS shall be applied by companies with an interest in subsidiaries, joint arrangements, associates or unconsolidated structured entities. The application of this standard intends to enable users of the financial statements to evaluate the nature of and risks associated with its interests in other entities, and the effects of those interests on its financial position, financial performance and cash flows. Companies will be required to disclose information about significant judgments and assumptions made in determining the control of another entity, the joint control of an arrangement or significant influence over another entity and the type of joint arrangement when the arrangement has been structured through a separate vehicle. This standard is effective for years beginning on or after January 1, 2013. The Company does not expect IFRS 12 to have a material impact on the consolidated financial statements. IFRS 13, ‘Fair value measurement’, aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRS. The requirements do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRS. The Company is yet to assess IFRS 13’s full impact and intends to adopt IFRS 13 no later than the accounting period beginning on or after January 1, 2013. IFRIC 20 ‘Stripping costs in the production phase of a surface mine’ – This interpretation applies to waste removal costs that are incurred in open pit mining activity during the production phase of the mine. Recognition of a stripping activity asset requires the asset to be related to an identifiable component of the ore body. Stripping costs that relate to inventory produced should be accounted for as a current production cost in accordance with IAS 2, ‘Inventories’. Stripping costs that generate a benefit of improved access and meet the definition of an asset should be accounted for as an addition to an existing asset. Existing stripping costs on the balance sheet at transition that do not relate to a specific ore body should be written off to opening retained earnings. The stripping activity asset shall be depreciated on a systematic basis, over the expected useful life of the identified component of the ore body that becomes more accessible as a result of the stripping activity. This interpretation is effective for years beginning on or after January 1, 2013. The Company does not expect IFRIC 20 to have a material impact on the consolidated financial statements as the Company currently applies comparable principles to those found in this interpretation. ● There are no other IFRS or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Company. 64 eldoradogold.com NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 3. Significant accounting policies The principal accounting policies set out below have been applied consistently to all years presented in these consolidated financial statements, and have been applied consistently by Eldorado entities. Refer to Note 32 for the IFRS 1 exemptions taken in applying IFRS for the first time. 3.1 Basis of presentation and principles of consolidation (i) Subsidiaries and business combinations Subsidiaries are entities controlled by Eldorado. Control exists when Eldorado has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that currently are exercisable are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The acquisition method of accounting is used to account for business acquisitions. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are generally measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of Eldorado’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets acquired, the difference, or gain is recognized directly in the income statement. Transaction costs, other than those associated with the issue of debt or equity securities, which the Company incurs in connection with a business combination, are expensed as incurred. The most significant wholly owned and partially owned subsidiaries of Eldorado, are presented below: Subsidiary Qinghai Dachaidan Mining ltd (“QDMl”) Tüprag Metal Madencilik Sanayi ve Ticaret AS (“Tüprag”) unamgen Mineração e Metalurgia S/A Thracean Gold Mining SA Sino Guizhou Jinfeng Mining limited Sino Gold Jilin BMZ Mining limited heihe Rockmining limited Brazauro Resources Corporation (“Brazauro”) Ownership interest Status Operations and development projects owned 90% Consolidated TJS Mine Location China Turkey 100% Consolidated Kis¸ladag˘ Mine Efemçukuru Mine Brazil Greece China China China Brazil 100% 100% 82% 95% 95% Consolidated Vila Nova Iron Ore Mine Consolidated Perama hill Project Consolidated Jinfeng Mine Consolidated White Mountain Mine Consolidated Eastern Dragon Project 100% Consolidated Tocantinzinho Project (ii) Investments in associates (equity accounted investees) Associates are those entities where Eldorado has the ability to exercise significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when the Company holds between 20 and 50 percent of the voting power of another entity. Joint ventures are those entities over whose activities the Company has joint control, established by contractual agreement and requiring unanimous consent for strategic financial and operating decisions. Eldorado Gold 2011 Annual Report 65 NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 3. Significant accounting policies continued Associates and jointly controlled entities are accounted for using the equity method (equity accounted investees) and are recognized initially at cost. The consolidated financial statements include Eldorado’s share of the income and expenses and equity movements of equity accounted investees, after adjustments to align the accounting policies with those of Eldorado, from the date that significant influence or joint control commences until the date that significant influence or joint control ceases. When the Company’s share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest (including any long-term investments) is reduced to nil and the recognition of further losses is discontinued except to the extent that the Company has an obligation or has made payments on behalf of the investee. At each balance sheet date, the investment in associates is assessed for indicators of impairment. (iii) Transactions with non-controlling interests Eldorado treats transactions with non-controlling interests as transactions with third parties. For purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non- controlling interests are also recorded in equity. (iv) Transactions eliminated on consolidation Intra-company and intercompany balances and transactions, and any unrealized income and expenses arising from all such transactions, are eliminated in preparing the consolidated financial statements. 3.2 Foreign currency translation (i) Functional and presentation currency Items included in the financial statements of each of Eldorado’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The consolidated financial statements are presented in uS dollars, which is the Company’s functional and presentation currency, as well as the functional currency of all significant subsidiaries. (ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the exchange rate at that date. Foreign exchange gains and losses resulting from the settlement of such transactions, and from the translation of monetary assets and liabilities denominated in foreign currencies, are recognized in the income statement. 3.3 Property, plant and equipment (i) Cost and valuation Property, plant and equipment are carried at cost less accumulated depreciation and any impairment in value. When an asset is disposed of, it is derecognized and the difference between its carrying value and net sales proceeds is recognized as a gain or loss in the income statement. (ii) Property, plant and equipment Property, plant and equipment include expenditures incurred on properties under development, significant payments related to the acquisition of land and mineral rights and property, plant and equipment that are recorded at cost on initial acquisition. Cost includes the purchase price and the directly attributable costs of acquisition or construction required to bring an asset to the location and condition necessary for the asset to be capable of operating in the manner intended by management. 66 eldoradogold.com NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 3. Significant accounting policies continued (iii) Depreciation Mine development costs, property, plant and equipment and other mining 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 units-of-production method calculated based on proven and probable reserves related to each pit. Property, plant and equipment 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. Where components of an asset have a different useful life and cost that is significant to the total cost of the asset, depreciation is calculated on each separate component. Depreciation methods, useful lives and residual values are reviewed at the end of each year and adjusted if appropriate. (iv) Subsequent costs Expenditure on major maintenance or repairs includes the cost of replacement parts of assets and overhaul costs. Where an asset or part of an asset is replaced and it is probable that further future economic benefit will flow to the Company, the expenditure is capitalized. Similarly, overhaul costs associated with major maintenance are capitalized when it is probable that future economic benefit will flow to the Company and any remaining costs of previous overhauls relating to the same asset are derecognized. All other expenditures are expensed as incurred. (v) Deferred 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 the stripping costs are incurred, unless the stripping activity can be shown to be a betterment of the mineral property, in which case the stripping costs are capitalized. Betterment occurs when stripping activity increases future output of the mine by providing access to additional reserves. Stripping costs incurred to prepare the ore body for extraction are capitalized as mine development costs (pre-stripping). Capitalized stripping costs are amortized on a unit-of- production basis over the economically recoverable proven and probable reserves to which they relate. (vi) Borrowing costs Borrowing costs are expensed as incurred except where they are directly attributable to the financing of construction or development of qualifying assets requiring a substantial period of time to prepare for their intended future use. Interest is capitalized up to the date when substantially all the activities necessary to prepare the asset for its intended use are complete. Investment income arising on the temporary investment of proceeds from borrowings is offset against borrowing costs being capitalized. (vii) 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. Mine standby costs include labour, maintenance and mine support costs during temporary shutdowns of a mine. Restructuring costs include severance payments to employees laid off as a result of outsourcing the mining function. Eldorado Gold 2011 Annual Report 67 NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 3. Significant accounting policies continued 3.4 Exploration and evaluation expenditures Exploration expenditures reflect the costs related to the initial search for mineral deposits with economic potential or obtaining more information about existing mineral deposits. Exploration expenditures typically include costs associated with the acquisition of mineral licences, prospecting, sampling, mapping, diamond drilling and other work involved in searching for ore. All expenditures relating to exploration activities are expensed as incurred except for the costs associated with the acquisition of mineral licences which are capitalized. Evaluation expenditures reflect costs incurred at development projects related to establishing the technical and commercial viability of developing mineral deposits identified through exploration or acquired through a business combination or asset acquisition. Evaluation expenditures include the cost of: i. establishing the volume and grade of deposits through drilling of core samples, trenching and sampling activities in an ore body that is classified as either a mineral resource or a proven and probable reserve; ii. determining the optimal methods of extraction and metallurgical and treatment processes; iii. studies related to surveying, transportation and infrastructure requirements; iv. permitting activities, and; v. economic evaluations to determine whether development of the mineralized material is commercially justified, including scoping, prefeasibility and final feasibility studies. Evaluation expenditures and the subsequent mine development costs are capitalized if management determines that there is sufficient evidence to support the probability of generating positive economic returns in the future. A mineral resource is considered to have economic potential when it is expected that the technical feasibility and commercial viability of extraction of the mineral resource is demonstrable considering long-term metal prices. Therefore, prior to capitalizing such costs, management determines that the following conditions have been met: ● There is a probable future benefit that will contribute to future cash inflows; ● The Company can obtain the benefit and control access to it; and ● The transaction or event giving rise to the benefit has already occurred. Expenditures incurred on extensions of mineral properties which are already being mined or developed that increase production volume or extend the life of those properties are also capitalized. Capitalized expenditures are assessed for potential impairment at the end of each reporting period. 3.5 Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of Eldorado’s share of the net assets of the acquired business at the date of acquisition. When the excess is negative (negative goodwill), it is recognized immediately in income. Goodwill on acquisition of subsidiaries and businesses is shown separately as goodwill in the financial statements. Goodwill on acquisition of associates is included in investments in significantly influenced companies and tested for impairment as part of the overall investment. Goodwill is carried at cost less accumulated impairment losses and tested annually for impairment. Impairment losses on goodwill are not reversed. The impairment testing is performed annually or more frequently if events or changes in circumstances indicate that it may be impaired. 