Overview On 4 September 2003, Highland Gold announced it had reached a conditional agreement to acquire 100% of JSC Mayskoye, the holder of a license to develop the Mayskoye deposit. The Mayskoye gold deposit, in the far northeast of the Russian Federation, was first identified in 1972 in the course of regional geological mapping. Preliminary exploration of the deposit commenced in 1974, followed by an intensive programme of geological exploration and resource definition by geophysical survey, drilling and underground development, which was completed in 1986.

Aerial view of Mayskoye

Throughout the exploration phase, various Russian institutes conducted metallurgical testwork on samples obtained from drilling and underground development. Further work continued sporadically until 1999, in order to confirm a technically and economically viable process for the refractory sulphide mineralisation.

The Mayskoye gold deposit is located in the Chaunski District of the Chukotka Autonomous Territory, in the far northeast of the Russian Federation. The location is remote tundra upland, although there is infrastructure development associated with earlier alluvial gold and tin production, which is now much curtailed, and commercial caribou farming. The project area is 10 km2 in area and its approximate coordinates are 173º 46´ east longitude and 68º 59´ north latitude.

Access and supply is via the seasonal (May to October) Arctic seaport of Pevek, which also has an airport suitable for all types of aircraft. The deposit is linked to Pevek by road via Komsomolsky, a small mining centre 58 km northwest of Mayskoye, a total distance of 187 km. The section from Pevek to Komsomolsky is of adequate all-weather standard, but approximately 80 km between Komsomolsky and Mayskoye is temporary and will require upgrading. The physiography of the region is Arctic desert/tundra zone, with rolling topography to a maximum elevation of 450 m and typical wildlife and vegetation. The climate is harsh with temperatures in the long winter exceeding -30 ºC and in the short summer rarely exceeding +10 ºC. Average annual precipitation is 200-250 mm.

Mayskoye region

Geology

Exploration history

Initial prospecting and geological mapping of the Chaun region was conducted during the period 1953 to 1971. This work served to define the regional structure and to identify the main metallogenic features. The Mayskoye deposit was discovered in 1972 during the course of 1:50,000 geological mapping. The first prospecting work included mapping, chip sampling, heavy minerals sampling of talus and alluvial material as well as silt and soil geochemical surveys. Based on the results of the early exploration data it was decided to undertake a programme of exploration development of the deposit, which was completed by 1973. To speed up exploration an independent Mayskoye Geologic Exploration Expedition was organized in June 1977. The work of this organisation was completed by July 1986. In addition to the extensive geologic exploration, the area of the deposit was covered by various geophysical surveys.

Mayskoye location map

Summary of Exploration Work

An extensive amount of exploration work has been carried out on the property, including trenching and core drilling and the amount of physical work:

Summary of Exploration Work

Programme	Trenching (m³)	Diamond Drilling (m)	Underground Development (m)
Geologic Mapping & Prospecting 1971-72	1,000
Prospecting 1973	11,446
Mineral Resource Definition 1974-75	90,800	2,964	521
Mineral Resource Definition 1975-80	740,000	183,671	14,366
Mineral Resource Definition 1979-81	127,054	71,506	6,792
Mineral Resource Definition 1982-85	300	144,903	5,207
Summary 1971-1985	970,600	403,044	26,886

Mineralised zones exposed at surface were traced along strike by trenching at 20 m to 40 m intervals. Channel samples measuring 10 cm x 3 cm x 20 -150 cm were collected from mineralised portion of the trenches.

Boreholes were drilled on a grid of 50 m x 80 m to outline C1 (indicated) mineral resources and at a spacing of 100 m x 180 m for C2 (inferred) mineral resources. Approximately one quarter of the metres drilled utilised a rotary method with air flushing. The remaining portion was diamond drilled extracting 76 mm and 59 mm diameter core. Initially standard coring methods were employed. In 1978 wireline equipment was introduced and 59 mm and 46 mm core was produced.

The initial inclination of holes varied from 65o to 75o and hole depth ranged from 50 m to 1,196 m. Bore hole inclination was measured every 20 m. Drill core was sampled at various intervals depending on the geology of the zone. A total of 65% of the samples ranged from 0.4 m to 2.0 m with more than 30% of the samples 1 m long.

The deposit has been developed on two levels, at +298 m and at +200 m. Adit No. 1, collared at local coordinates -179,149 E, 354,874 N, is developed as a drive along No. 1 zone at the +298 m level. Adit No.2, collared at -179,660 E, 355,167 N, on the same level, is a crosscut with development drives on zones No. 2, 3, 5, 7, 10, 13 and 13A. Access to the +200 m level is via a 236 m long, 29o inclined shaft, which has been driven to cross cut a number of structures. The +200 m level is extensive and explored the No. 1, 2, 3, 6, 9, 10, 11, 13, 23, 24, and 32 zones.

