19th Apr 2005 07:01
Highland Gold Mining Limited19 April 2005 19 April 2005 Highland Gold Mining Limited announces Preliminary Results for the twelve months to 31 December 2004 Highlights FY 2004 FY 2003 % Change US$000s US$000s (unless stated) (unless stated) Production (ounces) 199,896 194,000 3%Turnover 82,062 71,578 15%EBITDA 25,610 32,264 -21%Operating profit 18,784 27,892 -33%Profit before tax 14,229 24,632 -42%Net profit 5,011 18,049 -72%Earnings per share 4 cents 16 cents -75%Net cash flow from operations 10,455 7,602 37%Capital expenditure 69,168 56,883 22%Dividend per share 2 cents 3 cents -33% • Gold production for 2004 was 199,896 ounces (MNV 195,026; Darasun 4,870) • Acquired 3 important licenses for the Talatui, Novoshirokinskoye and Taseevskoye deposits • Significant progress on the Mayskoye and Novoshirokinskoye feasibility studies • US$140 million raised through two share issues • Total Group assets increased by 72% to US$337 million • Alex Davidson, Executive Vice-President of Barrick Gold appointed to our Board • Strengthened strategic partnership with Barrick Gold Commenting on today's results, James Cross, Chairman said: "Looking back over the past twelve months, I believe that Highland Gold hasmatured in many ways and that the valuable experience gained along the way willserve us well into the future as we continue the development of our strong assetbase and our strategic relationship with Barrick Gold." "Going forward, our major challenges will be cost containment and the completionof the feasibility studies associated with our development projects. The Boardhas full confidence in our management team and their ability to deliver thetasks ahead." Commenting on today's results, Dmitry Korobov, Managing Director said: "Having been appointed Managing Director of Highland Gold in early 2005 I amdelighted to be leading our team of 3,700 people with operations spread acrossthree vast regions of Russia. My challenges are to ensure our operating minesare being run effectively and to steer our development projects through toproduction and profitable growth for our shareholders, employees and otherstakeholders." A briefing to analysts will take place at 09.30 am on Tuesday 19th April atJPMorgan Cazenove, 20 Moorgate, London, EC2R 6DA. A live audio feed will be available to analysts and shareholders who are unableto attend this meeting in person. Please dial telephone number: +44 (0) 1452 561263 and quote "Highland Gold" to access this facility. A replay facility can beaccessed on +44 (0) 1452 55 00 00, PIN code 5669892#. A copy of the presentationwill be available on www.highlandgold.com at 09:30am. Financial CalendarAnnual General Meeting 31 May 2005Ex-Dividend date 27 April 2005Record date 29 April 2005Dividend date 3 June 2005 Enquiries: +44 (0) 20 7404 5959Highland Gold James Cross, Chairman Dmitry Korobov, Managing Director Denis Alexandrov, Finance Director Dmitry Yakushkin, Director of Communications Grant Sinitsin, Director of Investor RelationsBrunswick Andrew Garfield, Mark Antelme Highland Gold Mining Limited trades under the ticker, HGM.L www.highlandgold.com CHAIRMAN'S STATEMENT The priority over the past year has been to secure the long-term future of theCompany. In spite of a number of operational challenges, we have successfullybroadened the geographical and operational base of the business, whilstmaintaining output at our existing producing assets. We have also laid thefinancial foundations for future growth. Overview of Activities During 20042004 was a challenging year for Highland Gold. The company responded byimplementing its strategy of continued growth by pursuing three major aspects ofits long term policy, namely developing the assets already acquired, expandingexploration and looking for possible new acquisitions in Russia and the formerSoviet Republics. Our core producing mine, MNV, with gold production of 195,026 oz in 2004, showedimproved results for the sixth consecutive year with increased throughput to927,000 tonnes of ore. A new mill was commissioned at our second working mine -Darasun - which produced 4,870 oz of gold in the year. Darasun is expected toreach full production in the second half of 2005. While our full year results show a net profit after tax of US$5.0 million, whichis down from 2003, our operations have continued to generate a healthy cash flowof US$25.6 million before the investment in working capital that has beenrequired to expand other aspects of our business. Although these results haveclearly benefited from a stronger gold price during the year, we have sufferedfrom escalating costs of consumables. There has also been an additionalrequirement for administrative resources as we broaden our developmentactivities. The board has considered the cash requirements for the capitalprojects