68 eldoradogold.com NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 3. Significant accounting policies continued Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. If the composition of one or more cash-generating units to which goodwill has been allocated changes due to a re-organization, the goodwill is re-allocated to the units affected. The gain or loss on disposal of an entity includes the carrying amount of goodwill relating to the entity sold. Acquisitions prior to January 1, 2010 On transition to IFRS, Eldorado elected to restate only those business combinations that occurred on or after January 1, 2010. In respect of acquisitions prior to January 1, 2010, goodwill represents the amount recognized under Eldorado’s previous accounting framework, Canadian GAAP. 3.6 Impairment of non-financial assets Other long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment test is performed when the impairment indicators demonstrate that the carrying amount may not be recoverable and it is reviewed at least annually. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less cost to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units, or ‘CGus). These are typically the individual mines or development projects. Value in use is determined as the present value of the future cash flows expected to be derived from an asset or CGu based on the detailed mine and/or production plans. The estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Fair value less cost to sell is the amount obtainable from the sale of an asset or CGu in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal. For mining assets, fair value less cost to sell is often estimated using a discounted cash flow approach because a fair value is not readily available from an active market or binding sale agreement. Estimated future cash flows are calculated using estimated future prices, mineral reserves and resources, and operating and capital costs. All assumptions used are those that an independent market participant would consider appropriate. Non-financial assets other than goodwill impaired in prior periods are reviewed for possible reversal of the impairment when events or changes in circumstances indicate that an item is no longer impaired. 3.7 Financial assets (i) Classification The Company classifies its financial assets in the following categories: at fair value through profit or loss, loans and receivables, and available-for-sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. (a) Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are also categorized as held for trading unless they are designated as hedges. Eldorado Gold 2011 Annual Report 69 NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 3. Significant accounting policies continued (b) Loans and receivables loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for those with maturities of greater than 12 months after the end of the reporting period, which are classified as non-current assets. Eldorado’s loans and receivables comprise cash and cash equivalents, restricted cash, accounts receivable and other, and restricted assets and other in the balance sheet. (c) Available-for-sale financial assets Available-for-sale financial assets are non-derivative financial assets that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless the investment matures or management intends to dispose of it within 12 months of the end of the reporting period. Eldorado’s available-for-sale financial assets comprise marketable securities not held for the purpose of trading. (ii) Recognition and measurement Financial assets are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognized at fair value, and transaction costs are expensed in the income statement. Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Available-for- sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. loans and receivables are subsequently carried at amortized cost using the effective interest method. Gains or losses arising from changes in the fair value of the ‘financial assets at fair value through profit or loss’ category are presented in the income statement within ‘Gain or loss on marketable securities’ in the period in which they arise. Dividend income from ‘financial assets at fair value through profit or loss’ is recognized in the income statement as part of other income when Eldorado’s right to receive payments is established. Gains or losses arising from changes in the fair value of available-for-sale financial assets are recognized in other comprehensive income and presented within equity. When marketable securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments recognized in other comprehensive income are included in the income statement as ‘Gain or loss on marketable securities’. (iii) Impairment of financial assets The Company assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. 70 eldoradogold.com NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 3. Significant accounting policies continued An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate. An impairment loss in respect of an available-for-sale financial asset is calculated by reference to its fair value. In the case of equity instruments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is also evidence that the assets are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset that was previously recognized in profit or loss – is removed from equity and recognized in the income statement. All impairment losses are recognized in profit or loss. Any cumulative loss in respect of an available-for-sale financial asset recognized previously in equity is transferred to profit or loss. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognized. Impairment losses recognized for equity securities are not reversed. 3.8 Derivative financial instruments Derivatives are recognized initially at fair value on the date a derivative contract is entered into. Subsequent to initial recognition, derivatives are measured at fair value, and changes in fair value thereafter are recognized in profit and loss. Fair values for derivative instruments are determined using valuation techniques, using assumptions based on market conditions existing at the balance sheet date. Derivatives are not accounted for using hedge accounting. 3.9 Inventories Inventories are valued at the lower of cost and net realizable value. Costs incurred in bringing each product to its present location and conditions are accounted for as follows: i. Product inventory consists of stockpiled ore, ore on leach pads, crushed ore, in-circuit material at properties with milling or processing operations, doré awaiting refinement and unsold bullion. Product inventory costs consist of direct production costs including mining, crushing and processing; site administration costs; and allocated indirect costs, including depreciation and amortization of property, plant and equipment. Inventory costs are charged to production costs on the basis of ounces of gold sold. The Company regularly evaluates and refines estimates used in determining the costs charged to production costs and costs absorbed into inventory carrying values based upon actual gold recoveries and operating plans. Inventories for which processing and sale is not expected to complete within one year are classified as non-current. Net realizable value is the estimated selling price, less the estimated costs of completion and selling expenses. 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 net realizable value and, where appropriate, less a provision for obsolescence. Costs include acquisition, freight and other directly attributable costs. Eldorado Gold 2011 Annual Report 71 NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 3. Significant accounting policies continued 3.10 Trade receivables Trade receivables are amounts due from customers for bullion, doré or iron ore sold in the ordinary course of business. Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less a provision for impairment where necessary. 3.11 Cash and cash equivalents Cash and cash equivalents include cash on hand, deposits held at call with banks, other short-term highly liquid investments with maturities at the date of acquisition of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet. 3.12 Share capital Common shares are classified as equity. Incremental costs directly attributable to the issue of common shares and share options are recognized as a deduction from equity, net of any tax effects. Common shares held by the Company are classified as treasury stock and recorded as a reduction of shareholders’ equity. 3.13 Trade payables Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business, if longer). If not, they are presented as non-current liabilities. Trade payables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method. 3.14 Debt and borrowings Borrowings are recognized initially at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortized cost, calculated using the effective interest rate method. Any difference between the proceeds (net of transaction costs) and the redemption value is recognized in the income statement over the period of the borrowings using the effective interest rate method. Fees paid on the establishment of loan facilities are recognized as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a pre-payment for liquidity services and amortized over the period of the facility to which it relates. 3.15 Current and deferred income tax Income tax expense comprises current and deferred tax. Income tax expense is recognized in the income statement except to the extent that it relates to items recognized either in other comprehensive income or directly in equity, in which case it is recognized in other comprehensive income or in equity, respectively. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Taxes on income in the interim periods are accrued using the tax rate that would be applicable to expected total annual earnings. The tax rate used is the rate that is substantively enacted. 72 eldoradogold.com NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 3. Significant accounting policies continued Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. however, deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. 3.16 Employee benefits (i) Defined benefit plans Certain employees have entitlements under Company pension plans that are defined benefit pension plans. For defined benefit plans, the level of benefit provided is based on the length of service and earnings of the person entitled. The cost of the defined benefit plan is determined using the projected unit credit method. The related pension liability recognized in the consolidated balance sheet is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets. The Company obtains actuarial valuations for defined benefit plans for each balance sheet date. Actuarial assumptions used in the determination of defined benefit pension plan liabilities are based on best estimates, including discount rates, rate of salary escalation and expected retirement dates of employees. The expected long-term rate of return on assets is estimated based on the fair value of plan assets, asset allocation and expected long-term rates of return. Actuarial gains and losses are recognized in full in the period in which they occur in other comprehensive income without recycling to the statement of income in subsequent periods. Current service cost, the vested element of any past service cost, the expected return on plan assets and the interest arising on the pension liability are included in the same line items in the statement of income as the related compensation cost. Past service costs are recognized immediately to the extent the benefits are vested, and otherwise are amortized on a straight-line basis over the average period until the benefits become vested. (ii) Termination benefits Eldorado recognizes termination benefits when it is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal, or providing benefits as a result of an offer made to encourage voluntary termination. Benefits falling due more than twelve months after the end of the reporting period are discounted to their present value. (iii) Short-term benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognized for the amount expected to be paid under short-term cash bonus or profit-sharing plans if Eldorado has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. Eldorado Gold 2011 Annual Report 73 NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 3. Significant accounting policies continued 3.17 Share-based payment transactions The Company applies the fair value method of accounting for all stock option awards and equity settled restricted share units. under this method the Company recognizes a compensation expense for all stock options awarded to employees, based on the fair value of the options on the date of grant which is determined by using the Black- Scholes option pricing model. For equity settled restricted share units, compensation expense is recognized based on the quoted market value of the shares. The fair value of the options and restricted share units are expensed over the vesting period of the awards with a corresponding increase in equity. No expense is recognized for awards that do not ultimately vest. Deferred share units are liability awards recorded at the quoted market price at the grant date. The corresponding liability is marked to market at each reporting date. 3.18 Provisions A provision is recognized if, as a result of a past event, Eldorado has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. (i) Rehabilitation and restoration Provision is made for mine rehabilitation and restoration when an obligation is incurred. The provision is recognized as a liability with a corresponding asset recognized in relation to the mine site. At each reporting date the rehabilitation liability is re-measured in line with changes in discount rates, and the timing or amount of the costs to be incurred. The rehabilitation liability is classified as an ‘Asset retirement obligation’ on the balance sheet. The provision recognized represents management’s best estimate of the present value of the future costs required. Significant estimates and assumptions are made in determining the amount of restoration and rehabilitation provisions. Those estimates and assumptions deal with uncertainties such as: requirements of the relevant legal and regulatory frameworks, the magnitude of necessary remediation activities and the timing, extent and costs of required restoration and rehabilitation activity. These uncertainties may result in future actual expenditure differing from the amounts currently provided. The provision recognized is periodically reviewed and updated based on the facts and circumstances available at the time. Changes to the estimated future costs for operating sites are recognized in the balance sheet by adjusting both the restoration and rehabilitation asset and provision. Such changes give rise to a change in future depreciation and financial charges. 