Trading Update for Second Half of 2006

13.02.2007

Highland Gold Mining Limited (“Highland Gold”, or the “Company”) produced a total of 167,544 ounces of gold in 2006, a 4.6% increase over 2005.

SUMMARY Unit 6 months ended 6 months ended 12 months ended
30 June 31 December 31 December
Group   2006 2005 2006 2005 2006 2005
Gold recovered Ounces 91,205 63,749 76,339 96,467 167,544 160,216
Gold sold Ounces 85,567 63,333 73,278 98,846 158,845 162,179
Gold sales US$m 52.0 27.0 46.6 46.1 98.6 73.1
Gold price received US$/oz 607 427 636 467 621 451
MNV              
Ore processed Tonnes 485,561 371,403 448,008 503,958 933,569 875,361
Average grade g/tonne 5.60 4.81 5.44 6.03 5.52 5.51
Gold recovered Ounces 79,444 51,979 71,702 88,059 151,146 140,038
Gold sold Ounces 75,594 55,426 67,268 88,945 142,862 144,371
Darasun              
Ore processed Tonnes 158,085 86,700 80,199 120,893 238,284 207,593
Gold recovered Ounces 11,761 11,770 4,637 8,408 16,398 20,178
Gold sold Ounces 9,973 7,907 6,010 9,901 15,983 17,808

Listen to a recording of the conference

SECOND HALF OPERATING RESULTS

  • Barrick Gold transaction. Increased shareholding to 34% provides a stronger platform for further development and growth.
  • MNV. Produced 151,146 oz Au in 2006, an 8% increase on gold production compared to 2005. There was a significant increase in the open pit grades in 2006, averaging 6.24g/t Au during the year, an increase of 15% from 2005.
  • Darasun. After the tragic fire in September, the production at Darasun mine continued at a reduced rate and rehabilitation studies are currently underway.
  • Taseevskoye. Completion of phase 1 exploration drilling programme and in-house scoping study, site preparation work ongoing with implementation of environmental and social responsibility programmes for the Baley community.
  • Novoshirokinskoye. Partnership with Kazzinc optimizes production and sales opportunities.
  • Mayskoye. Progress made on feasibility study; metallurgical testwork on biooxidation has shown favourable results; exploration drilling and facility construction ongoing.
  • Exploration projects. Drilling completed at Belaya Gora and Lyubov and remains in progress at Sovinoye; preparatory work for drilling completed at Unkurtash.
  • Financial position. At 31 December, the Group held $29 million of cash and $81 million of debt.

Commenting on today’s announcement, Henry Horne, Managing Director, said:

"The months which have passed since the fire at Darasun have not erased this enormous disaster from our minds. Today our efforts are focused on helping the relatives of the deceased to cope with this tragedy. We are committed to maintaining the highest standards in occupational health and safety.

At the end of last year our Company completed two major transactions with Barrick Gold and Kazzinc both of which have provided us with a stronger platform to develop and grow our mining business in the Former Soviet Union.

Our production at MNV was within the forecasted range and with this stable production level at our core mine we expect further improvements and higher results in 2007. During H2 2006, our development and exploration projects progressed at a steady pace, which we will accelerate during 2007 to build a solid base for future growth and success".

CONFERENCE CALL

Highland Gold will hold a conference call hosted by Henry Horne, Managing director, Rene Marion, COO, and Scott Perry, CFO to discuss this trading update. The conference call will take place at noon UK time (15:00 pm Moscow) on Tuesday, 13 February 2007. To participate in the conference call, please dial one of the following numbers:

+44 (0) 1452 542 300 International dial in number
8108 0021 651 012 Russia toll-free number
0800 953 1444 U.K. toll-free number
1866 220 1452 USA toll-free number

Participants will be asked of their full name and Conference ID which is 9024365.

A replay of the conference will be available after the call’s completion for a period of one week by calling one of the numbers below and quoting Conference ID 9024365#:

+44 (0) 1452 55 00 00 International Dial In
0800 953 1533 U.K. Free Call Dial In
1866 247 4222 USA Free Call Dial In

A Wav file of the recorded conference call will be available at www.highlandgold.com.