of the group and will therefore recommend to shareholders at the AnnualGeneral Meeting a reduced final dividend of US$0.01 per share (US$0.015 - 2003). It is with deep regret that I report we have had three fatalities amongst ourworkforce at Darasun during the year. I would like to convey our condolences tothe families and the communities and re-iterate our commitment to providing asafe and healthy work environment for all of our employees. The company won at an open auction the right to develop a third deposit in theChita region - Taseevskoye - and shortly after obtained a 20-year licence forthe site for a consideration of US$26.8 million. Our strategic partner andshareholder, Barrick Gold Corporation of Canada, has confirmed its intention toexercise its 50% right to the Taseevskoye deposit. In early 2005 we won at an open auction, with a bid of US$0.4m, a furtherlicence for exploration and production rights in the Chita region for theSredne-Golgotayskoye deposit. Given the close proximity of the projects in theregion there are significant logistical and managerial synergies. Finally, at our largest asset located in the Chukotka region, Mayskoye, workprogressed on the feasibility study, camp construction and the installment ofcommunications and power supply systems. The results of bioleaching tests forrecovery rates on bulk samples of ore from Mayskoye were encouraging. Followingcompletion of the feasibility study at Mayskoye which is due to be deliveredshortly, Highland Gold and Barrick Gold will discuss possible participationarrangements in connection with the development of the deposit. On the financial side, we successfully completed two share placings, raising atotal of US$140 million for Highland Gold's development. The company alsonegotiated a 3.5 year, US$80 million syndicated banking facility. This is animportant financial step in strengthening our relationship with theinternational banking community. The Board and ManagementIn December 2004 and February 2005 we appointed Tim Wadeson and David Fish asnon-executive Directors respectively. Tim Wadeson has extensive experience inthe gold mining industry, having been technical and executive director at AngloAmerican. David Fish, also from Anglo American, has corporate finance expertiseand thus will head the Audit Committee. Under the terms of the agreementsentered into last year Barrick Gold has the right at the present time tonominate one Director to the Board of Highland Gold. I am pleased to advise thatAlex Davidson, Executive Vice-President responsible for exploration andcorporate development joins the Board with immediate effect. Furthermore, the management team has been restructured by appointing IvanKoulakov, former Managing Director, to the post of Deputy Chairman, withexecutive responsibility for corporate development. This appointment will allowhim to focus more on new opportunities in Russia and the former Soviet Union -one of Highland Gold's strategic priorities. Dmitry Korobov, former CommercialDirector, was appointed Managing Director. His operational experience willpermit him to deal successfully with the development of the company's assets.Both Ivan and Dmitry were instrumental in creating Highland Gold in the late1990s. Christopher Palmer-Tomkinson, who has been with Highland Gold since 2002, wasappointed Senior Independent Director, reflecting our commitment to meeting bestpractice standards in corporate governance. Peter Daresbury stepped down as Chairman of the Board - a post he held from May2002. Under Peter's Chairmanship Highland Gold was successfully floated on AIMand further developed its world class assets with the acquisitions of Mayskoyeand Taseevskoye. On behalf of the Board, I would like to thank Peter for histireless efforts for Highland Gold. Our achievements would not have been possible without one of Highland Gold'smain assets, the people who work for the company in Moscow and in the smallmining towns spread across the Eastern part of Siberia. They have the necessarygeological, mining and metallurgical skills and strong ambition to make HighlandGold one of the leaders in the gold mining business in Russia. As the company'soperations expanded and became more complex in 2004, we also attracted newskilled professionals to the company. Going ForwardThe Board remains strongly committed to the major principles of good corporategovernance, such as a clear division of executive responsibilities at the headof the company for the effective running of the business, and the appropriatebalance of executive and non-executive directors for proper and unbiaseddecision taking. An important factor in Highland Gold's strength and growth are the constructiveand open relationships which the company enjoys with the federal, regional andlocal authorities in Russia. In 2004 our