Trading Update for the First Half of 2011

16.08.2011

Highland Gold Mining Limited ("Highland Gold" or the "Company") is pleased to announce its trading update for the half year ended 30 June 2011. Full financial results for this period will be released on or about 19 September 2011.

HIGHLIGHTS

  • Mnogovershinnoye ("MNV"), Novoshirokinskoye ("Novo") (48.3% shareholding) and Belaya Gora combined produced 93,057 oz of gold and gold equivalents - an 8.5% increase on 1H 2010 production
  • The Company is un-hedged and realised an average gold sales price of US$1,453/oz in 1H 2011, a 25% increase over the prior year period
  • MNV exploration programme continues to target potential resources adjacent to existing operations
  • New JORC compliant audit increases MNV reserves by 190%
  • Novo continues production ramp up resulting in a 33% increase in processed tonnes compared to 1H 2010
  • Belaya Gora select oxide ore processing via MNV continued during the first half of 2011 and pre-construction preparations for a stand-alone processing facility remained on track with the submission of design documentation to Federal authorities
  • 1.38 million oz of C1+C2 reserves at Unkurtash approved by the State Committee on Reserves in Kyrgyzstan
  • Exploration drill works and underground development at Unkurtash site provides support for potential continuity of mineralisation along strike and at depth
  • Exploration work at Lyubov being compiled for GKZ regulatory submission and commencement of JORC audit by year end 2011
  • Blagodatnoye and Belaya Gora Flanks exploration properties continue to provide promising intercepts
  • The Company remains on track to produce 210,000 - 220,000 oz of gold and gold equivalents in 2011

OPERATIONS

Mnogovershinnoye (MNV) - Khabarovsk region, Russia

Overall production remained in line with Company targets. During the first half, process plant throughput accounted for 499,082 tonnes of ore with 71,926 oz of gold produced. Production was impacted by poor weather conditions in the first quarter but results have improved in recent months and operating conditions are normal. Upgrades to the process plant have been completed with the target of improving recovery levels to approximately 90% in the second half of 2011.

Mined ore tonnes and waste stripping volumes were both on target and equated to a 10% improvement on 1H 2010 performance. New mining equipment introduced in 2010 has helped in maintaining production targets as well as controlling operating costs. Additional equipment now in transit is expected to arrive on site during the second half of the year and will make a positive impact on production by providing an opportunity to retire some less efficient units. The near mine exploration programme continued drilling and trenching adjacent to existing mine workings and is focused on converting resources to reserves as well as adding potential new resources to help offset production depletion.

A 190% increase in proven and probable reserves resulted from a new JORC compliant audit carried out from June 2010 to July 2011. The primary factor for the increase in reserves was the use of a higher gold price assumption than in the previous audit from 2005.

MNV 100% Units 1H 2011 1H 2010
Mine development    
Waste stripping m3 790,897 713,390
Underground development metres 2,915 3,627
Mining    
Total ore mined tonnes 606,440 550,018
Average grade g/t 4.6 5.1
Ore processing    
Ore processed tonnes 499,082 521,855
Average grade g/t 5.2 5.2
Recovery rate % 87.7 88.1
Gold produced oz 71,926 75,771

Novoshirokinskoye (Novo) - Zabaikalsky region, Russia

Novo mine continued its ramp-up of operations and remains in line with expectations. Production improvements are expected to continue in both ore mining and processing with approximately. 450,000 tonnes of ore expected to be produced by year end. During the first half, underground ore production, waste development metres and processed ore throughput all exceeded their respective targets. Access to additional stoping blocks continues as a main focus of underground development in order to provide flexibility in future ore supply to the process plant.