3.19 Revenue recognition Revenue from the sale of bullion, doré and iron ore is recognized when persuasive evidence of an arrangement exists, the bullion, doré and iron ore has been shipped, title has passed to the purchaser, the price is fixed or determinable, and collection is reasonably assured. 74 eldoradogold.com NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 3. Significant accounting policies continued 3.20 Finance income and expenses Finance income comprises interest income on funds invested (including available-for-sale financial assets), gains on the disposal of available-for-sale financial assets and changes in the fair value of financial assets at fair value through profit or loss. Interest income is recognized as it accrues in profit or loss, using the effective interest method. Finance expenses comprise interest expense on borrowings, unwinding of the discount on provisions, changes in the fair value of financial assets at fair value through profit or loss and impairment losses recognized on financial assets. All borrowing costs are recognized in profit or loss using the effective interest method, except for those amounts capitalized as part of the cost of qualifying property, plant and equipment. 3.21 Earnings per share Eldorado presents basic and diluted earnings per share (EPS) data for its common shares. Basic EPS is calculated by dividing the profit or loss attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to common shareholders and the weighted average number of common shares outstanding for the effects of all dilutive potential common shares, which comprise warrants and share options granted to employees. 4. Critical accounting estimates and judgements The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed at each period end. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. Significant areas requiring the use of management estimates include assumptions and estimates relating to determining defined proven and probable reserves, value beyond proven and probable reserves, fair values for purposes of purchase price allocations for business acquisitions, asset impairment analysis, determination of recoverable metal on leach pads, reclamation obligations, share-based payments and warrants, pension benefits, valuation allowances for deferred income tax assets, the provision for income tax liabilities, deferred income taxes and assessing and evaluating contingencies. Actual results could differ from these estimates. 5. Cash and cash equivalents Cash at bank and on hand Short-term bank deposits December 31, 2011 $ December 31, 2010 $ 387,761 6,002 393,763 312,844 1,500 314,344 January 1, 2010 $ 264,669 700 265,369 Eldorado Gold 2011 Annual Report 75 NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 6. Restricted cash Restricted cash represents short-term interest-bearing money market securities and funds held on deposit as collateral for the following loans: Eastern Dragon CMB standby letter of credit loan (Note 15(e)) unamgen hSBC letter of credit Eastern Dragon CCB loan (Note 15(g)) December 31, 2011 $ December 31, 2010 $ 52,390 3,000 – 55,390 52,425 – – 52,425 January 1, 2010 $ – – 50,000 50,000 7. Marketable securities All marketable securities owned by the Company are categorized as available-for-sale. The fair value of all equity securities is based on the balance sheet date bid prices in an active market. 8. Accounts receivable and other Trade receivables Value added and other taxes recoverable Other receivables and advances Prepaid expenses and deposits December 31, 2011 $ December 31, 2010 $ January 1, 2010 $ 7,037 7,679 5,528 22,065 42,309 7,233 4,196 8,990 22,018 42,437 – 5,956 9,123 11,355 26,434 76 eldoradogold.com NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 9. Inventories Current Ore stockpiles In-process inventory including doré Materials and supplies Non-current Ore stockpiles In-process inventory December 31, 2011 $ December 31, 2010 $ January 1, 2010 $ 47,544 50,583 65,930 164,057 19,112 7,799 26,911 39,483 62,366 45,414 37,503 56,098 35,596 147,263 129,197 15,659 13,968 29,627 15,987 15,547 31,534 Non-current inventories represent material not scheduled for processing within the next twelve months at the TJS mine. The cost of materials and supplies consumed during the year and included in production costs amounted to $143,985 (2010 – $114,778). 10. Investments in significantly influenced companies Serabi Mining Plc (“Serabi”) Kopy Goldfields (“Kopy”) Glory Resources (“Glory”) December 31, 2011 $ December 31, 2010 $ January 1, 2010 $ 3,646 3,959 11,203 18,808 6,202 – – 6,202 – – – – (a) Serabi During 2011, the Company acquired an additional 2,340,000 units of Serabi for $1,318 pursuant to the Serabi initial public offering on the Toronto Stock Exchange. Each unit consisted of one ordinary share and one half of one share purchase warrant. As at December 31, 2011, the Company holds 16,840,000 ordinary shares and 2,420,000 purchase warrants of Serabi. This represents an approximately 26.3% interest in Serabi or 29% if the Company exercises all of its share purchase warrants. Eldorado Gold 2011 Annual Report 77 NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 10. Investments in significantly influenced companies continued The investment in Serabi is being accounted for under the equity method as follows: Balance at January 1, Purchases during the year Equity loss for the year Balance at December 31, 2011 $ 6,202 1,318 (3,874) 3,646 2010 $ – 6,727 (525) 6,202 Based on quoted market prices, the fair value of the Company’s investment in Serabi at December 31, 2011 was $1,490. Subsequent to December 31, 2011, the Company acquired an additional 4,500,000 units of Serabi for $696 to maintain its 26.3% interest in the Company. Each unit consisted of one ordinary share and one sixth of one share purchase warrant. Serabi is a gold mining company that is focused on the Tapajós region of Northern Brazil. (b) Kopy In September 2011, the Company entered into a purchase agreement with Kopy and acquired 1,700,000 ordinary shares for $2,470. The Company acquired an additional 1,000,000 ordinary shares of Kopy for $1,803 in October 2011 for a total investment of 2,700,000 ordinary shares. This represents a 28.9% interest in Kopy. The investment in Kopy is being accounted for under the equity method as follows: Balance at January 1, Purchases during the year Equity loss for the period Balance at December 31, 2011 $ – 4,273 (314) 3,959 Based on quoted market prices, the fair value of the Company’s investment in Kopy at December 31, 2011 was $2,297. Kopy is focused on gold exploration and development in the lena Goldfields area of the Irkutsk region of Russia. 78 eldoradogold.com NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 10. Investments in significantly influenced companies continued (c) Glory In November 2011, the Company entered into a purchase agreement with Glory and acquired 44,595,920 ordinary shares for $11,240. This represents a 19.9% interest in Glory and, under the agreement, gives the Company the ability to appoint one board member in Glory. The investment in Glory is being accounted for under the equity method as follows: Balance at January 1, Purchases during the year Equity loss for the period Balance at December 31, 2011 $ – 11,240 (37) 11,203 Based on quoted market prices, the fair value of the Company’s investment in Glory at December 31, 2011 was $9,142. Glory currently holds mineral interests in the Sapes gold project in Thrace, Greece. 11. Restricted assets and other Restricted non-current asset – SERP (Note 17) Restricted credit card deposits Restricted non-current marketable securities Non-current accounts receivable Prepaid loan costs (Note 15(i)) Environmental guarantee deposits Deposit on land acquisition at Jinfeng December 31, 2011 $ December 31, 2010 $ January 1, 2010 $ 14,456 648 – 15,104 369 2,849 12,304 7,804 38,430 7,872 656 – 8,528 352 – 10,448 – 19,328 7,066 618 156 7,840 2,477 – 3,442 – 13,759 Eldorado Gold 2011 Annual Report 79 NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 12. Property, plant and equipment Land and buildings $ Plant and equipment $ Capital works in progress $ Mineral properties and leases $ Total $ Cost Balance at January 1, 2010 259,068 612,347 95,810 1,723,178 2,690,403 Acquisition of Brazauro Additions Finalization of purchase price allocation for Sino Other movements Disposals and writedown of mineral interests – 118 – 108,282 108,400 25,585 120,713 44,475 71,083 261,856 – – – 268 (724) (4,549) – – – (58,523) (58,523) 261 529 (25,596) (30,869) Balance at December 31, 2010 283,929 728,897 140,285 1,818,685 2,971,796 Balance at January 1, 2011 283,929 728,897 140,285 1,818,685 2,971,796 Additions/transfers Other movements Disposals 58,067 185,012 (81,593) 118,299 279,785 – (345) (6,303) (1,418) – – - (3,430) (6,303) (5,193) Balance at December 31, 2011 341,651 906,188 58,692 1,933,554 3,240,085 Depreciation and impairment losses Balance at January 1, 2010 Depreciation for the year Disposals (35,558) (120,662) (22,412) (56,411) 273 1,501 Balance at December 31, 2010 (57,697) (175,572) Balance at January 1, 2011 Depreciation for the year Disposals (57,697) (31,712) (175,572) (63,869) 1,847 1,179 Balance at December 31, 2011 (87,562) (238,262) – – – – – – – – (6,616) (162,836) (32,124) (110,947) - 1,774 (38,740) (272,009) (38,740) (272,009) (27,611) (123,192) - 3,026 (66,351) (392,175) Carrying amounts At January 1, 2010 223,510 491,685 95,810 1,716,562 2,527,567 At December 31, 2010 226,232 553,325 140,285 1,779,945 2,699,787 Balance at December 31, 2011 254,089 667,926 58,692 1,867,203 2,847,910 The amount of capitalized interest during the year ended December 31, 2011 included in property, plant and equipment was $3,651 ($2010 – $2,897). 80 eldoradogold.com NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 13. Goodwill Cost Balance at January 1, Adjustments to preliminary purchase price allocation Balance at December 31, 2011 $ 365,928 – 365,928 2010 $ 324,935 40,993 365,928 The preliminary purchase price allocation for the Sino Gold acquisition was finalized as at December 31, 2010. Changes from that originally reported include a reduction of $58,523 to mining interest, an increase of $40,993 to goodwill, a reduction of $1,464 to accounts payable and accrued liabilities, a reduction of $16,474 to future income taxes and an increase in the purchase price of $408. There has been no goodwill impairment recorded for the years ended December 31, 2011 and 2010. Impairment tests for goodwill Goodwill is allocated to Eldorado’s cash-generating units (CGus). As of December 31, 2011, all goodwill for the Company relates to our China operating segment. The recoverable amount of a CGu is determined based on the higher of the fair value less costs to sell and value- in-use. These calculations use pre-tax cash flow projections based on financial budgets approved by management covering a five-year period. Cash flows beyond the five-year period are extrapolated using the estimated growth rates stated below. Goodwill is allocated to the Jinfeng, White Mountain, Eastern Dragon and Tanjianshan CGus in the amounts of $138,529, $50,276, $174,885 and $2,238, respectively. Recoverability of goodwill is determined using fair value less costs to sell calculations. The key assumptions used for fair value less cost to sell calculations are as follows: Gold price ($/oz) Discount rate 2011 2010 $1,300 – $1,700 $1,050 – $1,400 7% – 9% 7% – 9% These assumptions have been used for the analysis of each CGu. The discount rates used are pre-tax and reflect specific risks relating to the relevant CGus. The values assigned to the key assumptions represent management’s assessment of future trends in the gold mining industry and in the global economic environment. The assumptions used are management’s best estimates and are based on both current and historical information from external and internal sources. Eldorado Gold 2011 Annual Report 81 NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 14. Accounts payable and accrued liabilities Trade payables hST and other taxes Accrued expenses 15. Debt Current Jinfeng construction loan (a) White Mountain fixed asset project loan (c) White Mountain working capital project loan (c) White Mountain working capital loan (d) Eastern Dragon CMB standby letter of credit loan (e) Eastern Dragon hSBC revolving loan facility (f) Eastern Dragon CCB loan (g) Non-current Jinfeng construction loan (a) White Mountain fixed asset project loan (c) Jinfeng working capital loan (b) Total debt (a) Jinfeng construction loan December 31, 2011 $ December 31, 2010 $ 67,056 40,256 61,055 168,367 55,786 26,627 63,282 145,695 January 1, 2010 $ 27,786 28,630 96,620 153,036 December 31, 2011 $ December 31, 2010 $ January 1, 2010 $ 19,929 – – – 50,786 10,316 – 81,031 – – – – 81,031 21,139 9,749 6,176 7,549 48,317 5,593 – 98,523 52,951 15,189 – 68,140 166,663 – 3,633 5,991 – – – 46,875 56,499 97,867 24,214 12,452 134,533 191,032 In 2009, Guizhou Jinfeng Mining ltd. (“Jinfeng”), our 82% owned subsidiary entered into a RMB 680.0 million ($107,921) construction loan facility (“the construction loan”) with China Construction Bank (“CCB”). The construction loan has a term of 6 years commencing on February 27, 2009 and is subject to a floating interest rate adjusted annually at 95% of the prevailing lending rate stipulated by the People’s Bank of China for similar loans. The effective interest as at December 31, 2011 is 6.27%. The construction loan is secured as following: i. Sino Gold corporate guarantee; ii. pledge all shares held by Sino Gold in Jinfeng; iii. mortgage on all fixed assets of Jinfeng with a value above $100; iv. mortgage on Jinfeng mining licence and exploration license; and v. mortgage on land use right. 