management team strengthened theperception of Highland Gold as an active and responsible presence contributingto the development of Russia's most remote territories. The Governors of the three Regions where Highland Gold operates fully understandthe importance of the company's investment in projects for the economic andsocial development of their respective territories. They are well aware of thefact that the gold mining business requires significant financial, technical andhuman resources. This is why they value the long-term strategic commitment ofHighland Gold. We wish to thank the Governors and their administrations fortheir support of our endeavours. As part of our responsible approach, we are striving to achieve stricterenvironmental programmes at our mines, broadening health and safety measures tobring them in line with best international standards and to improve the qualityof life in the communities where Highland Gold is one of the largest employers. One of the most significant developments of 2004 was our announcement in Januarythat we had formed a strategic partnership with the Canadian gold major, BarrickGold. Barrick and Highland Gold have complementary strengths. While Barrick Goldhas long experience of exploration and greenfield development, plus considerablefinancial resources, Highland Gold has the knowledge and skills to operatesuccessfully in Russia. Our initial four-year partnership which is extendablebeyond that, gives us much greater flexibility for project development inRussia. It has already resulted in the agreement to form a JV company focused onexploration and the potential for sharing technical and financial expertise.Barrick Gold has the right to participate in the development of new projects. Welook forward to the continuation of a rewarding relationship between our twocompanies in 2005. In all this we have been helped by the fact that Russia offers a consistentlyimproving macroeconomic climate. Over the past several years the volume ofdirect investment in Russian industry has increased. The introduction of Westernreporting principles contributed to the development of an improved businessculture. Further reform of the tax, administrative and social systems will makethe economy more efficient. Continued political stability will help us plan forthe future with confidence. A stable political and macro-economic environment inRussia is critical in making our business plans for the future. I believe that our efforts will be supported by a robust international goldmarket. The recovery of the international gold price since 2002 has beensustained, underpinned by strong physical demand and by reduced official sectorsales compared with the late 1990s compounded by a contraction in producerhedging. Going forward, our major challenges will be cost containment and the completionof the feasibility studies associated with our development projects. The Boardand I have confidence in our management team and their ability to deliver thetasks ahead. James Cross Chairman MANAGING DIRECTOR'S REPORT Having been appointed Managing Director of Highland Gold in early 2005 I amdelighted to be leading our team of 3,700 people with operations spread acrossthree vast regions of Russia. I have been associated with many members of ourteam since 1998. In just two years of being a quoted company, Highland Gold hasearned a reputation for its ability to acquire, develop and operate quality goldmines in Russia. My challenges are to ensure our operating mines are being runeffectively and to steer our development projects through to production andprofitable growth for our shareholders, employees and other stakeholders. MNVMNV continued to perform well in 2004, not only meeting our productionexpectations of 195,000 ounces at a Cash Operating Cost of US$187 per ounce, butalso in establishing a new record of mill throughput at 927,000 tonnes. MNV - Operations Summary Unit 2004 2003Mine DevelopmentUnderground 000 m3 86.6 60.1Underground Meters 8,377 6,563Open Pit - waste stripping 000 m3 1,509 1,487Open Pit - waste stripping 000 tonnes 3,984 3,927 Ore minedUnderground Tonnes 389,506 474,767Open Pit Tonnes 413,543 326,033Total ore mined Tonnes 803,049 800,800Stockpiled ore Tonnes 124,320 90,402Ore processed Tonnes 927,369 891,202 Gold gradeUnderground g/tonne 8.51 8.82Open Pit g/tonne 6.43 6.05Stockpile g/tonne 4.83 4.37Average grade g/tonne 7.09 7.36 Recovery rate % 92.2 92.0 Gold production Ounces 195,026 194,000 Production CostsOur Cash Operating Costs of US$187 per ounce rose by 17.7% in comparison with2003. This was due to lower planned grades, a higher contribution from open pitore and a general increase in prices for materials, especially chemicals. Theseincreases flowed through into total cash costs, which were also affected byhigher royalties as a result