For further information please contact:  
  Henry Horne, Managing Director
Dmitry Yakushkin, Director of Communications
Moscow: + 7 (495) 777 31 55
Dominic Palmer-Tomkinson,
Head of Investor Relations
London: +44 (0) 207 851 64 00
Or, WMC Communications,
Alex Glover on +44 20 7930 9030

H&S, ENVIRONMENT AND CORPORATE SOCIAL RESPONSIBILITY

The September disaster at Darasun has become a painful reminder of the importance of health and safety practices in our industry. The fire had a tremendous impact on our Company but still more tragic is the suffering endured by family and friends of the 25 deceased miners. We continue to review our current policies and procedures to ensure the best technologies and practices are in place at each of the operations.

Our ongoing commitment to health and safety was demonstrated by the 16% increase in the total number of hours of safety trainings in 2006 compared with 2005. As a result, the January-August 2006 lost-time frequency was 30% lower than in 2005.

Following the Darasun tragedy in September, we conducted additional training of escape procedures in the event of an emergency for all underground employees at MNV.

As the Board confirmed in September, the families of the victims and the injured during the fire at Darasun continued to be supported by the Company. Over and above the compensation paid to the families in September, we have continued to provide monthly financial support to the under age children. Also, as we stated earlier, we are committed to providing and funding primary college education to all the children of the deceased. At the moment we are supporting three students.

In 2006, we held 115 internal environmental inspections compared to 38 in 2005. Our environmental activities in 2006 included development of a water treatment plan for MNV which is currently under review for approval and rehabilitation of the land used to lift the MNV tails impoundment.

Previously, safety, health, and environment were combined in one department. Recently, an environmental manager was put in place and filling the position of Director is currently underway. This will help the Company concentrate improved performance in both important areas.

The Environmental and Social Impact Assessment (ESIA) and Resettlement Action Plan for the Taseevskoye project are being developed by Golder Associates and are planned to be completed in 2008.

A comprehensive corporate social responsibility programme aimed at addressing key social issues in the Baley community was started in summer 2006 in partnership with the US Agency for International Development (USAID).

OPERATING REVIEW MNOGOVERSHINNOYE (MNV) - Khabarovsk Region, Russia

In the second half of 2006, MNV gold production was within the forecasted range resulting in the annual amount of 151,146 oz Au. During the second half of the year, the mill processed 448,008 tonnes at an average of 74,668 tonnes per month, at an average grade of 5.44 g/t Au and recovery of 91.53%.

Waste stripping in the open pit was slightly up on 2005, and ore production showed a 4% increase compared to 2005, but most significant was the 15% increase in grades from 5.42g/t Au in 2005 to 6.24g/t Au in 2006. Grades from the Upper ore body averaged over 7.6g/t Au in the final quarter of 2006.

Underground production was 3% higher than the corresponding prior year period due to increased mining rates partially offset by lower mine grades in the Central and North zones, attributable to increased dilution. Underground development was in line with expectations and only marginally below rates achieved in 2005.

MNV 6 months ended 6 months ended 12 months ended
30 June 31 December 31 December
  Unit 2006 2005 2006 2005 2006 2005
Mine development
Waste stripping 000 M3 751 641 717 823 1,468 1,464
Underground Metres 4,609 4,363 3,729 4,098 8,338 8,461
Mining
Open pit Tonnes 205,896 156,615 183,140 217,772 389,036 374,387
  g/tonne 5.90 4.70 6.62 5.94 6.24 5.42
Underground Tonnes 209,255 180,619 198,581 215,711 407,836 396,330
  g/tonne 5.90 5.37 5.22 7.24 5.57 6.39
Total ore mined Tonnes 415,151 337,234 381,721 433,483 796,872 770,717
  g/tonne 5.90 5.06 5.87 6.59 5.90 5.92
Ore processed Tonnes 485,561 371,403 448,008 503,958 933,569 875,361
  g/tonne 5.60 4.81 5.44 6.03 5.52 5.51
Incl. from stockpile Tonnes 70,410 34,169 66,287 70,475 136,697 104,644
  g/tonne 3.83 2.33 2.96 2.57 3.30 2.49
Recovery rate % 90.9 90.5 91.53 90.2 91.18 90.3
Gold recovered Ounces 79,444 51,979 71,702 88,059 151,146 140,038
Gold sold Ounces 75,594 55,426 67,268 88,945 142,862 144,371
Gold price received US$/oz 599 425 639 466 609 450