82 eldoradogold.com NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 15. Debt continued While the construction loan is outstanding, Jinfeng is required to obtain written consent from CCB before transferring funds to Sino Gold or any of its subsidiaries and must have a leverage ratio of 64% or lower in order to distribute dividends to its shareholders. Principal repayment of this loan is as follows: for the years 2011, 2012 and 2013 – quarterly payments of RMB 35.0 million ($5,555); for the year 2014 – quarterly payments of RMB 32.5 million ($5,158); and for the year 2015 a final payment of RMB 130.0 million ($20,632). Any pre-payments are applied to reduce future payments starting from the final payment. During 2010, Jinfeng pre-paid RMB 180.0 million ($28,567) on the outstanding balance of this loan and during 2011 it made scheduled quarterly payments of RMB 35.0 million ($5,555) each. Additionally, during 2011 Jinfeng pre-paid RMB 230.0 million ($36,503) on the outstanding balance of this loan, leaving a balance owing of RMB 130.0 million ($20,632) at December 31, 2011. Net deferred financing costs in the amount of $703 have been included as an offset in the balance of the loan in the financial statements and are being amortized using the effective interest method. (b) Jinfeng working capital loan In 2009, Jinfeng entered into a RMB 85.0 million ($12,452) working capital loan (“the working capital loan”) with CCB. The working capital loan has a term of 3 years and is due on August 17, 2012. This loan is subject to a floating interest rate adjusted annually at 95% of the prevailing lending rate stipulated by the People’s Bank of China for similar loans. While the working capital loan is outstanding, Jinfeng is required to obtain written consent from CCB before transferring funds to Sino Gold or any of its subsidiaries and is required to have a leverage ratio of 64% or lower in order to distribute dividends to its shareholders. During 2010, Jinfeng pre-paid the full amount of this loan. (c) White Mountain project loan In 2008, Sino Gold Jilin BMZ Mining limited (“White Mountain”), our 95% owned subsidiary, entered into a project loan (“project loan”) with CCB. The project loan has two components: i. A fixed asset loan of RMB 190.1 million ($30,170) with final payment due on September 2013 (fully paid); and ii. A working capital project loan of RMB 40.9 million ($6,176) due on November 2010 (fully repaid). The interest rate on the project loan was the prevailing lending rate stipulated by the People’s Bank of China, adjusted annually for the fixed asset loan and twice a year for the working capital loan. The project loan was secured by a Sino Gold corporate guarantee and White Mountain’s fixed assets with a value above $100. The security was released in October, 2011. During 2011, White Mountain completed its scheduled payment of RMB 14.5 million ($2,301) and made additional prepayments of RMB 150.8 million ($23,933). As at December 31, 2011 this loan has been repaid in full. Eldorado Gold 2011 Annual Report 83 NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 15. Debt continued (d) White Mountain working capital loan In 2010, White Mountain entered into a RMB 50.0 million ($7,549) working capital loan with China Merchants Bank (“CMB”). The working capital loan had a term of one year and was due on September 1, 2011. This loan was subject to a floating interest rate adjusted annually to the prevailing lending rate stipulated by the People’s Bank of China for similar loans. This loan was secured by a letter of guarantee issued by Eldorado. In January 2011, White Mountain pre-paid the full amount of this loan. (e) Eastern Dragon CMB standby letter of credit loan In January 2010, Rock Mining Industry Development Company limited (“Eastern Dragon”), our 95% owned subsidiary, entered into a RMB 320.0 million ($50,786) standby letter of credit loan with CMB. This loan has a one year term and is subject to a floating interest rate adjusted quarterly at 90% of the prevailing lending rate stipulated by the People’s Bank of China for working capital loans. This loan is collateralized by way of a restricted cash deposit of $52,200 as funding of the irrevocable letter of credit issued by Sino Gold to CMB. The interest rate on this loan as at December 31, 2011 was 5.90%. This loan is subject to an annual management fee of 10% of the interest accrued on the drawn down and outstanding amount. This management fee is paid in advance quarterly. On February 5, 2010, Eastern Dragon made a drawdown on this loan which was used to repay its letter of credit loan with CCB. Subsequent to December 31, 2011, this loan was extended for a second year term to January 2013 and the annual management fee of 10% of the interest accrued on the outstanding amount paid quarterly was removed. In addition, the floating interest rate is now adjusted monthly at the prevailing lending rate. The collateral by way of a restricted cash deposit has been increased to $56,500. This loan is to be repaid when Eastern Dragon obtains the required project approval that will allow it to complete the first drawdown on its project-financing loan. (f) Eastern Dragon HSBC revolving loan facility In May 2010, Eastern Dragon entered into a RMB 80.0 million ($12,697) revolving facility (“the Facility”) with hSBC Bank (China). The Facility can be drawn down in minimum tranches of RMB 1.0 million ($159) or its multiples. Each drawdown bears interest fixed at the prevailing lending rate stipulated by the People’s Bank of China on the date of drawdown. The Facility has a term of up to one year. Subsequent to December 31, 2011, the Facility was reviewed by the bank and was extended to November 30, 2012. The interest rate on this loan as at December 31, 2011 was 6.71%. In December 2011, Eastern Dragon repaid RMB12.5 million ($1,984) on the Facility. As at December 31, 2011, RMB 65.0 million ($10,316) was outstanding. The Facility is secured by a letter of guarantee issued by Eldorado. Eldorado must maintain at all times a security coverage ratio of 110% of the amounts drawn down. As at December 31, 2011, the security coverage is $11,348. This Facility is to be repaid in full when Eastern Dragon obtains the required project approval that will allow it to complete the second drawdown on the project-financing loan. 84 eldoradogold.com NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 15. Debt continued (g) Eastern Dragon CCB loan In 2008, Eastern Dragon entered into a RMB 320.0 million ($46,875) standby letter of credit loan (“lC loan”) with CCB. The interest rate on this loan as at December 31, 2009 was 5.40%. The lC loan was collateralized by way of irrevocable letter of credit drawn on CCB. The letter of credit was collateralized by Sino Gold’s funds held by Bank of China Sydney Branch as restricted cash. During 2010, the lC loan was repaid and the restricted cash was released. (h) Eastern Dragon CMB project-financing loan In 2009, Eastern Dragon entered into a RMB 450.0 million ($71,418) project-financing loan (“project-financing loan”) with CMB. The project-financing loan has three components: i) A 5 year term, RMB 320.0 million ($50,786) long term loan (“the long term loan”) to replace the lC loan with CCB; ii) A 4 year term RMB 100.0 million ($15,871) fixed asset loan (“the fixed asset loan”); and iii) A one year term RMB 30.0 million ($4,761) working capital loan (“the working capital loan”). The project-financing loan is subject to a floating interest rate adjusted quarterly to 90% of the prevailing lending rate stipulated by the People’s Bank of China for similar loans. The project-financing loan will be secured by an irrevocable letter of Guarantee issued by Sino Gold. under the terms of the agreement, the following conditions are required to be met before the first drawdown: 1. Obtain project approval from the heilongjiang Provincial Development and Reform Commission; 2. Sino Gold to open an offshore banking business bank account with CMB and deposit $40,000; 3. The aggregate of the amount deposited in the offshore account, Eastern Dragon registered capital and shareholder loan is at least $84,660 (this threshold has been reached as at December 31, 2009). In addition, before the drawdown on the fixed asset loan, Eastern Dragon should obtain the gold operation permit. The working capital loan can be drawn down once the following conditions are satisfied: i) The project obtains the mining licence; ii) The project has been developed and in production; iii) The gold operation permit has been granted; and iv) The safety production permit and environmental protection permit have been granted. The project-financing loan requires Eastern Dragon to maintain a liability to asset ratio of 70% or lower, excluding shareholder loan and total banking debt cannot exceed RMB 550.0 million ($87,289) and it is subject to an annual management fee of 10% of the annual interest on the drawn down amount. No amounts were drawn down under the project-financing loan as at December 31, 2011. Eldorado Gold 2011 Annual Report 85 NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 15. Debt continued (i) HSBC revolving credit facility In October 2011, the Company entered into a $280.0 million revolving credit facility with hSBC (“the credit facility”) and a syndicate of four other banks. The credit facility matures on October 12, 2015 and is secured by the shares of SG Resources and Tuprag, wholly owned subsidiaries of the Company. The credit facility contains covenants that restrict, among other things, the ability of the Company to incur additional indebtedness exceeding $200.0 million, make distributions in certain circumstances, sell material assets and carry on a business other than one related to the mining business. Significant financial covenants include a maximum debt to Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”) of 3.5:1 and a minimum EBITDA to interest ratio of 3:1. The Company is in compliance with these covenants at December 31, 2011. loan interest is variable, set at the lesser of lIBOR plus an interest rate margin or Prime rate plus interest rate margin dependent on a leverage ratio pricing grid. The Company’s current leverage ratio is less than 1:1. At this ratio, interest charges and fees are as follows: lIBOR plus margin of 1.75% and undrawn standby fee of 0.40%. Fees of $2,999 were paid on the establishment of the credit facility. This amount was deferred as a pre-payment for liquidity services and will be amortized over the term of the credit facility. As at December 31, 2011, the prepaid loan cost on the balance sheet was $2,849 (Note 11). (j) Entrusted loan In November 2010, Eastern Dragon, hSBC Bank (China) and QDMl, entered into a RMB 12.0 million ($1,904) entrusted loan agreement, which was subsequently increased to RMB 180.0 million ($28,567) in June 2011. under the terms of the entrusted loan, QDMl with its own funds entrusts hSBC Bank (China) to provide a loan facility in the name of QDMl to Eastern Dragon. The entrusted loan can be drawn down in tranches. Each drawdown bears interest fixed at the prevailing lending rate stipulated by the People’s Bank of China on the date of drawdown. Each draw down has a term of three months and can be rolled forward at the discretion of QDMl. The interest rate on this loan as at December 31, 2011 was 4.59%. As at December 31, 2011, RMB 119.0 million ($18,886) had been drawn under the entrusted loan. Subsequent to December 31, 2011, RMB15.0 million ($2,381) was drawn down under this loan. The entrusted loan has been recorded on a net settlement basis. 86 eldoradogold.com NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 16. Asset retirement obligations At January 1, 2010 Accretion during the year Revisions to estimate of obligation At December 31, 2010 Estimated undiscounted amount At January 1, 2011 Accretion during the year Revisions to estimate of obligation At December 31, 2011 Estimated undiscounted amount Brazil $ 1,062 95 1,684 2,841 3,805 2,841 135 269 3,245 4,281 China $ 20,555 2,268 (5,720) 17,103 22,658 17,103 855 1,991 19,949 25,788 Turkey $ 5,378 364 7,542 13,284 39,533 13,284 556 6,179 20,019 51,640 Total $ 26,995 2,727 3,506 33,228 65,996 33,228 1,546 8,439 43,213 81,709 The Company’s asset retirement obligations relate to the restoration and rehabilitation of the Company’s mining operations and projects under development. The expected timing of the cash flows in respect of the provision is based on the closure of the various mining operations. The provision is calculated as the present value of estimated future net cash outflows based on the following key assumptions: At January 1, 2010 Inflation rate Discount rate At December 31, 2010 Inflation rate Discount rate At December 31, 2011 Inflation rate Discount rate Brazil % 2.5 4.4 5.0 3.3 3.5 3.1 China % 2.5 to 3.3 4.4 to 7.0 4.0 2.0 to 3.3 3.5 3.1 Turkey % 2.5 4.6 5.0 4.1 to 4.3 3.5 3.1 The discount rate is a risk-free rate determined based on uS Treasury bond rates. uS Treasury bond rates have been used for all of the mine sites as the liabilities are denominated in uS dollars as the majority of the expenditures are expected to be incurred in uS dollars. The inflation rates used in determining the present value of the future net cash outflows are based on worldwide inflation rates. Environmental guarantee deposits exist with respect to the environmental rehabilitation of the mines in China (Note 11). Eldorado Gold 2011 Annual Report 87 NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 17. Defined benefit plans Balance sheet obligations for: Pension plan Non-registered supplementary pension plan Income statement charge for: Pension plan Non-registered supplementary pension plan Actuarial losses recognized in the statement of other comprehensive income in the period (before tax) Cumulative actuarial losses recognized in the statement of other comprehensive income (before tax) December 31, 2011 $ December 31, 2010 $ 388 19,581 19,969 329 11,690 12,019 Year ended December 31, 2011 $ Year ended December 31, 2010 $ 118 1,970 2,088 6,661 9,296 132 1,205 1,337 2,635 2,635 The Company operates defined benefit pension plans in Canada 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 related to these plans are actuarially determined and made at or in excess of minimum requirements prescribed by legislation. Eldorado’s plans are actuarially evaluated for funding purposes on a three-year cycle. The Pension Plan and the SERP were last actuarially evaluated on January 1, 2011 and January 1, 2009 respectively for funding purposes and the next required valuation will be as of January 1, 2014 for the Pension Plan and January 1, 2012 for the SERP. The measurement date used to determine all of the accrued benefit obligation and plan assets for accounting information was December 31, 2011 and 2010. 