of increased gold prices. Finally, our totalproduction cost of US$250 per ounce reflects the inclusion of a full year ofdepreciation on assets that were purchased from the Khabarovsk Administrationnear the end of 2003. MNV Production Costs per Ounce Unit 2004 2003Cash Operating Cost US$ per ounce $187 $159Total Cash Cost US$ per ounce $215 $187Total Production Cost US$ per ounce $250 $209 Cost ControlRecognising that cost pressures were building, based on lower mined grades andan increase cost of consumables and utilities, we have taken accelerated stepsto improve our control of costs. Among these steps are programmes to automatethe mill, test new technologies for the treatment of tailings, and create adigital resource model. We expect to see the initial benefits of theseprogrammes in 2005. Mine DevelopmentAlso, of longer term significance to this operation, by year-end our undergrounddevelopment works reached the Northern ore body and we began preparing the firstblocks of ore for mining in the current year. In 2005, this ore body willrepresent roughly 25% of all ore mined at MNV, and as this is our largest orebody, it will be an important part of our operations through to the end of thecurrent mine life. MNV - Mining ActivitiesTonnes 2004 2003UndergroundSouthern 101,736 295,268Central 108,631 119,112Deer 27,649 -Flank 38,237 -Intermediate 61,082 23,763Ore from development 52,171 36,624Total Underground ore 389,506 474,767Underground % of total mined ore 48.5% 59.3% Open PitUpper 413,543 277,633Flank - 48,400Total Open Pit ore 413,543 326,033Open Pit % of total mined ore 51.5% 40.7% Total 803,049 800,800 Capital CostsWe invested US$6.1 million during 2004 at MNV. The major items included US$3.7million for the purchase of additional haul trucks for the mining fleet, US$1.0million incurred for raising the height of the tailing dam and US$1.4 millionrelated to other construction at site. OutlookWe expect that MNV will remain an important generator of cash flows which wewill continue to reinvest for future growth. We experienced exceptionally badweather conditions at MNV in the early part of the year which has resulted indifficult operating conditions in the first quarter, nevertheless we expect toproduce a similar amount of gold in 2005 as we did in 2004. One of our ouncesthis year will be the one millionth ounce since we began the redevelopment ofthis operation in 1998. Even though we have more than 10 years remaining in ourexisting reserve base, we understand the importance of replacing the reserves wehave depleted and during 2005 we intend to organise and begin exploring for newresources within our MNV licence area. MNV - Resources1 at 31 December 2004 Ore Gold Gold % of (tonnes) (g/tonne) (ounces) Total GoldUndergroundNorthern 3,806,500 9.4 1,151,362 43.2%Central 431,400 14.9 206,144 7.8%Deer 358,500 12.3 141,695 5.3%Flank 322,400 20.6 213,828 8.0%Intermediate 343,400 12.4 137,313 5.1%Upper 305,600 6.7 65,926 2.5%Quiet 215,000 6.1 42,344 1.6%Deep 72,300 15.2 35,432 1.3%Rocky 156,500 7.5 37,747 1.4%Watershed 13,700 23.2 10,323 0.4% Total 6,025,300 10.5 2,042,114 76.6% Open PitUpper 2,559,400 7.0 576,078 21.6%Rocky 138,400 8.6 38,550 1.4%Quiet 36,800 8.5 10,195 0.4% Total 2,734,600 7.1 624,823 23.4% C1 (Indicated) 6,578,900 9.0 1,914,461 71.8%C2 (Inferred) 2,181,000 10.7 752,476 28.2% Total 8,759,900 9.5 2,666,937 100.0% 1. These resources are undiluted by estimates of dilution and losses. DARASUN Since 2002, we have invested a considerable effort into the re-development ofthe Darasun mine. This project has involved constructing a new 450,000 tonnesper annum mill as well as the rehabilitation of several existing undergroundshafts sunk into the Darasun and Teremki deposits and pre-production strippingworks at the nearby Talatui deposit, which after an initial 4 year period ofopen pit mining is planned to be converted into a longer term underground mine. ProductionAfter completing our investment programme and commissioning the new mill inmid-2004, the year's production of 4,870 ounces was well below our expectations.This was due to using low grade ore for the initial throughput and earlyproblems encountered in the crushing circuit that were then compounded by anunderpowered motor on our ball mill. Our team has worked hard in dealing withthese challenges and the mill is now running consistently at approximately 50%of capacity. We expect the mill to reach its full capacity in the second half ofthe current year. As 2005 progresses, we expect to be processing higher gradeore. Darasun - Operations Summary Unit 2004 2003Mine DevelopmentUnderground 000 m3 36,017 18,013Underground Meters 5,170 2,767Open Pit - waste 000 m3 304,152 -Open Pit - waste 000 tonnes 608,000 - Ore Processed, t Grade, g/t Recovery rate, % Gold Produced, ounces 31,909 5.92 80.2% 4,870 