Novo 100% Units 1H 2011 1H 2010
Mine development    
Underground development metres 3,614 3,143
Mining    
Ore mined tonnes 218,978 121,748
Average grade * g/t 6.6 6.1
Processing    
Ore processed tonnes 217,953 163,323
Average grade * g/t 6.6 5.4
Recovery rate * % 84.9 78.0
Gold Produced *
HGML (48.3%) interest
oz
oz
39,214
18,940
20,741
10,018

     *calculated approximate Au equivalent

DEVELOPMENT PROJECTS

Belaya Gora - Khabarovsk region, Russia

Belaya Gora 100% Units 1H 2011 4Q 2010
Mining    
Waste stripping m3 202,310 226,000
Total ore mined tonnes 225,190 76,000
Average grade g/t 2.1 1.7
Select ore to MNV tonnes 42,265 26,700
  g/t 2.6 2.4
Ore processed at MNV    
Ore processed tonnes 30,460 10,971
Average grade g/t 2.6 3.3
Recovery rate % 87.3 87.3
Gold produced oz 2,191 1,000

The Belaya Gora project continued to build momentum. The stand-alone process plant designs were completed and submitted to government authorities in anticipation of receiving the permit for construction in 2H 2011. Open pit ore and waste mining operations were maintained in order to increase ore stock feed for the future plant. During the first half of 2011 30,458 tonnes of ore were processed at MNV and resulted in the production of 2,191 ounces of gold. Oxide ore processed was lower than plan due to previously noted delays at MNV.

Taseevskoye - Zabaikalsky region, Russia

A new drilling programme, deemed critical for future design, was initiated during 1H 2011 for ore characterisation. This programme will ensure that the planned semi-industrial pilot test works will be completed using fully representative samples from each of the varying ore zones located within the potential open pit. Once collected, these samples will be used in the final process flotation and autoclave recovery tests which are now expected in 2012. The Company believes this to be a prudent course of action to ensure that test lab results can be reproduced in an industrial production environment.

EXPLORATION

In 1H 2011 the Company substantially increased its exploration budget to more than US$10 million out of a planned full year expenditure of US$30 million.

Unkurtash - Kyrgyzstan

The approval of an initial 42.9 tonnes (1.38 million oz) gold reserves (C1+C2 category) by the regulatory authorities of Kyrgyzstan marked a major milestone for the development of the Unkurtash project and increased the overall GKZ reserves of the Company as stated at 31 December 2010 by 19%. In 1H 2011 the Company continued with its drilling programmes at three targets - Unkurtash, Sarytube and Karatube where a total of more than 27,000 metres of reverse circulation and diamond core drilling and 1,000 metres of new underground development were completed in order to delineate mineral resources. Drilling results obtained continue to support the potential of the property for hosting a world class open-pit mineable gold resource at Unkurtash and Sarytube. Final assays with evaluation of results are expected to be completed by 1Q 2012. The Company's ongoing 2011 drilling programme allocates over 50,000 metres of reverse circulation and diamond core drilling as well as advancing 3,000 metres of underground exploration development in order to test the continuity of the mineralisation across the three prospects. A JORC compliant resource audit is anticipated to be completed during 2H 2011.

Lyubov - Zabaikalsky Region, Russia

In 1H 2011 the Company completed a 1,700 metre diamond core drilling programme designed to convert part of prognostic P1 resources into the C1+C2 category at the Evgraf target as well as providing data for regulatory submittals.In order to accelerate the project towards reserve registration, 12,000 metres of drilling were completed last year. Final assays with evaluation of results were completed in 1Q 2011 and drilling results obtained to date remain in-line with the Company's own resource model. Independent metallurgical test work during the first half was aimed at corroborating previous tests, indicating conventional process methodologies. This work will be finalised and submitted by year end along with exploration data results for consideration by the regulatory authorities in development of reserves. A JORC compliant resource audit is planned to follow shortly thereafter.

Blagodatnoye - Khabarovsk region, Russia

At the Blagodatnoye prospect located 30 km to the southwest of the Belaya Gora Project the Company completed 4,000 metres of diamond core drilling and 1,000 metres of trenching in 1H 2011. This work is part of a programme of 10,000 metres of drilling aimed to delineate the extent and continuity of widespread gold mineralisation which was confirmed during the Company's initial 2010 exploration programme. Historic government data has previously reported a prognostic resource estimate of 161,000 of gold at Blagodatnoye. Assay results received to date indicate the potential for Blagodatnoye to host substantial near surface resources grading between 1.0 and 2.0 g/t and support potential to significantly exceed the historic resource estimate. Final assays with evaluation of drilling results are planned to be completed in H2 2011.

