Increased Participation by Barrick Gold Corporation

20.11.2006

London - Highland Gold Mining Limited (“Highland”, or the “Company”) announces that it has signed a Share Exchange Agreement with Barrick Gold Corporation (“Barrick”) in relation to the transaction announced in principle on 2 November 2006, the terms of which have not changed materially since then. A Circular to shareholders, including a letter from the Chairman with details of the increased participation by Barrick, a summary of the main terms of the Share Exchange Agreement and an outline of the arrangements for co-operation between the two parties following completion, together with notice of an Extraordinary General Meeting to be held on Wednesday 13 December, 2006, is being posted to shareholders today. The Circular will be available for information to the public as of today via Highland’s website at www.highlandgold.com.

Further detail

1. Introduction

Barrick is a leading international gold mining company, with a portfolio of 27 operating mines and seven advanced exploration and development projects located across five continents, and a large land position on the world’s best exploration belts. It is listed in Canada and has an equity market capitalisation of c. 28 billion Canadian dollars. Barrick is to increase its shareholding in the Company to approximately 34 per cent. in exchange for shares of certain Barrick subsidiaries which hold:

  • Barrick’s 50 per cent. interest in all existing joint ventures with the Company; and
  • four further gold exploration interests owned by Barrick.

In addition, following completion of the transaction, certain Barrick personnel will be appointed to the Board and further senior personnel of Barrick will join Russdragmet, Highland’s management company in Russia. Completion is subject to, amongst other things, the approval of shareholders by way of passing the special resolution granting the necessary authority to the Directors for the issue of 34,492,305 ordinary shares to certain companies in the Barrick group. The Company is also reviewing its financial options to raise up to US$50 million to continue the development of its business.

2. Background to and reasons for the transaction

Barrick has had a long collaborative relationship with the Company and in October 2003 it first acquired a holding of shares equivalent to 10 per cent. of the Company’s then issued share capital. In January 2004, Barrick and the Company entered into agreements under which Barrick subscribed for further shares in the Company, taking its holding to approximately 17 per cent.. These agreements also provided mutual back-in rights to equity participation in acquisitions in Russia. In July 2005, Barrick subscribed for a further 11.4 million shares taking the holding to approximately 20 per cent. of the then issued share capital of the Company. The Company has received technical support and advice from Barrick since its initial subscription and Barrick has exercised its back-in rights over three properties acquired by the Company since 2004. Alex Davidson, Barrick Executive Vice President, Exploration and Corporate Development, sits on the Board as a non-executive director, and, in addition, the executives of the Company and Barrick’s employees based in Moscow have developed a close working relationship. The Company and Barrick believe that it is in the interests of both companies to develop this relationship further and to combine the ownership of the mining interests which have been acquired by the Company since 2002 with the technical skills of Barrick. The Company’s mining interests include the producing mines at MNV and Darasun, the gold prospect at Mayskoye (at pre-feasibility stage), 50 per cent. of the polymetallic prospect at Novoshirokinskoye (“Novo”) (for which a joint development with Kazzinc has been announced) and 50 per cent. of the gold prospect at Taseevskoye (at pre-feasibility study stage). The Company believes that the combination will provide a stronger platform to develop and grow its mining business in the former Soviet Union. The Directors believe that the Company will significantly benefit from Barrick's industry-leading expertise in mining operations, extensive worldwide exploration experience, up-to-date technology and access to capital markets.

3. Information on the assets

Pursuant to the Share Exchange Agreement, the Company will acquire Barrick’s interests in the following companies which hold the interests described below:

  • 100% of Barrick’s shares in Taseevskoye Netherlands B.V., and Barrick’s rights and interests in the Taseevskoye licence;
  • 100% of Barrick’s shares in HB Ventures Netherlands B.V., and Barrick’s rights and interests in the Sovinoye, Belaya Gora and Malo Fedorov licences;
  • 100% of the shares in Barrick Resources LLC, the holder of the Lyubov, Maya-Inikan, and Sarasa licences; and
  • 100% of the shares in Barrick Gold Kyrgyzstan LLP, the holder of the Unkurtash and Kassan licences in Kyrgyzstan.

4. Principal terms and conditions of the transaction

Pursuant to the Share Exchange Agreement, the Company has agreed to acquire these interests in consideration for the issue to certain companies in the Barrick group of 34,492,305 ordinary shares. Completion of the transaction is subject to certain conditions, including the passing by shareholders of the special resolution authorising the Directors to issue such ordinary shares at the EGM. Pursuant to the Share Exchange Agreement, all existing arrangements between Barrick and the Highland group are to be terminated. The Company and Barrick have also signed a co-operation agreement (the “Co-operation Agreement”) to address the ongoing relationship between the parties following completion of the transaction, the purpose of which is to ensure that Highland is able to carry on its business independently of Barrick.

5. Board appointments

Following completion, Barrick will have the right to appoint two additional directors to the Board and a further announcement will be made upon such appointments. It is expected that all of the current Directors will remain on the Board until the Board structure is reviewed to take account of independence, experience and other compliance considerations. Henry Horne will remain as Managing Director of the Company. The Co-operation Agreement provides that the Board shall consist of at least nine members.