North East Shaft ProjectOver the past 15 to 20 years, there have been several studies conducted on there-development of the Darasun mine and mill. One of these studies from 1989described a project to sink a new North East shaft with a diameter of 6 metersto a depth of 900m in order to access and develop the lower parts of the minebetween the South West shaft and the new North East shaft. This project wasapproved and construction began in 1991, though a lack of available financing inthe early 1990s stopped the project at a depth of just 292 meters. During 2004,we revisited this project with an internal study that examined three developmentoptions that would provide access to significant deep level resources; easierand more effective access for further exploration of the lower levels; notinterfere with current mining operations; and improve productivity and operatingcosts of underground mining. An optimal plan has been selected and a decision has been taken to proceed withdevelopment. We are now carrying out the detailed engineering for the shaft andonce this is complete, a contractor will be selected and the sinking works willbegin. We currently expect the shaft to be sunk over a period of 24 months,though a precise estimate of the final completion date will only be possibleonce a steady state sinking rate is achieved. On completion of this project, the North East shaft will be the main hoistingshaft at Darasun with a capacity of 320,000 tonnes per year, to include at least210,000 tonnes of ore. This shaft will be used in tandem with our modern SouthWest shaft to increase underground production at Darasun to at least 300,000tonnes of ore per year. It will allow us to take the older, less efficientshafts out of service. The most attractive feature of this project is that itprovides access to higher grade reserves and resources in the deeper levels ofthe mine. TalatuiDuring 2004, we re-evaluated our existing mining plans at our newly licensedTalatui deposit and were able to come up with a new development concept that hasmore than doubled our mine life for this project, located just 12 kilometresfrom our new mill. Talatui will now be a more important component of the Darasunmine, supplying some 200,000 tonnes of ore per year. Once our mining plan wasagreed, stripping operations commenced and recently we began trucking ore to themill. Capital CostsWe invested US$25.9 million at Darasun in 2004. The major items included US$13.0million of running costs (salaries, electricity, fuel and overheads), US$6.9million for the purchase of equipment and machinery, US$5.0 million forcontracted construction works, and US$1.0 million for engineering and designworks. OutlookThe outlook at Darasun is still constrained by the mechanical problemsencountered in start-up that will not be fully rectified until early in thesecond half of 2005. Nevertheless, with the planned improvements to the mill weexpect to be able to reach our 2005 target of 70,000 ounces. With the longerterm production targets in sight from 2006 and a newly installed operating teamin place we remain confident about the prospects for Darasun. NOVOSHIROKINSKOYE During 2004 we devoted time and effort to progressing Novoshirokinskoye towardsproduction. This work included a re-contouring of the resources and reserves,advancement of the feasibility study, and the initiation of somepre-construction development. At year end, our expectation was that the finalfeasibility study would be delivered by the end of the first quarter of 2005,however some slower than expected progress on the design of the Kivcet FlashSmelter has caused the delivery date to slip towards the end of the secondquarter of 2005. Additionally, in 2004, we received the licence for the depositand were able to increase our ownership to 96.5% from 87.3%. Resources and reservesDuring 2004, we carried out a re-estimation of the resources and reserves of theNovoshirokinskoye project. This work has confirmed our initial expectations forimproved grades and higher contents of contained metals. Rather than convertingeach metal into a gold equivalent, as we have in the past, we have taken adecision that for reporting of reserves and resources and for future productionaccounting, only silver will be treated as a gold equivalent. Lead and zinc willbe treated as by-products. The resource has increased by 60% to 2.1 million ounces of gold equivalents andthe reserve has increased by 52% to 1.2 million ounces of gold equivalents.These results have now been submitted to the State Geological Committee forapproval. Novoshirokinskoye Resource: 3.0 g/t gold equivalent cutoff By-Products Gold EquivalentsCategory Ore Lead Zinc Gold Silver (000t) (%) (%) (g/t) (g/t)C1 (Indicated) 1,895 5.91% 1.76% 6.32 109.1C2 (Inferred) 7,227 3.64% 1.84% 5.35 100.0 Total 9,122 4.11% 