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 Cash contributed to the Pension Plan and the SERP was $7,549 (2010 – nil). Cash payments totalling $174 were made directly to beneficiaries during the year (2010 – $167). The Company expects to contribute $128 to the Pension Plan and $169 to the SERP in 2012. The estimated future pension payments for the next five years and five years thereafter are as follows: Estimated future pension payments 2012 $ 169 2013 $ 228 2014 $ 1,280 2015 $ 1,280 2016 $ 1,488 2017 and later $ 1,490 88 eldoradogold.com NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 17. Defined benefit plans continued The amounts recognized in the balance sheet are determined as follows: Present value of funded obligations Fair value of plan assets Liability on balance sheet December 31, 2011 December 31, 2010 Pension Plan $ 2,101 (1,713) SERP $ 19,581 – 388 19,581 Pension Plan $ 1,609 (1,280) 329 SERP $ 11,690 – 11,690 The Company has $14,456 (2010 – $7,872) in an investment account to fund its SERP obligation. This amount is included in restricted assets and other (Note 11). The movement in the defined benefit obligation over the year is as follows: Pension Plan $ 2011 SERP $ Total $ Pension Plan $ Balance at January 1, 1,609 11,690 13,299 Current service cost Interest cost Actuarial losses Benefit payments Exchange variance 120 92 265 – 15 1,292 678 6,396 (174) (301) 1,412 770 6,661 (174) (286) 1,268 127 81 64 – 69 2010 SERP $ 7,685 705 500 2,571 (167) 396 Total $ 8,953 832 581 2,635 (167) 465 Balance at December 31, 2,101 19,581 21,682 1,609 11,690 13,299 The movement in the fair value of plan assets over the year is as follows: At January 1, Expected return on plan assets Actuarial gains and losses Contributions by employer Exchange variance At December 31, 2011 2010 Pension Plan $ SERP $ 1,280 94 58 322 (41) 1,713 – – – – – – Pension Plan $ 1,137 76 – – 67 1,280 SERP $ – – – – – – Eldorado Gold 2011 Annual Report 89 NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 17. Defined benefit plans continued The amounts recognized in the income statement are as follows: Current service cost Interest cost Expected return on plan assets Defined benefit plans expense 2011 Pension Plan $ 120 92 (94) 118 The actual return on plan assets was $152 (2010 – $76). The principal actuarial assumptions used were as follows: Expected 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 2011 Pension Plan % 6.5 5.5 4.5 3.0 SERP $ 1,292 678 – 1,970 SERP % 6.5 5.5 4.5 3.0 2010 Pension Plan $ 127 81 (76) 132 2010 Pension Plan % 6.5 6.0 5.5 4.5 SERP $ 705 500 – 1,205 SERP % 6.5 6.0 5.5 4.5 6.7 years 6.7 years 5 years 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. 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: December 31, 2011 December, 2010 Pension Plan SERP Pension Plan 2% 98% – 100% 2% 43% 55% 100% 4% 96% – 100% SERP 4% 51% 45% 100% Cash and equivalents Fixed income Equity Total 90 eldoradogold.com NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 17. Defined benefit plans continued The sensitivity of the overall pension liability to changes in the weighted principal assumptions is: Discount rate Change in assumption Impact on overall liability Increase by 0.5% Decrease by 0.5% Decrease by 6.2% Increase by 6.9% Salary escalation rate Increase/decrease by 0.5% Increase/decrease by 0.2% 18. Income tax expense and deferred taxes Total income tax expense consists of: Current tax expense Deferred tax expense (recovery) December 31, 2011 $ 163,783 1,804 165,587 Total income tax expense attributable to geographical jurisdiction is as follows: Turkey China Greece Brazil Canada Other jurisdictions 2011 $ 94,781 70,131 260 125 172 118 December 31, 2010 $ 95,022 (8,083) 86,939 2010 $ 47,780 38,876 – – 283 – 165,587 86,939 Eldorado Gold 2011 Annual Report 91 NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 18. Income tax expense and deferred taxes continued Factors affecting income tax expense for the year: Profit before income tax Canadian statutory tax rate Tax on profit at Canadian statutory tax rate 2011 $ 512,810 26.50% 135,895 Items that cause an increase (decrease) in income tax expense: Foreign income subject to different income tax rates than Canada (23,973) Derecognition (initial recognition) of deferred tax assets Non-tax affected operating losses and capital gains Non-deductible expenses and other items Foreign exchange and other translation adjustments Amounts under (over) provided in prior years Withholding tax on foreign income Income tax expense (7,634) 16,593 9,302 18,699 5,800 10,905 165,587 2010 $ 325,397 28.50% 92,738 (23,463) – 9,488 8,118 (2,702) (518) 3,278 86,939 The Canadian income tax rate declined during the year due to changes in the law that reduced corporate income tax rates in Canada. The change for the year in the Company’s net deferred tax position was as follows: Net deferred tax asset (liability) Balance at January 1, Deferred income tax (expense) recovery in the income statement Deferred income tax charged to other comprehensive income Adjustments to acquisitions Other Net balance at December 31, 2011 $ (330,512) (1,804) (12) – 8 2010 $ (355,425) 8,083 40 16,474 316 (332,320) (330,512) 92 eldoradogold.com NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 18. Income tax expense and deferred taxes continued The composition of the Company’s net deferred income tax asset and liability and deferred tax expense (recovery) is as follows: Type of temporary difference Deferred tax assets Deferred tax liabilities Expense (recovery) on the income statement Property, plant and equipment loss carryforwards liabilities Other items Balance at December 31, 2011 $ 1,838 11,142 11,534 1,536 26,050 2010 $ 3,286 6,581 7,678 – 2011 $ 2010 $ 346,687 338,876 – 6,365 5,318 – 494 8,687 17,545 358,370 348,057 2011 $ 9,259 (4,561) 2,015 (4,909) 1,804 Unrecognized deferred tax assets Tax losses Other deductible temporary differences Total unrecognized deferred tax assets Unrecognized tax losses 2011 $ 61,287 9,639 70,926 2010 $ (9,463) 833 (1,257) 1,804 (8,083) 2010 $ 61,599 19,218 80,817 At December 31, 2011 the Company had losses with a tax benefit of $61,287 (2010 – $61,599) that are not recognized as deferred tax assets. The Company recognizes the benefit of tax losses only to the extent of anticipated future taxable income that can be reduced by the tax losses. The gross amount of the tax losses for which a tax benefit has not been recorded expire as follows: Expiry date 2012 2013 2014 2025 2026 2027 2028 2029 2030 2031 No Expiry Canada $ – 5,989 6,030 7,938 14,868 10,725 25,965 23,455 7,480 46,445 – 148,895 Brazil $ – – – – – – – – – – 9,397 9,397 Greece $ 1,611 1,652 – – – – – – – – – 3,263 Australia $ – – – – – – – – – – 28,346 28,346 Total $ 1,611 7,641 6,030 7,938 14,868 10,725 25,965 23,455 7,480 46,445 37,743 189,901 Capital losses with no expiry 96,868 – – – 96,868 Tax effect of total losses not recognized 49,342 2,174 653 8,504 60,673 Eldorado Gold 2011 Annual Report 93 NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 18. Income tax expense and deferred taxes continued Deductible temporary differences At December 31, 2011 the Company had deductible temporary differences for which deferred tax assets of $9,639 (2010 – $19,218) have not been recognized because it is not probable that future taxable profits will be available against which the Company can utilize the benefits. The vast majority of the temporary benefits have no expiry date. Temporary differences associated with investments in subsidiaries The Company has not recognized deferred tax liabilities in respect of unremitted earnings that are considered indefinitely reinvested in foreign subsidiaries. At December 31, 2011, these earnings amount to $1,028,127 (2010 – $649,791). Substantially all of these earnings would be subject to withholding taxes if they were remitted by the foreign subsidiaries. Tax Credits The Company has $18,600 (2010 – nil) of tax credits that have not been recognized. Other factors affecting taxation During the year the Company recognized deferred income tax assets in respect of its Vila Nova iron ore operations. This operation has operated profitably throughout the year and is expected to in the future. Prior to this year the Company had significant tax losses in Brazil for which no deferred tax asset had been recorded. Since it is probable that the Vila Nova iron ore operation will be able to use a portion of those losses and the losses do not expire, the Company has recorded a deferred income tax asset at December 31, 2011 of $4,259 in respect of those losses and certain other temporary differences. During the year the Turkish lira has weakened substantially. This has caused a deferred income tax expense during the year of $18,470 due to the reduction in the value of the future tax deductions associated with the Turkish operations. The Company expects that in the future significant foreign exchange movements in either the Turkish lira or Chinese Renminbi in relation to the u.S. dollar will cause significant volatility in the deferred income tax expense or recovery. 94 eldoradogold.com NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 19. Share capital Eldorado’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, 2011 there were no non-voting common shares outstanding (December 31, 2010 – none). Voting common shares At January 1, 2010 Shares issued upon exercise of share options, for cash Estimated fair value of share options exercised Shares issued for acquisition of subsidiary Shares issued for cash upon exercise of warrants At December 31, 2010 Shares issued upon exercise of share options, for cash Estimated fair value of share options exercised Shares issued for cash upon exercise of warrants Number of Shares 537,136,235 5,056,216 – 5,993,898 843 548,187,192 3,399,096 – 96,629 Total $ 2,671,634 35,895 12,020 95,118 12 2,814,679 30,115 9,410 1,485 At December 31, 2011 551,682,917 2,855,689 20. Share-based payments (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 (“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, 2011, a total of 9,710,429 options (2010 – 5,424,669) 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 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, 2011, a total of 9,687,704 Options (2010 – 4,990,394) were available to grant to directors and officers under the D&O Plan. Eldorado Gold 2011 Annual Report 95 NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 20. Share-based payments continued Movements in the number of share options outstanding and their related weighted average exercise prices are as follows: 2011 Weighted average exercise price CDN$ 9.49 16.53 8.70 14.96 12.60 Number of options 8,720,524 3,869,691 (3,399,096) (575,006) 8,616,113 2010 Weighted average exercise price CDN$ 6.11 13.30 7.37 11.76 9.49 Number of options 8,928,901 5,448,842 (5,056,216) (601,003) 8,720,524 At January 1, Granted Exercised Forfeited At December 31, At December 31, 2011, 4,992,624 share purchase options (December 31, 2010 – 5,423,758) with a weighted average exercise price of CDN$10.57 (December 31, 2010 – CDN$7.32) had vested and were exercisable. Options outstanding are as follows: Total options outstanding Exercisable options December 31, 2011 Range of exercise price CDN$ Shares $4.00 to $4.99 1,218,686 $5.00 to $5.99 $6.00 to $6.99 $7.00 to $7.99 $9.00 to $9.99 $11.00 to $11.99 $12.00 to $12.99 82,500 471,000 284,333 302,900 10,000 183,500 $13.00 to $13.99 2,616,916 $15.00 to $15.99 453,646 $16.00 to $16.99 2,919,026 $18.00 to $18.99 $19.00 to $20.02 24,000 49,606 8,616,113 Weighted average remaining contractual life (years) Weighted average exercise price CDN$ 1.8 0.6 1.1 0.5 2.3 2.2 3.1 3.1 4.3 4.1 3.9 4.4 3.1 4.88 5.31 6.42 7.24 9.64 11.40 12.60 13.23 15.54 16.66 18.81 19.35 12.60 Weighted average exercise price CDN$ 4.88 5.31 6.42 7.24 9.64 11.40 12.44 13.23 15.44 16.66 18.81 19.46 10.57 Shares 1,218,686 82,500 471,000 284,333 302,900 10,000 116,833 1,381,091 231,215 858,329 16,000 19,737 4,992,624 96 eldoradogold.com NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 20. Share-based payments continued The assumptions used to estimate the fair value of options granted during the years ended December 31, 2011 and 2010 were: Risk-free interest rate (range) Expected volatility (range) Expected life (range) Expected dividends Forfeiture rate 2011 2010 1.60% – 2.05% 1.69% – 1.99% 29% – 61% 38% – 73% 0.8 – 2.8 years 0.8 - 2.8 years CDN $0.10 4% Nil 4% The weighted average fair value per stock option was CDN$3.75 (2010 – CDN$4.12). Volatility was determined based on the historical volatility over the estimated lives of the options. (b) Restricted share unit plan In March 2011, the Company commenced a Restricted Share unit (‘‘RSu’’) plan whereby restricted share units may be granted to senior management of the Company. Once vested, an RSu is exercisable into one common share entitling the holder to receive the common share for no additional consideration. A portion of the RSus granted have a vesting schedule where half vest immediately and the remaining half vest on the first anniversary of the grant. The remaining portion of the RSus granted vest over two years with one third of the RSus vesting immediately. The current maximum number of common shares authorized for issue under the RSu plan is 1,500,000. A total of 416,454 restricted share units with a weighted average grant-date fair value of CDN$15.69 per unit were granted during the year ended December 31, 2011 and 168,027 were exercisable at December 31, 2011. Fair value of each RSu issued is determined as the closing share price at grant date. A summary of the status of the restricted share unit plan and changes during the year ended December 31, 2011 is as follows: Balance at December 31, 2010 RSus Granted Redeemed Forfeited Balance at December 31, 2011 Total RSUs – 416,454 (146,059) (16,808) 253,587 As at December 31, 2011, 253,587 common shares purchased by the Company remain held in trust in connection with this plan. At the end of the period, 21,968 restricted share units are fully vested and exercisable. These shares purchased and held in trust have been included in treasury stock in the balance sheet. Restricted share units expense for the year ended December 31, 2011 was $5,166. Eldorado Gold 2011 Annual Report 97 NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 20. Share-based payments continued (c) Deferred share units plan In July 15, 2010 the Company adopted the Independent Directors Deferred Share unit (“DSu”) Plan under which DSus will be granted by the Board from time to time to independent directors (“participants”). The performance period of each DSu commences on the Grant Date and expires on the Termination Date of the participant. The Termination Date is when the participant ceases to be a Director of the Company. On redemption each unit entitles the participant to receive a cash payment equal to the market value of the Company’s shares on the date of redemption. At December 31, 2011, 65,982 DSus were outstanding (2010 – 29,970) with a value of $910 (2010 – $573), which is included in accounts payable and accrued liabilities. 