Normally, the mineralised zones are traced along strike by drifting with short crosscut stubs driven to define vein width every 20 m. The drifts measure roughly 2.4 m x 2.4 m and range up to 3.1 m wide x 2.4 m high. To further investigate the mineralisation raises were driven between the +200 m and the +298 m levels at 160 m intervals along strike of B (measured) category mineral resources. Crosscut stubs were driven at 20 m intervals within each raise to define the limits of the mineralisation. The inclined shaft between the +298 m and +200 m levels was driven as a winze and measures 3 m x 3 m in cross section.

Mayskoye Geology

In-fill drill
programHighland Gold has initiated an in-fill drill program to begin the process of upgrading Inferred resource into the Measured and Indicated classification and the first phase of this in-fill program will consist of 4,000 meters of drilling through to the end of 2005. A parallel channel sampling program will also be carried out in the underground to obtain additional representative samples from all exposed ore bodies for metallurgical test work.

All drifts, raises and crosscuts were channel sampled with cuts measuring 10 cm x 3 cm and sample length varying from 20 cm to 150 cm. Drift faces were sampled at 3 m to 3.5 m intervals along strike and raises were sampled on both ribs across the strike at 4 m intervals. Initially samples were collected manually using hammer and moil, later channels were cut using handheld disk saws. Channel samples generally weighed between 6 kg and 8 kg per metre.

Sample data was verified by collecting and analysing panel samples measuring 1 m high, 5 cm deep and with width corresponding to the original sample length. In addition bulk samples were extended 0.5 m to 1.5 m into the face. Panel samples ranged from 40 kg to 100 kg and bulk samples ranged from 5 t to 20 t. A total of 73 panel samples and 39 bulk samples were collected.

Geology

The Mayskoye gold deposit is situated on the eastern flank of the Palyavaam synclinorium within the Chukotka Mesozoic fold system. The stratigraphy of the district is comprised of Triassic siltstone and sandstone units, which are unconformably overlain by Cretaceous stratified and subvolcanic formations and Early Cretaceous continental sedimentary rocks. The Cretaceous volcanic formations crop out to south of Mayskoye and form the Okhotsk-Chukotka volcanic belt. Intrusive rocks occur rarely as Cretaceous granitoids and acid subvolcanic bodies. The largest fold of the region is the Ichuveem anticline, which occurs near the deposit.

The Triassic rocks have been split into Middle, indivisible Middle and Upper, and Upper Triassic subunits with aggregate thickness ranging from 1700 m to 2500 m. The lowest part of the succession is predominantly fine grained rock (shale), the middle part comprises mainly sandstone and the upper subunit (Kamian and Norian ages) is predominated by siltstone and slate. Cretaceous volcanogenic and coal-bearing continental sedimentary rocks overlie Triassic rocks with angular unconformity. The Cretaceous volcanic succession consists of basic and acid tuffs, tuff lavas and ignimbrites. The continental sedimentary complex comprises sandstone, siltstone, shale, and coal bands. Unconsolidated Quarternary deposits occur throughout the district.

Localisation of gold mineralisation is controlled by northwest and northeast trending tectonic zones formed contemporaneously with Mesozoic folding. Gold mineralisation is spatially associated with northwest trending structures that strike sub parallel to the trend of Mesozoic folding. Exploration in the region beyond the Mayskoye deposit (7-30 km) has led to the discovery of a number of other gold occurrences, including the Promezhutochny, Vstrechny, Silny, Sopka Rudnaya and Pogranichny prospects.

Bedrock in the vicinity of the deposit consists of siltstones and slates, which have been intruded by a series of acid dykes. The dykes range to 100 m thick, extend for up to 2 km and make up about 10% of the total volume of the deposit area. The principal fold in the deposit area is a northeast trending anticline, which plunges southwards at 15° to 20°. The intrusions trend roughly parallel to the axis of the dominant anticline.

The structure of the deposit area is complicated by a series of faults, which strike in both sub parallel and transverse orientations to the trend of the principal direction of folding. Displacement along these structures ranges to hundreds of meters.

Three structural-stratigraphic domains are recognised within the deposit area. These include: Eastern, Central and Western. In the Western domain the stratigraphy dips 70° to east and hosts orebodies No. 24, 34, 35, 40, 41 and 43. The Central domain comprises the oldest and most deformed stratigraphy, which dips 50° to 60° to the east. Folding is most extensively developed where sandstone is dominant and isoclinal and overturned folds with north and northwest trend axes are evident. Orebodies No. 1, 2, 2a, 3, 13, 13a, 23, 29, 30, 31, 32 and 33 are located in the Central domain.