1.82% 5.55 101.9 Total Contained Metal, tonnes 375,041 166,089 50.6 930Total Contained Metal, 000s ounces 1,628 29,885Gold equivalent, 000s ounces 2,126 Novoshirokinskoye Diluted, Mineable Ore Reserves: 3.0 g/t gold equivalent cutoff By-Products Gold EquivalentsCategory Ore Lead Zinc Gold Silver (000t) (%) (%) (g/t) (g/t)C1 + 50% C2 (Probable) 6,180 3.72% 1.63% 4.56 92.3Total Contained Metal, tonnes 229,897 100,734 28.2 570Total Contained Metal, 000s ounces 906 18,338Gold equivalent, 000s ounces 1,212 1. Resources and Reserves were calculated using the assumptions of US$375/ounce for gold; US$6.25/ounce for silver; US$850/tonne for lead and US$450/tonne for payable zinc. The recovery rates assumed were 86% for gold and silver; 87% for lead and 75% for zinc. 2. Reserves were calculated using assumptions of 12.1% for dilution and 8.0% for losses. Mining and Processing FacilitiesWe have completed our underground preparation and will be ready to begin miningworks ahead of the completion of the mill and smelter. As the volume of workrequired to bring the mill into operation is quite low, the feasibility anddevelopment of the flash smelter is, therefore, our main priority. When theflash smelting feasibility work is complete, we consider that this technologywill deliver many attractive benefits to the project such as higher recoveryrates; lower transport costs; lower working capital requirements and a betterenvironmental performance when compared with a traditional smelting process. Capital CostsWe invested US$13.6 million at Novoshirokinskoye in 2004. The major itemsincluded US$1.4 million on engineering and design, US$4.3 million onconstruction activities, US$4.2 million in running costs, and US$3.7 million forthe purchase of equipment and machinery. OutlookSince mid-2002 we anticipated that Novoshirokinskoye would become our thirdoperating mine and, while there remains extensive work to complete, we arelooking forward to finalising the feasibility study and progressing the projectfurther. Once this has been received and reviewed, we will be in a position tobegin construction works for the Flash Smelter, complete the upgrades to themill, and initiate our mining activities. MAYSKOYE Mayskoye is our first project in Chukotka and, as we have done in the otherregions where we operate, we intend to leverage this initial project leading toa wider presence in the local gold industry. In fact, in the short time we havebeen present on the ground in Chukotka we have established representative andadministrative offices in Pevek and attracted experienced staff who have beenprominent in Chukotka's gold industry for many years. Feasibility StudyMayskoye is our largest asset, containing a large portion of our totalresources. Early in 2004, after studying the deposit characteristics andfactoring in a favourable economic environment, we took a decision to revise thescope of production from 180,000 to 260,000 ounces of gold per year. During the year we sent floatation concentrates produced from a bulk sample ofMayskoye ore to metallurgical laboratories located both in Russia and abroad.Test work has been completed on these concentrates and the reported results haveindicated bio-oxidation recovery rates ranging from 92.9% - 95.7%. These resultshave confirmed our initial expectations and clearly demonstrate the amenabilityof Mayskoye concentrates to bio-oxidation. We are awaiting final delivery of our new resource estimate and feasibilitystudy from the mining consultants that have been engaged to complete this work.On receipt we will provide a detailed review of the project plan to move quicklyto tailor our construction programme for the year and to continue discussionswith our project finance bankers. Capital CostsOn the basis of our confidence in the feasibility of the Mayskoye project andthe reality of a short construction period in this part of the world, during2004 we committed ourselves to early investments that will serve us during themine construction phase. We invested US$22.6 million at Mayskoye in 2004. Themajor items included the purchase and transport to site of a pre-fabricated 500man camp, equipment and construction materials totalling US$16.4 million. Inaddition, there was US$2.2 million for engineering and design works and US$4.0million for on-site construction works and overheads. OutlookAs we wait for the delivery of our resource and feasibility work, I remainconfident that Mayskoye will be one of the Company's largest and most profitableoperations when it enters full production. The mine will also have a long life,which we believe can be extended through the development of the resource base. TASEEVSKOYE Following our acquisition of the Mayskoye deposit in 2003, we successfullyacquired the large Taseevskoye deposit towards the end of 2004. With