21. Supplementary cash flow information Changes in non-cash working capital Accounts receivable and other Inventories Accounts payable and accrued liabilities Total Supplementary cash flow information Income taxes paid Interest paid Non-cash investing and financing activities December 31, 2011 $ December 31, 2010 $ (7,902) (13,299) 31,149 9,948 134,594 7,856 (14,307) (12,452) (32,750) (59,509) 93,056 10,415 Shares, options and warrants issued on acquisition of subsidiaries – 95,683 22. Financial risk management 22.1 Financial risk factors Eldorado’s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk and price risk), credit risk and liquidity risk. Eldorado’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on Eldorado’s financial performance. (a) Market risk (i) Foreign exchange 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. Foreign exchange risk arises when future commercial transactions or recognized assets or liabilities are denominated in a currency that is not the entity’s functional currency. Eldorado’s cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities and debt are denominated in several currencies, and are therefore subject to fluctuation against the uS dollar. 98 eldoradogold.com NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 22. Financial risk management continued The table below summarizes Eldorado’s exposure to the various currencies denominated in the foreign currency, as listed below: Cash and cash equivalents 20,837 1,308 61 65,989 855,214 7,097 Canadian dollar Australian dollars Euro Turkish lira Chinese renminbi Brazilian real Marketable securities Accounts receivable and other 2,686 2,353 Accounts payable and accrued liabilities (12,424) – – (12) – – – – – 499 8,560 90,695 25,189 (38) (59,520) (672,734) (12,740) – – (510,568) – – 13,452 1,296 522 15,029 (237,393) 19,546 Debt Net balance Equivalent in uS dollars $13,227 $1,318 $675 $7,956 $(37,676) $10,433 Based on the balances as at December 31, 2011, a 1% increase/decrease in the uS dollar exchange rate against all of the other currencies on that date would have resulted in a decrease/increase of approximately $41 in profit before taxes. There would be no effect in other comprehensive income. Cash flows from operations are exposed to foreign exchange risk, as commodity sales are set in uS dollars and a certain amount of operating expenses are in the currency of the country in which mining operations take place. (ii) Metal price risk and other price risk Eldorado is subject to price risk for fluctuations in the market price of gold and iron ore. Gold and iron ore prices are affected by numerous factors beyond the Company’s 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 and iron ore production levels also affect their prices, and the price of these metals is occasionally subject to rapid short-term changes due to speculative activities. The Company has elected not to actively manage its exposure to metal price risk at this time. From time to time, Eldorado may use commodity price contracts to manage its exposure to fluctuations in the price of gold and iron ore. 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. (iii) 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 exposed to interest rate risk as it is subject to floating interest rates. As at December 31, 2011 the average interest rate in Eldorado’s debt was 6.09% (2010 – 5.94%). A 10% increase or decrease in the interest rate on debt held at December 31, 2011 would result in a $125 increase or decrease (2010 – $670) in the Company’s profit before tax. Eldorado Gold 2011 Annual Report 99 NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 22. Financial risk management continued (b) 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 rating agencies. As at December 31, 2011, approximately 37% (2010 – 44%) of Eldorado’s cash and cash equivalents, including restricted cash, are held with one financial institution. The Company considers this to be its only significant credit risk exposure. Eldorado sells its gold bullion exclusively to large international financial institutions or on the Istanbul and Shanghai Gold Exchanges and its doré exclusively to refineries. 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, 2011. (c) 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. Management monitors and reviews both actual and forecasted cash flows, and also matches the maturity profile of financial assets and liabilities. Contractual maturities relating to debt are included in Note 15. 22.2 Capital risk management Eldorado’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of our mining projects. Capital consists of all of the components of equity; share capital from ordinary shares, contributed surplus, accumulated other comprehensive income, retained earnings and non-controlling interests. Consistent with others in the industry, Eldorado monitors capital on the basis of the debt to capital ratio and debt to EBITDA. The debt to capital is calculated as debt, including current and non-current debt, divided by capital. Debt to EBITDA is calculated as debt, including current and non-current debt, divided by earnings before interest costs, taxes and depreciation. This policy includes a target debt to capital ratio of less than 30% and a debt to EBITDA target ratio below 3.5. As at December 31, 2011, our debt to capital ratio was 2.4% (2010 – 5.6%) and our debt to EBITDA ratio was 0.12 (2010 – 0.36). These policy targets are managed through the repayments and issuances of debt as well as the continuing management of operations and capital expenditures. 100 eldoradogold.com NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 22. Financial risk management continued 22.3 Fair value estimation 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. The three levels of the fair value hierarchy 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). Assets and liabilities measured at fair value on a recurring basis as at December 31, 2011 include: Balance at December 31, 2011 $ Quoted Prices in Active Markets for Identical Assets $ Significant Other Observable Inputs $ Significant Unobservable inputs $ (Level 1) (Level 2) (Level 3) Assets Held-for-trading Restricted asset (SERP) 14,456 14,456 Available-for-sale financial assets Marketable securities Total assets 2,640 17,096 2,640 17,096 – – – – – – No liabilities are measured at fair value on a recurring basis as at December 31, 2011. The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The quoted market price used for financial assets held by the group is the current bid price. These instruments are included in level 1. Instruments included in level 1 comprise primarily publicly-traded equity investments classified as held-for-trading securities or available-for-sale securities. Eldorado Gold 2011 Annual Report 101 NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 23. Commitments The Company’s contractual obligations, not recorded on the balance sheet, at December 31, 2011, include: Operating leases and capital expenditures Purchase obligations Totals 2012 $ 10,337 81,785 92,122 2013 $ 3,560 5,133 8,693 2014 $ 3,491 1,056 4,547 2015 and later $ 1,930 562 2,492 Purchase obligations in 2012 relate primarily to mine expansion projects at Kis¸ladag˘, mine development projects at Tocantinzinho and Eastern Dragon as well as operating and maintenance supply contracts at our operating mines. 24. Contingencies The Company is involved in legal proceedings from time to time, arising in the ordinary course of its business. As at December 31, 2011, the amount of ultimate liability with respect to these actions will not, in the opinion of management, materially affect Eldorado’s financial position, results of operations or cash flows. 25. Related party transactions Key management includes directors (executive and non-executive), officers and senior management. The compensation paid or payable to key management for employee services is shown below: Salaries and other short-term employee benefits Termination benefits Post-employment benefits Share-based payments 2011 $ 18,897 732 95 17,104 36,828 2010 $ 7,966 – 87 25,556 33,609 102 eldoradogold.com NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 26. Financial instruments by category Fair value The following table provides the carrying value and the fair value of financial instruments at December 31, 2011 and December 31, 2010: December 31, 2011 December 31, 2010 Carrying amount % Fair value $ Carrying amount $ Fair value $ Financial Assets Held-for-trading Restricted assets and other (SERP) 14,456 14,456 7,872 7,872 Available-for-sale Marketable securities Loans and receivables Cash and cash equivalents Restricted cash Accounts receivable and other Restricted assets and other Financial Liabilities Accounts payable and accrued liabilities Debt 27. Production costs labour Fuel Reagents Electricity Mining contractors Operating and maintenance supplies and services Finance and administrative costs Inventory change Royalties, production taxes and selling expenses Total production costs 2,640 2,640 8,027 8,027 393,763 393,763 314,344 314,344 55,390 34,630 23,974 55,390 34,630 23,974 52,425 38,241 11,456 52,425 38,241 11,456 168,367 81,031 168,367 81,031 145,695 166,663 145,695 166,663 2011 $ 59,079 30,580 39,873 31,753 31,677 73,532 19,210 13,185 47,595 2010 $ 47,302 22,143 29,910 25,146 42,415 62,725 23,579 (2,375) 27,129 346,484 277,974 Eldorado Gold 2011 Annual Report 103 NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 28. Interest and financing costs Interest expense Financing fees Interest on capital leases Total interest and financing costs 29. Earnings per share 2011 $ 4,208 1,123 – 5,331 2010 $ 7,730 357 2 8,089 The weighted average number of ordinary shares for the purposes of diluted earnings per share reconciles to the weighted average number of ordinary shares used in the calculation of basic earnings per share as follows: Weighted average number of ordinary shares used in the calculation of basic earnings per share Diluted impact of stock options December 31, 2011 (in thousands) December 31, 2010 (in thousands) 549,791 1,834 542,861 2,989 Weighted average number of ordinary shares used in the calculation of diluted earnings per share 551,625 545,850 The earnings used to calculate basic and diluted earnings per share for the year ended December 31, 2011 were $318,662 (2010 – $221,001). 30. Segment information Identification of reportable segments The Company has identified its operating segments based on the internal reports that are reviewed and used by the chief executive officer and the executive management (the chief operating decision makers or CODM) in assessing performance and in determining the allocation of resources. The CODM considers the business from both a geographic and product perspective and assesses the performance of the operating segments based on measures of profit and loss as well as assets and liabilities. These measures include operating profit, expenditures on exploration, property, plant and equipment and non- current assets, as well as total debt. During the year ended December 31, 2011, Eldorado had five reporting segments based on the geographical location of mining and exploration and development activities. 30.1 Geographical segments Geographically, the operating segments are identified by country and by operating mine or mine under construction. The Brazil reporting segment includes the Vila Nova mine, development activities of Tocantinzinho and exploration activities in Brazil. The Turkey reporting segment includes the Kis¸ladag˘ and the Efemçukuru mines and exploration activities in Turkey. The China reporting segment includes the TJS, Jinfeng and White Mountain mines, the Eastern Dragon development project and exploration activities in China. 