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.

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, forecast currently at approximately US$ 40 million for 2006-2009 inclusive. Half of this required capital will be funded by Kazzinc.

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