Darasunmoving into production, this project replenishes our development pipeline andalso demonstrates that quality assets are still available in Russia. Equallyimportant, Taseevskoye continues our consolidation of the most significant goldassets in the Chita region and it provides the first concrete project that willbe jointly developed under our strategic relationship with Barrick Gold. Resource Update and Review of 1997 Feasibility StudyHaving finalised this acquisition, we are now re-evaluating prior resourceestimation work that was completed in 1997 to ensure it meets today's JORCstandards. This work has been undertaken by Snowden of Vancouver, Canada and isnearing completion. In parallel we are now working together with Barrick Gold,our 50% joint venture partner, on a review of the 1997 feasibility studyresults. This comprehensive study was conducted by Kvaerner Metals and resultedin an average annual production of 220,000 ounces over the initial 10 year minelife. This level of primary production and a subsequent 6 year period of lowgrade processing was based on a 2.9 million ounce mineable reserve of 28.2million tonnes grading 3.23 grams per tonne. Project EnhancementEarly in 2005, we won the open auction for the rights to explore and develop theSredne Golgotayskoye deposit, a promising exploration deposit located 13kilometres to the south of Taseevskoye. We are hopeful that this deposit will,subject to additional exploration, be a source of high grade ore that canenhance the financial attractiveness of the overall Taseevskoye project. OutlookGiven that we will benefit from a comprehensive feasibility study that wasconducted in 1997, we are sure that once the overall project scope has beenagreed we will be ready to proceed directly to re-estimating the project'sfinancial parameters. In short we believe this project has potential to be fasttracked through the feasibility stage. This would put us in a good position tomake further financing and construction decisions with Barrick Gold, our jointventure partner. EXPLORATION In 2004, our board and management committed to broadening our strategy toinclude acquisitions of earlier stage exploration projects as part of ourstrategic alliance with Barrick Gold. The priority projects that our geologistshave identified for acquisition have all benefited from early stage prospectingworks, and in some cases a considerable amount of drilling and undergrounddevelopment. While the execution of this strategy will unfold over the next fewyears, we have recently acquired a license for the Sredne Golgotayskoye projectnext to our Taseevskoye deposit and we have entered into a Joint Venture inKhabarovsk with a local mining company. OUR PEOPLE Our people are one of the most valuable assets of Highland Gold as itsoperations are expanding and are becoming more complex. In 2004 we continuedbuilding our team and focused on hiring responsible, well qualifiedprofessionals that share the company's pioneering spirit. As of December 31, 2004, we had 3,700 employees, an increase of 900 over the endof 2003 which was necessary due to the expansion of our operations. This numberincludes 117 at the Moscow management office and a total of 43 in ourrepresentative offices in Khabarovsk and Chita. We welcomed several new key members. Mr. Dmitry Yakushkin joined as our newDirector of Communications. Dmitry brings with him a tremendous amount ofexperience that he earned during a 20-year career in journalism, specialising ininternational affairs. In 1998 he became the Deputy Head of the PresidentialAdministration and press-secretary for the President of the Russian Federation. Mr. Grant Sinitsin joined as our new Head of Investor Relations. Grant is veryfamiliar with Highland Gold, having been involved with the company as an advisersince our founding. He has been in Moscow for the past 10 years as an investmentbanker and, prior to that, spent several years in the gold mining industry asthe Chief Financial Officer for several Canadian junior exploration anddevelopment companies. Mr. Vladimir Boukin joined as our new Mine Manager at Darasun. Vladimir earnedhis strong reputation as a mine operator over 30 years in the mining industry,with his last few years at the world class, Dukat silver mine. He takes overfrom Mr. Vachislav Zamaleev, who oversaw the redevelopment of the project and isnow heading up our representative office in Khabarovsk. Mr. Alexander Zorin has been promoted to the position of Mine Manger at MNV.Alexander has 20 years of experience in the mining industry, including 4 yearsat MNV where he has been the mine's Chief Engineer. In line with our Staff Skills Improvement Programme, we have agreements withseveral educational facilities in the regions where we operate which provideaccess for our employees to specialised technical and