Belaya Gora Flanks - Khabarovsk region, Russia

During 1H 2011 the Company commenced its trenching and diamond drilling programme at several gold prospects historically known to be located within the license area. The 2H 2010 acquisition included the exploration and mining rights for the license area (a total of 33 sq km) which encapsulates the Belaya Gora deposit and represents excellent near-mine exploration potential. Total trenching of 2,000 metres and 3,000 metres of diamond core drilling have been completed to date, with assay results providing several promising intercepts.

Mnogovershinnoye - Khabarovsk region, Russia

At the Pebble and Quiet prospects the Company continues with its near-mine surface exploration programme, which in 2011 will allocate 8,000 metres of resource definition diamond core drilling, including the testing of 0.6 kilometres of undrilled sections along the entire length of the Pebble and Quiet zones. Assay results received to date continue to be in line with the reserve models' potential to add to the life of mine ounces. In addition, the underground diamond core drilling programme remains on target to complete 16,000 metres drilled by year end.

Mr. Werner Klemens, Head of Exploration at Highland Gold has reviewed and verified the information contained in this release with respect to drilling and resource / reserves matters. Mr. Klemens holds a Ph.D. in Geology from the University of Toronto. He has 13 years of experience in mineral exploration and is a fellow of the Geological Association of Canada. A rigorous quality assurance programme complying with international standards is in effect at all exploration projects and includes duplicate sampling, insertion of standards and check assaying at external laboratories.

HEALTH, SAFETY & ENVIRONMENT

During the first half of 2011 the Group's overall safety performance was negatively impacted by incidents involving ancillary vehicles, accounting for seven lost time injuries out of a total eleven recorded during the period. A review of all incidents noted that poor weather conditions and individual errors were the major contributors resulting in several corrective measures and controls being implemented. As a result, the lost time incident (LTI) rate (the LTI rate is the number of lost time incidents for every 200,000 man hours worked) increased to 0.84 up from 0.25 achieved during 1H 2010.

746 employees went through introductory (1 day) safety training, 235 employees completed courses in safe working methods, labour protection and industrial (3/5 days) safety training and 291 employees were involved in industrial safety certification by the RosTechNadzor Agency. In addition, special courses included 51 drivers and 13 managers receiving vehicle safety and driving training with a focus on vehicular incident mitigation.

Our approach to Health and Safety remains a focus for improvement and in keeping with this approach, licenses were obtained for site medical facilities at both MNV and Novo operations. These licenses are expected to help improve medical response times and health testing services for employees.

Environmental compliance remained in good standing with regulatory authorities. Environmental safety training was provided to 68 employees at MNV, Belaya Gora and Taseevskoye. The Company has progressed with its programme of Environmental Management Systems (EMS) through an independent consultant specialising in ISO 14001 standards. The programme is expected to continue through to the end of 2012 at which time certification is targeted.

NEW APPOINTMENTS

During the latter part of the first half of 2011, two new appointments to the management team took place.

Tatyana Breeva retired as Chief Financial Officer of the Company. We are grateful for her valuable input as CFO since 2008. Alla Baranovskaya has joined the Company as the new CFO. After graduating with honors from the Economic faculty of the Moscow State University, she worked as the CFO in oil companies Slavneft and Russneft. Before joining Highland Gold, Alla was the CFO in the West Alumina Division of Rusal.

Ulan Kachkynbekov joined the Company as General Director of Highland Exploration LLC which oversees the Unkurtash operation. He graduated from the underground mining faculty of the Kyrgyz Mining and Metallurgical Institute as a specialist in mining engineering. Prior to joining the Company, he worked for Kumtor Gold, Frontier Mining Ltd., European Minerals, Global Gold and Kazakhmys Gold Kyrgyzstan.

For further information please contact:

Highland Gold

 

Dmitry Yakushkin, Head of Communications + 7 495 424 95 21
  Duncan Baxter, Chairman + 44 (0) 1534 814 202
   
Matrix

 

Robin Henshall, +44 (0) 20 3206 7172
(Nominated Adviser and broker) Nick Stone, +44 (0)20 3206 7343
   
Fin Public Relations Alex Glover + 44 (0) 20 7608 2280