Highland Gold - Novoshirokinskoye

Introduction MNV Novoshirokinskoye Mayskoye Taseevskoye Exploration

Novoshirokinskoye

Overview

Geology

Mineral Resources & Ore Reserves

Mining

Overview

The deposit at Novoshirokinskoye (Novo) in Chita Region of Eastern Siberia was discovered in 1951 and extensively explored between 1956 and 1962. A development plan for a base metal mine was formulated in 1969 and construction of the project began in 1970. The construction work progressed slowly and was suspended in the 1970s. A modified development plan which proposed a production rate of 450,000 tonnes per annum of ore was approved in 1988, but construction was again suspended in 1994, after the majority of the construction work was complete, due to the prevailing economic conditions and the termination of centralised state funding.

Prior to acquisition in 2002 the Novo mine had been researched and extensively developed to produce primarily zinc and lead, with gold and silver as by-products. At the beginning of 2003, the Group commissioned a feasibility study to review both the ore body and the existing plant to prioritise gold production.

In the end of 2005 HGM submitted a report on recalculated Novo resources to the State Committee for Reserves for expertise. The expertise pointed out a number of defects and the report was returned for improvements.

The revised cut-off study was filed with the Committee in November 2006. We now expect the final decision on the report in April 2007.

At the end of 2005, the Board decided to conduct a review of the strategic options available at Novo. Economic evaluations of the Novoshirokinskoye gold, silver, lead, zinc project showed that the project would be viable if a solution could be found to sell the gold rich lead flotation concentrates that would be produced by the mine on the international metal market.

Having studied these options the Company made a decision to find a partner to jointly develop this polymetallic asset.

The joint venture deal between Highland and Kazzinc, involving the sale of a 48.3% interest in the development project at Novoshirokinskoye (“Novo”) was completed in December 2006. The interest sold represented 50% of Highland Gold’s current holding of 96.6% If further shares in Novo are purchased, they will be acquired equally between Highland Gold and Kazzinc.

Kazzinc has an extensive track record and expertise in developing polymetallic deposits. When concluding a deal, the parties agreed on the parity contribution to the pre-production capital. As per the agreement, HGML takes responsibility for rehabilitation and commissioning of the underground mine, as well as the site infrastructure, while Kazzinc does processing flow sheet and the plant commissioning. An extensive amount of mining infrastructure already exists on this project including equipped haulages and shafts (with winders) and a partially completed mill and processing facility.

The capital expenditure required to bring the development project to production, which is expected to be in 2008, is relatively modest, forecast currently at approximately US$ 40 million for 2006-2008 inclusive. Half of this required capital will be funded by Kazzinc.

In 2006, development of the Novo block model was initiated. The contractor – ZZP Institute – completed the geological database in October 2006 and launched modeling.

Chita location map

Processing plant and two mine shafts

Geology

The Novoshirokinskoye deposit occurs in a 20 m to 300 m thick fault zone hosted by a sequence of Upper Jurassic volcanic and sedimentary rocks. The mineralisation is confined to the central portion of the zone with a strike length of up to 2.2 km and to a maximum depth of 700 m. 17 en-echelon ore bodies have been delineated of which the "Main", "V" and "VII" ore bodies are the largest, constituting 91%of the resource.

Novoshirokinskoye local geology

The ore bodies are vein-like in nature, with pinch and swell structures and numerous splays. Towards the centre of the structure these often merge together forming thicker zones of mineralisation. The ore bodies strike to the north-west and dip at between 30° to 82° to the south-west. The Main ore body lies in the central part of the deposit and has a strike length of 670 m and an average thickness of 6.6 m. The V ore body is located some 20 m to 25 m from the Main ore body and has a strike length of some 540 m and an average thickness of 3.5 m. The Main and the V ore body coalesce in some areas. The VII ore body is located to the south-east of the V ore body and has a strike length of 625 m and an average thickness of 3.6 m.

The average depth of oxidation is 18 m from the surface with only weakly oxidised ore above this level. Novoshirokinskoye is also located in a zone of perma-frost which varies in depth between 38 m and 123 m.