104 eldoradogold.com NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 30. Segment information continued The Greece reporting segment includes the development activities of the Perama hill development project. The Other reporting segment includes operations of Eldorado’s corporate office and exploration activities in other countries. Financial information about each of these operating segments is reported to the CODM on at least a monthly basis. Turkey China Brazil Greece Other Total 2011 Information about profit and loss Metal sales from external customers 455,311 586,759 56,863 Production costs Depreciation Operating profit 117,189 198,995 30,300 11,342 104,154 4,689 326,780 283,610 21,874 – – – – – – 1,098,933 346,484 2,229 122,414 (2,229) 630,035 Other material items of income and expense Exploration costs Income tax expense 10,515 94,781 8,741 5,639 – 5,878 30,773 70,131 125 260 290 165,587 Information about assets and liabilities Property, plant and equipment 591,896 1,903,793 185,667 163,239 3,315 2,847,910 Goodwill Non-current assets – 365,928 – – – 365,928 591,896 2,269,721 185,667 163,239 3,315 3,213,838 Additions to property, plant and equipment during the year Total debt 166,601 82,249 17,532 2,902 2,062 271,346 – 81,031 – – – 81,031 Turkey China Brazil Greece Other Total 2010 Information about profit and loss Metal sales from external customers 339,151 443,699 8,325 Production costs Depreciation Operating profit 96,658 177,045 14,419 90,304 228,074 176,350 4,271 1,031 3,023 Other material items of income and expense Exploration costs Income tax expense 13,181 3,464 3,063 47,780 38,876 – – – – – – – – – 791,175 277,974 1,403 107,157 (1,403) 406,044 2,793 22,501 283 86,939 Information about assets and liabilities Property, plant and equipment 431,392 1,924,959 179,612 160,335 3,489 2,699,787 Goodwill Non-current assets – 365,928 – – – 365,928 431,392 2,290,887 179,612 160,335 3,489 3,065,715 Additions to property, plant and equipment during the year Total debt 141,001 101,089 9,560 2,368 2,421 256,439 – 166,663 – – – 166,663 Eldorado Gold 2011 Annual Report 105 NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 30. Segment information continued The Turkey and China segments derive their revenues from sales of gold. The Brazil segment derives its revenue from sales of iron ore. The measure of non-current assets does not include non-current inventories, investments in significantly influenced companies, deferred tax assets, and other items in restricted assets and other, including post- employment benefit assets. The measure of total debt represents the current and long-term portions of debt. 30.2 Economic dependence At December 31, 2011, each of our Chinese mines had one major customer, to whom each sells its entire production, as follows: TJS Mine Jinfeng Mine henan Zhongyuan Gold Smelter Factory Co. ltd. of Zhongjin Gold holding Co. ltd. China National Gold Group Corporation White Mountain Mine Refinery of Shandong humon Smelting Co. ltd. 30.3 Seasonality/cyclicality of operations Management does not consider operations to be of a significant seasonal or cyclical nature. 31. Events occurring after the reporting date On December 18, 2011, the Company announced that it had entered into a definitive agreement with European Goldfields limited (“European Goldfields”) pursuant to which Eldorado agreed to acquire all of the issued and outstanding common shares of European Goldfields by way of a plan of arrangement (the “Arrangement”) under the Yukon Business Corporations Act. under the Arrangement, shareholders of European Goldfields will receive 0.85 Eldorado shares and CDN$0.0001 in cash per European Goldfields share (the “Exchange Ratio”). Each outstanding option of European Goldfields shall be exchanged for options of Eldorado that will entitle the holder to receive, upon the exercise thereof, Eldorado shares based upon the Exchange Ratio and otherwise on the same terms and conditions as in the original European Goldfields option. The total transaction value is estimated to be approximately CDN$2.4 billion based on the Eldorado share price on February 23, 2012. The transaction was to be carried out by way of a court-approved plan of arrangement and required shareholders’ approval. The shareholders of both Eldorado and European Goldfields approved the transaction on February 21, 2012 and court approval was obtained on February 22, 2012. 106 eldoradogold.com NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 32. Explanation of transition to IFRS The accounting policies set out in Note 3 have been applied in preparing the financial statements for the year ended December 31, 2011, the comparative information presented in these financial statements for the year ended December 31, 2010 and in the preparation of an opening IFRS balance sheet at January 1, 2010 (Eldorado’s date of transition). In preparing its opening IFRS balance sheet, Eldorado has adjusted certain amounts reported previously in financial statements prepared in accordance with Canadian GAAP. An explanation of how the transition from Canadian GAAP to IFRS has affected Eldorado’s financial position, financial performance and cash flows is set out in the following tables and the notes that accompany the tables. 1. Initial elections upon adoption Set out below are the applicable IFRS 1 exemptions applied by Eldorado in the conversion from Canadian GAAP to IFRS: 1.1 IFRS exemption options: Exemption for business combinations IFRS 1 provides the option to apply IFRS 3, ‘Business combinations’, prospectively from the transition date or from a specific date prior to the transition date. This provides relief from full retrospective application that would require restatement of all business combinations prior to the transition date. The Company elected to apply IFRS 3 prospectively to business combinations occurring after its transition date. Business combinations occurring prior to the transition date have not been restated. Exemption for share-based payment transactions An IFRS 1 exemption allows the Company to not apply IFRS 2, ‘Share-based payment’, to equity instruments granted after November 7, 2002 that vested before the date of transition to IFRS. The Company has elected to take the exemption and, as a result, was only required to recalculate the impact on any share based payments that have not vested at the date of transition. Exemption for employee benefits IFRS 1 provides relief from applying IAS 19, ‘Employee benefits’, for the recognition of actuarial gains and losses. In line with the exemption, the Company elected to recognize all cumulative actuarial gains and losses that existed at its transition date in opening retained earnings for all its employee benefit plans. Exemption for borrowing costs IFRS 1 allows a first time adopter to apply the transitional provisions set out in IAS 23, 'Borrowing Costs'. Taking this exemption allows the Company to apply IAS 23 prospectively from the date of transition. The Company has not elected to adopt the remaining voluntary exemptions or they do not apply to the Company. 2. Reconciliations of Canadian GAAP to IFRS IFRS 1 requires an entity to reconcile equity and comprehensive income from that previously reported under Canadian GAAP to that under IFRS. The following tables represent the reconciliation from Canadian GAAP to IFRS for the opening balance sheet (January 1, 2010) and at December 31, 2010. The Company’s first-time adoption did not have an impact on cash flows. As there were no material adjustments to cash-flows, no reconciliation has been provided. Eldorado Gold 2011 Annual Report 107 NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 32. Explanation of transition to IFRS continued 2.1 Opening balance sheet (January 1, 2010) Assets Current assets Cash and cash equivalents Restricted cash Marketable securities Accounts receivable and other Inventories long term inventories Restricted assets and other Property, plant and equipment Goodwill Liabilities & Equity Current liabilities Note Canadian GAAP January 1, 2010 Effect of transition to IFRS 265,369 50,000 13,951 26,434 129,197 484,951 31,534 13,872 – – – – – – – (113) IFRS 265,369 50,000 13,951 26,434 129,197 484,951 31,534 13,759 (a); (c); (f) 2,580,816 (53,249) 2,527,567 324,935 3,436,108 – 324,935 (53,362) 3,382,746 Accounts payables and accrued liabilities (bii); (e) Current debt Deferred income taxes Debt Asset retirement obligations Pension fund obligation Deferred income taxes (aii) (c) (b) (a); (c); (e); (f) Non-controlling interests (d) Equity Share capital Contributed surplus Accumulated other comprehensive income Deficit Total equity attributable to shareholders of the Company 157,250 56,499 4,264 218,013 134,533 26,566 – 390,242 769,354 26,144 2,671,634 17,865 2,227 (51,116) (4,214) – (4,264) (8,478) – 429 7,811 (34,817) (35,055) (26,144) 153,036 56,499 – 209,535 134,533 26,995 7,811 355,425 734,299 – – – – 2,671,634 17,865 2,227 (18,307) (69,423) 2,640,610 (18,307) 2,622,303 Attributable to non-controlling interests (d) – 26,144 26,144 2,666,754 3,436,108 7,837 2,648,447 (53,362) 3,382,746 108 eldoradogold.com NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 32. Explanation of transition to IFRS continued 2.2 Balance sheet (December 31, 2010) Note Canadian GAAP December 31, 2010 Effect of transition to IFRS (aii) 314,344 52,425 8,027 42,437 147,263 606 565,102 29,627 6,202 19,328 – – – – – (606) (606) – – – IFRS 314,344 52,425 8,027 42,437 147,263 – 564,496 29,627 6,202 19,328 (ai); (c) 2,793,722 (93,935) 2,699,787 365,928 3,779,909 – 365,928 (94,541) 3,685,368 Assets Current assets Cash and cash equivalents Restricted cash Marketable securities Accounts receivable and other Inventories Deferred income taxes long term inventories Investment in significantly influenced company Restricted assets and other Property, plant and equipment Goodwill Liabilities & Equity Current liabilities Accounts payables and accrued liabilities (bii); (e) 152,781 Current debt Deferred income taxes Debt Asset retirement obligations Pension fund obligation Deferred income taxes Non-controlling interests Equity Share capital Contributed surplus Accumulated other comprehensive income Retained earnings (deficit) Total equity attributable to shareholders of the Company Attributable to non-controlling interests (aii) (c) (b) (a); (c); (e) (d) (bi) (d) 98,523 2,915 254,219 68,140 24,275 – 430,020 776,654 36,021 2,814,679 22,967 998 128,590 2,967,234 – 3,003,255 3,779,909 (7,086) – (2,915) (10,001) – 8,953 12,019 (99,508) (88,537) (36,021) – – (2,635) (3,369) (6,004) 36,021 30,017 145,695 98,523 – 244,218 68,140 33,228 12,019 330,512 688,117 – 2,814,679 22,967 (1,637) 125,221 2,961,230 36,021 2,997,251 (94,541) 3,685,368 Eldorado Gold 2011 Annual Report 109 NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 32. Explanation of transition to IFRS continued 2.3 Reconciliation of Total Comprehensive Income Reconciliations between the Canadian GAAP and IFRS total comprehensive income for the year ended December 31, 2010 are provided below: Comprehensive Income under Canadian GAAP Profit adjustments Reduction in pension expense Increase in depreciation of asset retirement obligation (net of tax) Decrease in severance provision expense (net of tax) Revision to asset retirement obligation liability (net of tax) Foreign exchange (loss) gain on reversal of deferred income tax Tax adjustment to reflect foreign exchange difference Other comprehensive income adjustments Recognition of actuarial gains/losses in other comprehensive income Total IFRS adjustments to comprehensive income Comprehensive Income under IFRS Explanatory Notes Note (b) (c) (e) (c) (a) (aii) (bi) Year ended December 31, 2010 222,291 1,037 (274) 300 (866) 12,223 2,518 (2,635) 12,303 234,594 a) (i) under IFRS, deferred income taxes are not recognized on an asset acquisition providing certain conditions are met, whereas they are under Canadian GAAP. During 2008, Eldorado completed the acquisition of Frontier Pacific Corporation (“Frontier”) and accounted for this transaction as an asset acquisition. Accordingly, a deferred tax liability was recognized under Canadian GAAP. The reversal of the deferred income tax liability recognized on the acquisition of Frontier results in an adjustment to decrease property, plant and equipment by $51,440, decrease deferred income tax liabilities by $37,582 and increase deficit by $13,858 at January 1, 2010. Further, in 2010 Eldorado completed the acquisition of all of the issued and outstanding common shares of Brazauro that it had not already owned. This transaction was accounted for as an asset acquisition and a deferred income tax liability was recorded under Canadian GAAP. The reversal of the deferred income tax liability recognized under Canadian GAAP resulted in an adjustment to decrease property, plant and equipment by $47,682 and decrease deferred income tax liabilities by $49,441 as of December 31, 2010 and a foreign exchange gain of $1,759 being recognized in the income statement for the year ended December 31, 2010. The reversal of these deferred income tax liabilities resulted in a reduced foreign exchange movement under IFRS compared to Canadian GAAP during the year ended December 31, 2010, resulting in an adjustment to further decrease deferred income tax liabilities by $1,685 and an increase in foreign exchange gain for the same amount. 110 eldoradogold.com NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) 32. Explanation of transition to IFRS continued (ii) under Canadian GAAP, no future tax assets or liabilities are recognized for temporary differences associated with the cost of non-monetary assets and liabilities of subsidiaries where the tax basis is measured in a currency different from the functional currency. IFRS requires that deferred taxes be recognized in respect of these foreign exchange differences by translating the tax bases of the assets and liabilities at the year end rate and comparing them to the accounting carrying value calculated at historical rates. upon adoption of IFRS, this resulted in an adjustment to decrease property, plant and equipment by $1,864, decrease deferred income tax liability by $1,620 and increase the deficit by $244. Further to the adjustment at January 1, 2010, for the year ended December 31, 2010 this resulted in an adjustment to decrease the deferred income tax liability by $11,297, increase foreign exchange gain by $8,779 and decrease deferred income tax expense by $2,518. As required under IFRS, all deferred taxes are reclassified and presented as non-current in the balance sheet. b) (i) under Canadian GAAP, Eldorado applied the corridor method of accounting for actuarial gains and losses. under this method, gains and losses are recognized only if they exceed specified thresholds. under IFRS the Company has not used the corridor method, resulting in the carrying value of the net liability for pension fund obligations and deficit increasing by $2,020 to recognize cumulative net actuarial losses as at January 1, 2010 in accordance with the IFRS exemption. For the year ended December 31, 2010, actuarial losses of $2,635 were recognized within other comprehensive income. (ii) under IFRS, Eldorado expenses the cost of past service benefits awarded to employees under post employment benefit plans over the year in which the benefits are vested. under Canadian GAAP, Eldorado expensed past service costs over the weighted average service life of active employees remaining in the plan. This adjustment increased benefit fund obligations and deficit by $2,665 as at January 1, 2010. For the year ended to December 31, 2010 this resulted in an adjustment to decrease the pension expense by $1,440, decrease the foreign exchange gain by $403 and decrease the pension liability by $1,037. As required under IFRS, the pension liability is presented as a separate line item. Accordingly, these amounts have