Novoshirokinskoye Update

14.12.2004

Highland Gold Mining Limited is pleased to provide an update on the development activities at its Novoshirokinskoye project.

Resources and Reserves

Active exploration of the Novo deposit was conducted in the 1960s. In 1961 the geological resources were calculated and approved by the Soviet Union’s State Committee for Reserves (GKZ) using a 2% lead equivalent cutoff grade. These resources were calculated based on prevailing prices and technology available.

Having re-evaluated the resources based on more current metal prices, in 2002 Highland Gold re-assessed the geological resources at 1.8 million oz of gold equivalent. Within this resource was a diluted, mineable reserve of 1.05 million oz. These resources and reserves were still based on a lead equivalent cutoff grade and old technologies. As a result of a search for more effective recovery technologies, the Group adopted the Kivcet process near the end of 2003. Importantly, the Kivcet process should provide much better recovery rates for lead and silver.

Subsequently, a significant re-contouring of the ore bodies dictated by gold equivalent cutoff grades was initiated. This work was contracted to ZabTsvetMetNIIProyekt and ZabGeo, geological and mining consultants familiar with the deposit and based in Chita. The re-contouring of the deposit based on gold equivalent cutoff grades between 0.5 – 5.0 g/t has now been completed and, in accordance with Russian law, has been sent to GKZ for their review and approval. Using a 3 g/t gold equivalent cutoff grade, the geological resource has increased to 3.156 million gold equivalent oz, an increase of 68% from the comparable 2002 figure.Expected Geological Resources at Varying Cutoff Grades

Category

Ore
(000t)

Lead
(%)

Zinc
(%)

Gold
(g/t)

Silver
(g/t)

Au Eq
(g/t)

2004 Resource: 1.0 g/t Gold Equivalent Cutoff
C1 (Indicated)

5,333

3.20%

1.25%

3.24

60.7

6.94

C2 (Inferred)

22,729

1.76%

1.07%

2.17

47.1

4.56

Total

28,062

2.04%

1.10%

2.38

49.7

5.01

Total Contained Metal, tonnes  

571,598t

309,982t

66.7t

1,395t

140.6t

Total Contained Metal, 000s ounces      

2,143 koz

44,851 koz

4,520 koz

2004 Resource: 3.0 g/t Gold Equivalent cutoff
C1 (Indicated)

1,895

5.91%

1.76%

6.32

109.1

12.91

C2 (Inferred)

7,227

3.64%

1.84%

5.35

100.0

10.20

Total

9,122

4.11%

1.82%

5.55

101.9

10.76

Total Contained Metal, tonnes  

375,041t

166,089t

50.6t

930t

98.2t

Total Contained Metal, 000s ounces      

1,628 koz

29,885 koz

3,156 koz

2004 Resource: 5.0 g/t Gold Equivalent cutoff
C1 (Indicated)

1,310

7.78%

2.02%

8.31

140.9

16.84

C2 (Inferred)

4,001

4.88%

2.08%

7.64

133.6

14.01

Total

5,311

5.60%

2.06%

7.80

135.4

14.71

Metal Contained, tonnes  

297,259t

109,485t

41.4t

719t

78.1t

Metal Contained, 000s 0unces      

1,332 koz

23,116 koz

2,511 koz

1. Diluted, mineable reserves and Geological resources were calculated using the following long term assumptions

   

Gold

Silver

Lead

Payable Zinc*

2004: Gold Equivalent

Price

$375

$6.25

$850

$450

 

Recovery

86%

86%

87%

75%

2002: Lead Equivalent

Price

$317

$5.07

$454

$404

 

Recovery

85%

70%

57%

85%

* zinc to be extracted from concentrate As part of its review, GKZ will assess all geological and economic assumptions, including the cutoff grade. Highland Gold has proposed a 3.0 g/t cutoff grade for the calculation of diluted, mineable reserves and includes these figures in the table below together with a comparison with the 2002 result. Using an assumption of 8% for losses and 12% for dilution, the diluted ore reserve at Novo is 6.2 million tonnes at a gold equivalent grade of 9.27 g/t. This represents an increase of 786,000 gold equivalent oz, or 74%, to 1.8 million gold equivalent oz.Diluted Mineable Ore Reserves

Category

Ore
(000t)

Lead
(%)

Zinc
(%)

Gold
(g/t)

Silver
(g/t)

Au Eq
(g/t)

2004 Reserve: 3.0 g/t Gold Equivalent Cutoff

C1 + 50% C2 (Probable)

6,180

3.72%

1.63%

4.56

92.3

9.27

Total Contained Metal, tonnes

 

229,897t

100,734t

28.2t

570t

57.3t

Total Contained Metal, 000s ounces

     

906 koz

18,338 koz

1,842 koz

The Novo deposit remains open for further exploration at depth. The detailed work on the resources and the new reserves has been conducted by Russian mining consultants of ZabaikalTsvetMetNIIProyekt and other institutes. These consultants have been involved with the Novo project for many years. The work was supervised by A.M. Titkov, chief mining engineer for Highland Gold.Mine Update The Group is in the process of optimising the mine plan with a view towards scheduling higher grade ore in early years to accelerate the payback of initial capital. This work is just beginning and will be fully reported on completion. The annual production currently envisaged is as follows:

Metal

Oz / tonnes

Au.Eq. oz*

Gold

56,734 oz

56,734

Silver

1,148,372 oz

19,140

Lead

14,564t

33,011

Zinc

5,501t

6,602

 