DARASUN – Chita Region, Russia

Following the tragedy at Darasun on 7th September, production in the final quarter of the year continued at a reduced rate in the Talatui open pit. In the second half of the year, 80,199 tonnes were processed from surface stockpiles and the Talatui open pit ore.

The management has undertaken various studies investigating the cost of rehabilitation, and is currently evaluating these options in order to make a decision on steps moving forward. The mine is currently being kept on a care and maintenance basis, while stripping in the Talatui open pit is continuing.

DARASUN 6 months ended 6 months ended 12 months ended
30 June 31 December 31 December
  Unit 2006 2005 2006 2005 2006 2005
Mine development
Waste stripping 000 M3 541 730 598 816 1,139 1,546
Underground Metres 2,242 2,125 676 1,797 2,918 3,922
Mining
Open pit Tonnes 47,369 17,425 52,743 29,861 100,112 47,286
  g/tonne 3.11 6.43 2.14 5.95 2.6 6.13
Underground Tonnes 64,523 55,084 19,312 71,987 83,835 127,071
  g/tonne 6.73 12.37 5.3 10.0 6.4 11.04
Total ore mined Tonnes 111,892 72,509 72,055 101,848 183,947 174,357
  g/tonne 5.17 10.94 3.03 8.83 4.33 9.71
Ore processed Tonnes 158,085 86,700 80,199 120,893 238,284 207,593
  g/tonne 3.4 5.84 2.90 3.61 3.32 4.54
Recovery rate % 68.1 72.3 61.9 64.7 62.65 68.8
Gold recovered Ounces 11,761 11,770 4,637 8,408 16,398 20,178
Gold sold Ounces 9,973 7,907 6,010 9,901 15,983 17,808
Gold price received US$/oz 671 437 606 474 646 457

DEVELOPMENT PROJECTS TASEEVSKOYE – Chita Region, Russia

Formerly a 50:50 joint venture between Highland Gold and Barrick Taseevskoye is now 100% owned by Highland Gold.

The drilling programme to confirm earlier drilling programmes, provide metallurgical and geotechnical samples and locate underground workings started in the first half of the year and was completed by the end of the year. A total of 26,500 metres was drilled. We received assay results from over 33,000 samples, of which 29,000 were assayed by an Alex Stuart laboratory.

The first stage of direct leaching tests has been completed. This testwork has allowed the development team to categorize various ore types required to design the next phase of testing which will include mineralogical testwork, grinding, pressure oxidation and bio-leach.

Predictive modelling of the dewatering of the current pit was completed in preparation for dewatering efforts during operation. In addition, pre-design work was completed for a sewage water purification facility for the town of Baley.

A Scoping Study was completed in-house in September, providing focus and direction for the Pre-Feasibility Study.

MAYSKOYE – Chukotka Region, Russia

The Mayskoye Feasibility Study is progressing well, although delays in the development of the geological model due to data validation will delay the study to mid year.

Lakefield Researches preliminary testing indicates an 89% recovery of gold in the sulphide material using conventional CIL in combination with a Biox plant.

Aker Kvaerner completed base case plant designs for production levels at 600,000 tpy, 700,000 tpy and 750,000 tpy.

Infill drilling to raise the confidence level of the resource is in progress with a 23,000 metre drilling program of which 2,900 metres were completed by year end.

Site construction work completed during the year consisted of 17 km of all season road between Komsomolsky and Mayskoye with 6 creek crossings, a heated maintenance shop for light vehicles, the foundations for heavy equipment shop and the first stage of a 360-person camp.