Mayskoye: cross section 28

The Eastern domain is underlain by sandstone and brittle deformation is widespread. The stratigraphy strikes north-northeast and is deformed into a series of open folds with limbs dipping gently from 5° to 15°. In the central portion of the block the stratigraphy dips more steeply at 40° to 60°. A series of orthogonal and diagonal faults are present which post date the intrusions of dykes in structures parallel to the fold axes. The Eastern block is host to orebodies No. 6, 9, 9a, 9b, 10, 11 and 28.

Mineralisation is controlled by two systems of fractures: steeply dipping (> 65°) and gently dipping (< 65°). The gently dipping mineralised zones occur parallel to stratigraphy and quartz and quartz-feldspar porphyry dykes. They occur as linear, tabular bodies, which pinch and swell from 0.6 m to 10 m thick. Contacts are usually sharp and rectilinear. The main factors affecting the form of the mineralised zones are the composition of the host rocks and the presence of early, pre-ore folds and faults. The most significant mineralised zones occur in successions of relatively uniformly dipping siltstone.

All zones have similar composition, and textural appearance and occur as shatter zones with relatively abrupt geological boundaries. The mineralised zones are metasomatically altered with weakly developed sericite and kaolinite in carbonaceous siltstones, slates, fine-grained sandstone, and less frequently in quartz porphyry dykes. These units are cut by quartz veinlets and contain fine-grained disseminations of gold-bearing sulfide minerals, mainly pyrite and arsenopyrite. Gold mineralisation is recognised to have occurred in three phases: gold - pyrite - arsenopyrite, quartz - stibnite and gypsum - carbonate.

Quartz comprises the bulk of the mineralisation with sulphide minerals varying from 1-3% to 10-l2% (average 6-8%). Pyrite and arsenopyrite occur as fine grained aggregates and uniform disseminations in brecciated quartz-altered rocks or in thin quartz veinlets. The ratio of pyrite to arsenopyrite is 2 or 3:1 and stibnite (0.1-2.0%) is usually present. Other materials include organic carbon, 0.03-0.9 %, (average 0.3 %) and Ag-bearing sulphosalts. Some 40 other minor minerals occur in small quantities. Orebodies No. 2 and 2a are distinct from the other mineralised zones having a higher degree of silicification. However, the sulphide component of the mineralisation remains similar to the other zones.

The gold content of the mineralisation varies from 3.0 to 40 g/t Au and averages 10 g/t Au. Silver ranges from 1.0 to 15 g/t Ag averaging 3.2 g/t. More than 80 % of the gold is enclosed in sulphides (pyrite, arsenopyrite) as dispersed submicroscopic disseminations. The native gold that does occur is intimately associated with arsenopyrite and has a fineness that ranges from 850 to 890. Silver occurs mainly in galena and sphalerite and rarely as argentite, native silver or miargyrite (AgSbS2). Overall the gold mineralisation is refractory and oxidation of the ore is required to facilitate the recovery of gold.

Mineral Resources and Ore Reeserves

Mayskoye mineral resources have been defined by a combination of core drilling and channel sampling of underground workings. The density of drilling used to define mineral resources varies but on average is approximately 50 m x 50 m and 100 m x 100 m. In addition channel samples collected at closely spaced intervals as described above were used to define mineral resources. In July 2005, the Company received an independent resource estimate from Micon International Co Limited (Micon). This estimate, prepared by Competent Person P. Gribble, C.ENG, has been reported in accordance with JORC guidelines. The resource uses a 5 g/t cut-off grade and is reported below.

Mayskoye: cross section 12

Mayskoye Mineral Resource Statement

Mayskoye Resource – 5 g/tonne	Tonnes (000)	Gold (g/tonne)	Gold(Ounces)
Measured	1,742	16.25	910,100
Indicated	5,151	9.92	1,643,040
Measured and Indicated	6,89	11.52	2,553,141
Inferred	15,020	9.88	4,768,800

Feasibility Study
We are in the process of preparing a feasibility study on the Mayskoye project. This work has been slower than anticipated due to the process of integrating work of the Russian institutes and our in-house engineers with international consultants from Micon, the independent engineering firm chosen for the study. The work program is moving forward and the study will be released once it is completed. Concurrent with this work, the Russian feasibility study has been submitted to the state authorities for their review and public hearings on the ecological and social aspects of the project have been held in Chukotka.