Total

115,487

* Based on the submission to the State committee at 3 g/t cutoff Prior to the initiation of mining activities, the condition of existing equipment and mine facilities is being checked. To date, the shafts and skips appear to be in excellent condition, however, a new engine will be required in the existing underground crusher. The current plan is to begin mining activities early in 2005. Initially, the plan is to prepare approximately 150,000 tonnes of ore for mining, of which some 60,000 tonnes would be brought to the surface for processing in the last quarter of 2005 as the mill is readied for commissioning. Mining is planned to increase to 300,000 tonnes in 2006, before reaching capacity of 450,000 tonnes per year in 2007. In the first phase of mining operations, beginning in 2005, it is planned to concentrate on developing and mining ore blocks located on the upper levels of the mine (850 metre, 800 metre and 750 metre levels). These levels are already prepared for mining works. In the future, it will be necessary to deepen both shafts and the ore pass by 100 metres and add a second underground crusher to gain access to deeper dore blocks (700 metre and 650 metre levels).Metallurgical Update There will be two primary metallurgical facilities in the flow sheet for Novo. The first, a 450,000 tonnes per annum facility has a grinding and crushing department ready and, after the instalment of new flotation machines, thickeners, ventilation and electrical wiring, will produce gravity and flotation concentrates rich in lead and precious metals for further on-site processing; a zinc concentrate (with small amounts of precious metals) for further sale; and a pyrite concentrate for storage in a separate tailings pond. The second metallurgical facility will house a Kivcet Flash Furnace and a shop for electro-refining. A site for this facility has been selected (1.1 kilometres from the mill) and cleared, so that the laying of the foundation can commence by May 2005, and heavy equipment installed throughout the rest of the year. The primary feed for this facility should be approximately 26,000 tonnes of dried gravity and flotation concentrates containing lead and precious metals, with a final output of lead bullion and doré containing gold and silver. Kivcet is a well known direct smelting process designed during the Soviet era. The process has been in use at Ust-Kamenogorsk, Kazakhstan since 1986, Glencore’s Portovesme facility in Sardinia, Italy since 1987, and in 1997 was introduced into Teck-Cominco’s Trail facility in Canada, one of the world’s largest zinc and lead smelting complexes. The Kivcet Flash Furnace is seen by the Company as the enabling technology that has improved the Novo project by generating annual benefits through cost savings and higher revenues. The Company believes that these benefits outweigh the additional operating and capital costs of the facility. Some details of the Kivcet key advantages are as follows:

  • Transport efficiencies. Under prior development proposals, lead concentrates were to be transported some 4,600 kilometres for further smelting. At current domestic rail rates, the transport of 26,000 tonnes of lead concentrates would cost roughly US$1.0 million per year. On-site processing of lead concentrates eliminates the need for incurring this cost.
  • Higher recovery and payable rates. Significantly higher revenues are now achievable due to higher recovery and payable rates, particularly for lead and silver, which have increased by 30% and 16%, respectively. For lead, this equates to the additional recovery and sales of more than 5,000 tonnes of metal worth some US$4.75 million at current metal prices. For silver, this equates to the additional recovery and sale of more than 225,000 oz of metal worth some US$1.7 million at current silver prices.
  • Accelerated Timing of Cash Flows. The new process has significantly shortened production and cash collection cycle, leading to improved working capital positions.
  • Capacity. The Kivcet plant should be capable of treating larger volumes of concentrate than will be supplied from the currently planned Novo project. This available capacity would offer the potential for relatively low capital cost expansion opportunities should additional feedstock become available, either from higher mining rates at Novo or the acquisition of additional nearby projects.
  • Environment. Because the Kivcet process uses a closed furnace, all emissions will be filtered and dust particles will bere-cycled. This process shouldtherefore result in significantly lower emissions to the environment when compared with a traditional smelting process.Construction and Procurement Update By the end of 2004 Highland Gold plans to have completed up to US$14 million of investments at Novo. Novo investments are currently budgeted at US$33 million for 2005 and US$15 million for 2006. In 2005 the major project activities will be focused on the Kivcet Flash Furnace, including the completion of project documentation, laying the new foundation, ordering and installation of equipment (furnace, filters, oxygen station), and the erection of the building. In addition, the construction of the main administration building is expected to be completed.

Cash Operating Costs

The estimated cash operating costs of the Novo project are expected to be below US$200 per oz of gold equivalent based on the new milling rate of 450,000 tonnes per year. The cost estimates include all related cash expenses to recover and sell all gold and by-products. These estimates will be also affected by changes in prices for by-products, namely silver, lead and zinc.

Increased Shareholding in OAO Novo Rudnik

On 22 November 2004, the Group purchased at a privatisation auction a further 4.88% of the issued shares of Novo Rudnik from the Chita Regional Administration taking its stake to 96.51%.

Commenting on today’s announcement Ivan Koulakov, Managing Director, said:“Since mid-2002 we have known that Novoshirokinksoye will become our third operating mine and, while there remains much hard work to complete the development, we are very confident that the project is viable and very attractive economically. To reach our production goal in 2006, we are following up on the successful work done this year with an additional investment of US$33 million in 2005. "By the time of commissioning of our new Kivcet Flash Furnace in 2006, we will have spent approximately US$63 million on acquisition and development costs at Novo. This represents just US$34 per ounce of gold equivalent reserves, or US$20 per ounce of gold equivalent resource. These are impressive figures for an operating mine with a long mine life and again demonstrate our team’s dedication to steadily creating value for shareholders.”

Enquiries: +44 (0) 20 7404 5959
 
Highland Gold

James Cross, Chairman
Ivan Koulakov, Managing Director
Denis Alexandrov, Finance Director
Dimitry Yakushkin, Director of Communications

 
Brunswick Andrew Garfield
Mark Antelme
Pavla Kazbundová

www.highlandgold.com