The ore is mainly lead/zinc sulphide mineralisation, with associated gold and silver in host rocks predominantly containing quartz, carbonates and sericites. Additional accessory minerals are pyrite, chalcopyrite and various iron and copper oxides. It is noted that the mineralisation is fairly homogenous through the deposit, with little variation being displayed.

Lead in the form of galena is the major mineral in the range 4 to 5%, with sphaleritic zinc comprising 1.5 to 2%. Average gold and silver grades are around 4 g/t and 90 g/t respectively.

Mineral Resources & Ore Reserves

Novoshirokinskoye Mineral Resource Statement

	Tonnage (kt)	Au Grade (g/t)	Au Eq. Ounces attributable to Highland Gold

B (Measured)	680	9.0	192,054
C1 (Indicated)	5,200	5.1	827,091
C2 (Inferred)	3,480	3.3	357,087

Total	9,360	4.7	1,376,232



Notes: Novoshirokinksoye is a polymetallic deposit containing Gold, Silver, Lead, and Zinc in commercial quantities. For resource and reserve reporting and for future production accounting, only Gold and Silver will be included as gold equivalents. Lead and Zinc will be treated as by-products. In addition to 1.4 million ounces of gold equivalents adopted in the table above, the deposit also contains Resources of 349,650 tonnes of lead at a grade of 3.7 per cent and 165,900 tonnes of zinc at a grade of 1.8 per cent. Similar figures for the Resources recently submitted to GKZ for approval are 375,000 tonnes of lead at a grade of 4.1 per cent and 166,000 tonnes of zinc at a grade of 1.8 per cent.

	Tonnage (kt)	Au Grade (g/t)	Au Eq. Ounces attributable to Highland Gold

B (Proved)	820	6.7	171,112
C1 (Probable)	4,700	4.5	650,188

Total	5,520	4.8	821,300



Notes: Novoshirokinksoye is a polymetallic deposit containing Gold, Silver, Lead, and Zinc in commercial quantities. For resource and reserve reporting and for future production accounting, only Gold and Silver are included as gold equivalents. Lead and Zinc will be treated as by-products. In addition to 851,000 of gold equivalents adopted in the table above, the deposit also contains Reserves of 170,000 tonnes of lead at a grade of 3.1 per cent and 75,000 tonnes of zinc at a grade of 1.4 per cent. Should the new Reserves discussed above be adopted, similar figures would be 170,000 tonnes of lead at a grade of 3.1 per cent and 101,000 tonnes of zinc at a grade of 1.6 per cent.

Mining

Novoshirokinskoye was developed as a longhole open stoping operation. The mine has been developed down to the first 3 levels (levels are at 50 m vertical intervals) and there is reportedly some 9 years of ore available, at 450 kt per year, from these 3 levels.

The underground mine is fully developed to the extent that some of the stopes have been drilled and blasted and broken ore is present in the draw points. The haulages are fully equipped with compressed air mains, water pipes and pumping mains.

The man-riding and materials shaft is concrete-lined and in excellent condition and extends to 250 meters below the collar. The shaft stations are well equipped with double track entries and overhead lifting facilities. The rock hoisting shaft is 200 meters deep and is comprehensively equipped with skips and a flask loading system. The mine has a fully developed ore and waste handling system, with separate passes for ore and waste on each level.

The winders for both shafts are modern units and are in good operating condition.

Novoshironkinskoye Longitudinal Section

Mineral Processing and Testwork

Over the period from 1967 to 2001 a large amount of laboratory test work has been conducted on samples of Novoshirokinskoye ore. This work has been performed on a number of samples, ranging from 5 t to 1,105 t (pilot plant simulation) in mass.

Much of this work focussed on the lead and zinc as being the primary economic target, with gold and silver recovery being viewed as useful and valuable by-products. As a result of Highland Gold’s acquisition of the project, a new 5 t sample of ore was collected and sent for further metallurgical testwork. The primary thrust of this work has been to focus on the recovery of gold and silver at site, with the generation of any lead and zinc metal being viewed as useful by-product credit.

Mill and floatation section