6. Senior management and operational changes

As part of the transaction, it is proposed that Rene Marion, currently Barrick’s Regional Vice President, Russia and Central Asia, will join Russdragmet as Chief Operating Officer and Scott Perry, currently Barrick’s Director of Finance, Russia and Central Asia, will join Russdragmet as Chief Financial Officer. It is also proposed that other Barrick personnel will be engaged by Russdragmet to fill exploration, technical and other strategic roles. As part of an ongoing strategy, the offices and operations of both Barrick and Russdragmet are being combined. By combining the offices, Barrick’s technical skills and exploration experience in Russia will be merged with Russdragmet’s expertise and know-how relating to the operation of assets within Russia.

7. Related party

Given its existing shareholding, Barrick is a related party for the purposes of the AIM Rules. As at 17 November 2006, Barrick was interested in 31,742,959 ordinary shares representing 19.8 per cent. of the issued share capital of the Company at that date. Barrick has undertaken to vote in favour of the resolutions to be proposed at the EGM in respect of its holding of ordinary shares. Following Completion, Barrick will own approximately 34 per cent. of the Company’s issued share capital. In view of Alex Davidson’s position with Barrick as Executive Vice President, Exploration and Corporate Development, he has taken no part in the Board’s consideration of the transaction. The Independent Directors (being the Directors of the Company other than Alex Davidson) consider, having consulted with JPMorgan Cazenove, the Company’s nominated adviser, that the terms of the transaction are fair and reasonable in so far as shareholders are concerned. In providing advice to the Company, JPMorgan Cazenove has taken into account the Independent Directors’ commercial assessments.

8. Darasun mine tragedy

Since the tragic events at Darasun, the Company has taken practical steps to mitigate its effect on the families involved and the inevitable disruption in its mining activities. The Company continues to support the management and personnel involved. As part of the ongoing investigations, one Darasun employee has been criminally charged with breach of safety rules.

9. Current trading

At MNV, given the recent unusual extreme weather conditions, the Company expects to be at the lower end of its target production range for 2006 of 150,000 to 160,000 ounces of gold. Underground production at Darasun has not re-started because it has not yet been possible for management to gain access underground. Darasun management has applied to the authorities for the necessary approvals for underground access to assess the damage caused by the fire to the central shaft. Open pit production is, however, slowly coming back on stream, although grades are below expectations. The first phase of the drilling programme at Taseevskoye is now complete and almost 100 per cent. of the assay results have been received. These results are in the process of being interpreted and early indications are encouraging. At Mayskoye, good progress is being maintained and the bankable feasibility study is on track to be completed by the end of the first quarter 2007. Initial metallurgical test work at this stage is in line with our expectations and more results are expected soon. In October 2006, Stanmix Holdings Limited (a wholly owned subsidiary of the Company) entered into an agreement whereby Kazzinc is to acquire an interest of 48.3 per cent. in the mine at Novo for US$36 million. This agreement is subject to the parties entering into a joint venture agreement which is now in the course of being agreed and is expected to be finalised by the end of November 2006. The agreement is also subject to certain Russian and Kazakh regulatory requirements. The Directors believe that the appropriate approvals will be obtained during the course of December 2006.

10. Funding requirements

On the basis that the transaction is completed, the Company is projecting total capital expenditure to the end of 2007 on the Highland group’s mines and projects to amount to approximately US$90 million and other capital requirements to the end of 2007 to amount to approximately US$3 million. Outstanding loans which are currently repayable between now and the end of 2007 amount to approximately US$22 million. Accordingly, the funding requirements of the enlarged Highland group to the end of 2007 are expected to amount to a total of approximately US$115 million. The Company expects to have the following sources of funding available in order to meet this funding requirement:

  • the Highland group’s operating resources;
  • proceeds of US$36 million from the sale to Kazzinc of 50 per cent. of the Company’s interest in Novo. Kazzinc will also contribute approximately US$13 million which represents 50 per cent. of the capital expenditure budget for Novo to the end of 2007;
  • a new debt facility the details of which are currently under discussion; and
  • the proceeds of an equity placing. The timing and level of such placing will ultimately depend upon market conditions.

The Board currently considers that it is appropriate to raise approximately US$50 million through an equity placing. Barrick has undertaken in the Co-operation Agreement that, if an equity placing of up to US$50 million is launched, it will participate to maintain its shareholding in the Company at approximately 34 per cent.; the balance of the cash to be raised pursuant to the equity placing will then be raised from the subscription for ordinary shares by institutional investors. Authority for the Directors to issue ordinary shares pursuant to such a placing and generally is to be sought at the EGM.

11. Takeover Code

Although the Company has its registered office in Jersey, the place of central management and control of the Company is currently located outside the UK, the Channel Islands or the Isle of Man. Accordingly, the Takeover Panel has confirmed that the Company is not subject to the City Code on Takeovers and Mergers (the “Code”) and shareholders will not be afforded any protections under the Code. If circumstances change, including if further changes to the Board are made, the Company will consult with the Takeover Panel to ascertain whether this will affect the central management and control of the Company. If the Takeover Panel determines that, as a result of such changes, the place of central management and control of the Company is located in the UK, the Channel Islands or the Isle of Man, such that the Code then becomes applicable to the Company, an announcement will be made. As the Company is not currently a company subject to the Code, investors should be aware that shareholders (including Barrick) are currently able to increase their interests in voting rights in the Company to 30 per cent. or more without having to make a mandatory offer under the Code.

For further information please contact: 

Highland Gold Moscow: +7 (495) 777 5529
  E-mail: info@highlandgold.com
  Henry Horne, Managing Director
  Dmitry Yakushkin, Director of Communications
   
JPMorgan Casenove

London: +44 (0) 207 588 2828

  Michael Wentworth-Stanley
  Sam Critchlow