NOVOSHIROKINSKOYE – Chita Region, Russia

A joint venture agreement is now in place with Joint Stock Company (AO) Kazzinc as a 50% partner with Highland Gold to develop the Novoshirokinskoye mine. Kazzinc will bring significant metallurgical and plant operating expertise to the partnership to ensure optimization of the processing plant.

A revised Russian cut-off grade study was filed with GKZ (Russian State Committee of Reserves and Resources) and has been reviewed at a hearing in November to resolve outstanding issues. Approval is expected shortly.

A geological data base was completed in October and development of a block model is in progress and scheduled for completion in the first quarter of 2007. On completion of the model a new mine design will be developed before the end of the first quarter 2007.

In coordination with Kazzinc, the final design work for the process plant and tailings facility is being completed.

Start up of development mining is scheduled for 2007 with plant start up scheduled for 2008. Once the block model is completed and a mining schedule finalized more specific dates will be available.

EXPLORATION BELAYA GORA – Khabarovsk Region, Russia

A total of 4,200 metres of diamond drilling has been completed on schedule and assaying of 3,000 core samples is in progress. Based on previous and Barrick’s exploration data, a 3D geological and exploration model of the deposit has been constructed which indicates gold-mineralization in altered host rocks down to 300 metres from surface with an estimated resource of circa 108 M tonnes grading more than 0.5 g/t gold. A 12,000 metres drilling program has been designed for the 2007 exploration season with the objective of defining average grades and delineating resources for the two areas - the Stockwork and Pologaya zones, on the property.

LYUBOV – Chita Region, Russia

The multi-disciplinary field programme of 2006 has been completed on schedule including 1,500 metres of diamond drilling, 850 metres of trenching, 3,500 core and trench samples, and geophysical surveys (IP, resistivity, magnetics) covering a 10 sq. km area. Drilling at the Malo-Fedorovsky prospect visually confirmed previous results and identified additional wide intersects of visible sulfide mineralization; all assaying is in progress. The geophysical surveys identified several well-defined broad anomalies over an area of 6 sq. km in continuity of known zones of significant gold mineralization. The new anomalies are to be tested in 2007 with a 3,500 metres diamond drilling programme in addition to resource delineation drilling at the Malo-Fedorovsky prospect.

SOVINOYE – Chukotka Region, Russia

The evaluation of the main 2,400 metres x 500 metres gold-mineralized zone with a known vertical extent of 300 metres is in progress and includes large-diameter pneumatic percussion drilling, trenching and sampling. To date 600 metres drilling out of a 3,000 metres total programme and 1,900 metres trenching has been completed, and 1,800 samples selected. Sample preparation has been tailored to avoid losses of coarse gold, 370 samples (21% of total collected) have been processed to date. The programme is to be completed in Q2 2007.

MAYA-INIKAN – Khabarovsk Region, Russia

The two adjoining property licences with a combined 3,733 sq. km area are located in a highly prospective geological setting which is similar to that of other world-class Russian gold deposits. The 2006 grass root exploration programme completed in Q4 2006 covered the entire licence area and was aimed at identifying targets for follow-up work. 2,200 samples were collected during a detailed stream-sediment geochemical and hydrological survey, an early-stage exploration method used successfully by other major mining companies elsewhere. Analytic work is in progress and should be completed by the end of Q1 2007 for data assessment and target selection for further exploration.

UNKURTASH – Kyrgyzstan

All preparatory works (access roads, drill pads) have been completed for a 4,000 metre large-diameter reverse-circulation drilling programme planned to commence in Q2 2007. The objective is to constrain the potential of three adjacent gold-mineralized zones (Unkurtash, Sarytube and Karytube) for hosting a combined bulk-mineable gold resource of more than 5 M oz with an average gold grade exceeding 1.5 g/t. Previous bulk sampling done by Barrick (3 samples of 30 tonnes each) demonstrated that diamond core drilling underestimates average gold grade. An evaluation of the mineralized zones is expected to be completed in Q2 2007.