been reclassified in the financial statements. c) IFRS requires that asset retirement obligations are discounted using a current discount rate specific to the related future liability or a risk-free interest rate if risks are incorporated into the related cash flows. under Canadian GAAP, a credit adjusted risk-free rate was used. As a result, the asset retirement obligation recorded at January 1, 2010 has been re-measured using the risk-free discount rate in effect at that date, given that risks have been incorporated into the related cash flows, and an adjustment has been recorded to the corresponding asset. This resulted in an increase in property, plant and equipment of $370, an increase in asset retirement obligation of $429, a decrease in the deferred income tax liability of $11 and an increase in deficit of $48 at January 1, 2010. As a result of this, the annual accretion of the liability increased under IFRS. In addition to the adjustment at January 1, 2010, the Company revised the asset retirement obligation estimates at December 31, 2010, resulting in an adjustment to the asset retirement obligations and property, plant and equipment. under IFRS, the asset retirement obligation recorded at December 31, 2010 has been re-measured using the discount rate in effect at that date, and an adjustment has been recorded to the corresponding asset. This item resulted in an increase in property, plant and equipment of $6,996, an increase in asset retirement obligation of $8,524, a decrease in the deferred income tax liability of $388, an increase in asset retirement obligation costs of $1,163 all as at December 31, 2010, and for the year ended December 31, 2010 an increase in depreciation of $365 and a decrease in deferred income tax expense of $297 related to the asset retirement obligation costs and $91 related to the depreciation. Eldorado Gold 2011 Annual Report 111 NOTES TO ThE CONSOlIDATED FINANCIAl STATEMENTS December 31, 2011 and 2010 (expressed in thousands of US dollars, unless otherwise stated) d) e) under IFRS, the non-controlling interests’ share of the net assets of subsidiaries is included in equity and their share of the comprehensive income of subsidiaries is allocated directly to equity. under Canadian GAAP, non-controlling interests were presented as a separate item between liabilities and equity in the statement of financial position and the non-controlling interests’ share of income and other comprehensive income were deducted in calculating net income and comprehensive income of the entity. Non-controlling interest of $26,144 at January 1, 2010 has been reclassified to equity. Similar adjustments were made at December 31, 2010 of $36,021. IFRS requires provisions to be recorded at fair value rather than carrying value, therefore the severance provision at January 1, 2010 in Turkey was reduced by $975, creating a deferred tax liability of $195 on transition. The offsetting entry for these adjustments was recorded against retained earnings. During the 2010 year the provision was decreased by $375 and the deferred tax liability increased by $75. The decrease has been accrued over the year on a straight-line method, with the offsetting entry recorded in the income statement. f) As part of the IFRS transition and the evaluation of components of property, plant and equipment, the Company recorded at January 1, 2010 a decrease of $315 to property, plant and equipment, a decrease of $63 to the deferred tax liability and an increase of deficit of $252. 112 eldoradogold.com Directors Senior Management Dale l. Churcher VP, Engineering Doug M. Jones Senior VP, China Peter D. lewis VP, Exploration Eduardo E. Moura VP, Corporate Development Paul J. Skayman Senior VP, Operations Nancy E. Woo VP, Investor Relations Brazil Operations lincoln Silva General Manager and Director 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 S¸ irketi China Operations Richard (Shilin) li Managing Director, China Greece Operations George Markopoulos General Manager and Director Thracean Gold Mining SA 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 Robert R. Gilmore 1,2 Denver, CO, uSA Non-executive Chairman of the Board (Independent Director) Timothy C. Baker 4 Toronto, ON, Canada (Independent Director) K. Ross Cory 1,3 Vancouver, BC, Canada (Independent Director) Geoffrey A. handley 2,4 Bronte, NSW, Australia (Independent Director) Wayne D. lenton 2,4 Tucson, AZ, uSA (Independent Director) Michael A. Price 1,4 london, uK (Independent Director) Jonathan A. Rubenstein 2,3 Vancouver, BC, Canada (Independent Director) Donald M. Shumka 1,3 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 4 Environmental, Health & Safety Committee Officers Paul N. Wright President & Chief Executive Officer Fabiana E. Chubbs Chief Financial Officer Norman S. Pitcher Chief Operating Officer Dawn l. Moss VP, Administration and Corporate Secretary CORPORATE INFORMATION Brazil unamgen Mineração e Metalurgia S/A Avenida Olegário Maciel, 1846 - Santo Agostinho Belo horizonte, MG, Brazil CEP 30180-112 Tel: 55-31-2101-3750 Fax: 55-31-2101-3758 China Eldorado Gold Corporation Room 1001, West Tower, lG Twin Towers B-12 Jianguomenwai Avenue, Chaoyang District, Beijing, China 100022 Tel: 86-10-5828-7966 Fax: 86-10-5828-7967 Turkey Tüprag Metal Madencilik Sanayi ve Ticaret A.S. Iran Caddesi Turan Emeksiz Sok. No. 1 06700 Gaziosmanpasa / Ankara Turkey Tel: 90-312-468-4536 Fax: 90-312-468-2646 Greece Thracean Gold Mining SA 27, Omirou Street Athens, Greece, 10672 Tel: 30-210-363-3930 Fax: 30-210-363-3383 Legal Counsel Fasken Martineau DuMoulin llP Vancouver, BC, Canada Dorsey & Whitney llP Denver, CO, uSA Auditors KPMG llP Chartered Accountants Vancouver, BC, Canada Eldorado Gold 2011 Annual Report 113 ShAREhOlDER INFORMATION Transfer Agents Valiant Trust Company 600-750 Cambie Street Vancouver, BC Canada V6B 0A2 Shareholder Inquiries line (Toll-Free): 1-866-313-1872 Email: inquiries@valianttrust.com In Australia: link Market Services limited Postal Address: locked Bag A14 Sydney South NSW 1235 Phone: 1-800-218-694 International: +61-2-8280-7601 Fax: +61-2-9287-0303 Email: registrars@linkmarketservices.com.au Stock Exchanges The Toronto Stock Exchange Stock Symbol: ElD The New york Stock Exchange Stock Symbol: EGO Australian Securities Exchange Stock Symbol: EAu 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 40-F and other corporate and continuous disclosure documents available on the Company’s website, CDS SEDAR website (www.sedar.com), the uS Securities and Exchange Commission EDGAR website (www.edgar-online.com) and the Australian Securities Exchange website (www.asx.com.au). Section 303A.11 of the NySE listed Company Manual permits foreign private issuers to follow home country practices in lieu of certain provisions of the NySE listed Company Manual. A foreign private issuer that follows home country practices in lieu of certain provision of the NySE listed Company Manual must disclose any significant ways in which its corporate governance practices differ from those followed by domestic companies. A description of the significant ways in which the Company’s governance practices differ from those followed by domestic companies pursuant to the NySE listed Company Manual is available on the Company’s website at www.eldoradogold.com. Website: www.eldoradogold.com Investor Relations Email: info@eldoradogold.com 114 eldoradogold.com Cautionary Notes Cautionary Note about Forward-Looking Statements and Information Certain statements and information in this Annual Report, including all statements that are not historical facts, are 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, cash costs, and future growth, 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 Annual Report, we have made numerous assumptions including among other things, assumptions about the price of gold and other commodities; exchange rates; anticipated costs and expenditures; estimated production, mineral reserves and metallurgical recoveries; the impact of the integration of acquired businesses on our operation, financial position, reserves and resources and gold production; and the 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; risks of not meeting production and cost targets; discrepancies between actual and estimated production, mineral reserves and resources and metallurgical recoveries; mining operational and development risk; litigation risks; regulatory restrictions, including environmental regulatory restrictions and liability; risks of sovereign investment and operating in foreign countries; currency fluctuations; speculative nature of gold exploration; global and local economic climate; prices for energy inputs labour, material costs and other supplies remaining consistent with expectations; dilution; share price volatility; the impact of the European Goldfields acquisition, including the expanded portfolio of projects on our operations, capital requirements and financial condition; risks related to the integration of acquired businesses, including the risk that the integration of European Goldfields may take longer than expected, the anticipated benefits may be less than estimated and the cost higher than anticipated; ability to complete acquisitions; competition; ability to obtain financing; environmental risks; share price volatility; 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 Annual Report except as may be required by law. All forward-looking statements and information made in this document are qualified by this cautionary statement. Cautionary Note about Production Outlook, Guidance and Estimates Readers are cautioned that production outlook, guidance and estimates are subject to a variety of factors that are likely to cause actual results to vary from our estimates, and such variations may be material. Forward-looking information generally involves risks and uncertainties as described above that are, in many instances, beyond our control, including: (i) global economic conditions; (ii) pricing and cost factors; (iii) unanticipated events or changes in current development plans, execution of development plans, future operating results, financial conditions or business over time; and (iv) unfavourable regulatory developments that could cause actual events and results to vary significantly from those included in or contemplated by such statements. The production outlook, guidance and estimates reflect certain assumptions by us, which assumptions may differ with respect to future events, economic, competitive and regulatory conditions, financial market conditions and future business decisions, including, without limitation, a continuation of existing business operations on substantially the same basis as currently exists, all of which assumptions are difficult to predict and many of which are beyond our control. Accordingly, there can be no assurance that the outlook, guidance and estimates are indicative of our future performance or that actual results would not differ materially from those in the outlook, guidance and estimates. Cautionary Note to US Investors Concerning Estimates of Measured, Indicated and Inferred Resources The terms “mineral resource”, “measured mineral resource”, “indicated mineral resource” and “inferred mineral resource” used herein are Canadian mining terms used 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 and Metallurgy and Petroleum (the “CIM”) Standards on Mineral Resources and Mineral Reserves, adopted by the CIM Council, as may be amended from time to time. These definitions differ from the definitions in the United States Securities & Exchange Commission (“SEC”) Industry Guide 7. In the United States, a mineral reserve is defined as a part of a mineral deposit that could be economically and legally extracted or produced at the time the mineral reserve determination is made. 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 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 herein concerning descriptions of mineralization and resources under Canadian standards may not be comparable to similar information made public by U.S. companies in SEC filings. With respect to “indicated mineral resource” and “inferred mineral resource”, there is a great amount of uncertainty as to their existence and a great uncertainty as to their economic and legal feasibility. It cannot be assumed that all or any part of an “indicated mineral resource” or “inferred mineral resource” will ever be upgraded to a higher category. Accordingly, information herein containing 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. Working together successfully to reduce costs – please consider signing up for e-delivery Eldorado Gold’s international success in exploring, developing, financing and operating mines is supported by loyal existing shareholders and has attracted the interest of new investors. With your support, we have: ● acquired or built seven mines and are operating them profitably, ● started paying dividends and increased them significantly in 2011, and ● successfully increased margins. We believe that Eldorado is well positioned to grow in value as we create and pursue new opportunities in gold and other resources. It is very important for us to sustain good relationships with our investors and the communities we operate in. To focus on what we do best and to communicate with you in a more direct and timely manner, we are asking for your support. We currently spend a substantial amount of resources to disseminate required shareholder information in hard copy. To help us save money, time and trees, and reduce greenhouse gases, please consider receiving the annual shareholder information in electronic format. Based on our previous mailings, this would save us more than $500,000 per year, which we would rather invest into the business to continue to grow your company. If you are a beneficial shareholder, please go to www.investordelivery.com to sign up for e-delivery. You will be asked to include the 12-digit control number located on the enclosed Voting Instruction Form. If you or other household members have several accounts at the same investment dealer, please ask them to remove any duplicate mailings or to consolidate your account. Thank you. Kis¸ladag˘ TSX: ELD NYSE: EGO ASX:EAU Eldorado Gold Corporation 1188 Bentall 5, 550 Burrard Street, Vancouver, BC Canada V6C 2B5 www.eldoradogold.com email: info@eldoradogold.com Telephone: 604.687.4018 Fax: 604.687.4026