With steep dipping orebodies presenting just a small surface outcrop, the choice of conventional underground mining methods is quite clear. However production will be enhanced in the early years from a small open pit operation sited on the orebody outcrop.

Access and mining methods have been dictated by the terrain, the orebody structure and particularly by relevant Russian experience.

Open Pit

The open pit operations will generally extract the oxide ore cap to the orebodies together with some intermediate and fresh ore. The pit bottom will be located at +260 m level giving a total depth of approximately 80 m. The pit has a planned life of just four years with total production during that time of 670,000 t at a mined grade of 14.4 g/t. Waste and ore production is expected to continue throughout the year but there will be some periods in the middle of winter when efficiencies will fall to unacceptable levels and production will need to be suspended for a period. The overall strip ratio amounts to approximately 17.5:1.

Underground

Access to the underground mine will be by a combination of shafts and a spiral decline. Two major hoisting shafts will be sunk.

A hoisting shaft at 5.5 m diameter and 840 m deep will be dedicated to ore and waste hoisting and will be equipped with twin skips of 5 m3 capacity each. A 630 kW motor will drive the double drum skip winder. A service shaft at 5.5 m diameter and 840 m deep will be used to provide men and materials access to the deeper levels of the mine and to provide access for compressed air, fresh water and pump columns. It will be equipped with a cage and counterweight and a ladder way. In emergencies ore and waste will be able to be truck hoisted in this shaft. A ventilation shaft at 5.0 m diameter will be constructed by raising from lower levels. This will also be utilised as an emergency exit. Working levels will be spaced at 50 m intervals with major haulage levels at 150 m intervals.

Some development and stoping will occur above the +290 m level from ore zones outside of the planned open pit. These will be accessed through adits using rubber tired equipment.

For mining levels below the +290 m level the shafts will be supplemented by a spiral decline driven from surface to provide both men and materials access and ore haulage capacity from the upper levels of the mine. In practise and given the time to develop the shaft system, all mining down to about the +150 m level will be conducted through the ramp, with the shafts only coming into use for levels below +150 m, i.e. some 150 m below portal.

Underground production will average approximately 550,000 tpa for the 20 years of mine life. The expected run of mine grade over the life of the underground operation will be 12.0 g/t. This is calculated after allowing for ore losses of approximately 10% and overall dilution ranging between 21% and 29%.

Mineral Processing

Metallurgical Testwork

The Mayskoye gold-bearing sulphide ore is refractory and characterised by its high arsenic content. 80 % of the gold is associated with the sulphides, primarily with arsenopyrite, as a submicroscopic dissemination. The lesser content of silver in the ore is primarily associated with galena and sphalerite.

A total of 16 bench scale and pilot scale test programmes are documented for the period 1975 to 1992. These programmes were conducted by Russian institutes (including VNII-1, IRGIREDMET, TSNIGRI) on 13 samples representing a range of location, ore type and ore grade. Processes investigated, including gravity, flotation/cynanidation, alkali treatment/cyanidation, roast/cyanidation, flotation/bio-oxidation/cyanidation, reflect the refractory nature of the ore. This work concluded that gold recovery to gravity/flotation concentrates is up to 92% and 50% for primary and oxidised ore types respectively. In the batch and pilot scale bio-oxidation tests conducted by TSNIGRI between 1987 and 1992, up to 96% gold extraction is achievable from flotation concentrates.

The metallurgical investigations culminated in bench scale flotation and bio-oxidation amenability tests in 1998 by the then Billiton Process Research Laboratory (Billiton), South Africa using BIOX® technology and by Mintek, South Africa using BacTech technology. Both laboratories were supplied with sub-samples from a 1.7 t sample collected in 1998 from earlier underground development in No. 1 orebody. The sample was representative of the Mayskoye sulphide ore and graded 11.3 g/t Au.

The flotation tests conducted by both laboratories demonstrate a strong correlation between gold and arsenic recovery. However, Mintek's results do not reach the maximum gold recovery of 93% achieved by Billiton, which appears to have used a more appropriate reagent scheme. Both laboratories confirm the amenability of the sulphide concentrate to bio-oxidation, requiring only a partial oxidation of the sulphides with an associated beneficial impact on residence time and equipment cost. Maximum gold dissolution by cyanidation after bio-oxidation is 96%, corresponding to 67% sulphide removal. CIL was used for leaching because of the presence of a carbonaceous preg-robber.

Both Billiton and Mintek recommend pilot scale continuous testwork on a representative ore sample in order to optimise the process and to provide data for plant design for the bio-oxidation, cyanidation and ancillary processes. To provide material for this testwork, Highland Gold is currently in the process of collecting a 6 t bulk sample from the deposit.