university education. Atotal of 129 employees were enrolled in these programmes. Highland Gold alsoconducts regular in-house training courses for its employees. SAFETY, HEALTH & ENVIROMENT Operational safety is a key priority for Highland Gold, and to emphasise this wehave raised the profile and responsibilities of our Safety Managers. Our goal isto be more proactive in the prevention of accidents. While we appreciate thatthere are risks of injury associated with mining, sadly and unfortunately wereport three fatalities at our operations during the year. We are developing a more comprehensive safety awareness training programme aimedat world class best practice. During 2004, more than 1,000 of our employees wentthrough job safety courses. We are also focusing on improving employeehealthcare by providing appropriate medical equipment, vaccinations and meetingother basic first-aid needs at each of our operations. ENVIRONMENT For Highland Gold a sound environmental policy is not just a formal obligationbut a moral responsibility. In 2004 at MNV we increased the level of the tailingdam, constructed a storage facility for collecting drain water from under thetailing dam for supplying the mill with recycled water, bulk storage tanks forfuels and lubricants, rehabilitated a base depot for sodium cyanide storage andorganised a sanitary protection zone at the water intake of the Ulchonok river.At Darasun we constructed a sludge dam for storing cyanide cakes, extended thetailing dam area, and also built three modular liquid fuel boiler units and amine water collection pit. In 2004 we started preparation for the introduction of a new environmental riskmanagement system at all Highland Gold's assets. It is designed to reduce andcontrol ecological risks at our mines and includes an alert reaction plan incase of accidents, as well as a programme of effective permanent environmentalmonitoring. CORPORATE & SOCIAL RESPONSIBILITY In the regions where we operate Highland Gold is one of the major tax payers,and in 2004 cumulative tax paid to local budgets was over US$11.3 million. In2004 the Group actively participated in various social programmes in Moscow andin the regions of Khabarovsk, Chita and Chukotka, including making donations tothe Russian Orthodox Church, an orphanage and a specialised school for blindchildren in the Moscow Region. We are also a sponsor of the Chita UniversityVolleyball team, as well as the regions hockey and football federations. We encourage our employees to be active in sports. This includes providingaccess to fitness equipment and support for various teams at MNV and Darasun. AtMNV, we have also installed and operate a ski facility and we sponsor asuccessful ski team for the children at MNV. We also felt it our duty to contribute to the rehabilitation campaign whichunfolded after the terrorist attack on a school in Beslan in September 2004. CONCLUSION The priority over the past year has been to secure the long-term future of thebusiness. In spite of a number of operational challenges, we have successfullybroadened the geographical and operational base of the business, whilstmaintaining output at our existing producing assets. We have also laid thefinancial foundations for future growth. Dmitry Korobov Managing Director FINANCE DIRECTOR'S REVIEW Financial Highlights FY 2004 FY 2003 % Change US$000s US$000s (unless stated) (unless stated) Turnover 82,062 71,578 15%EBITDA 25,610 32,264 -21%Operating profit 18,784 27,892 -33%Profit before tax 14,229 24,632 -42%Net profit 5,011 18,049 -72%Earnings per share 4 cents 16 cents -75%Net cash flow from operations 10,455 7,602 37%Capital expenditure 69,168 56,883 22%Dividend per share 2 cents 3 cents -33% Turnover in 2004 increased by 15% from US$71.6 million to US$82.1 million drivenby a 1% increase in MNV production, US$0.9 million of turnover coming from newproduction at Darasun and a 12% increase in the average gold price realised. Atthe same time cost of sales and administrative expenses increased by 46% and 38%respectively leading to decrease in operating profit of 33% from US$27.9 millionin 2003 to US$18.8 million in 2004. Cost of sales increased in 2004 by US$16.4 million compared with 2003. Thisincrease includes US$3.2 million of expenses relating to the Darasun operationswhere in 2003 all costs were capitalised. This led to a net loss of US$2.3million for Darasun, which represents mainly a write off of the carrying valueof the ore balance at year end to net realisable value. The undergroundoperations in 2004 included significant development works leading to expensiveore accumulated in the Balance Sheet. Given that during the first year lowergrade ore has been mined the net realisable value of such ore is less than itshistoric cost. The average rouble/dollar exchange rate moved from 30.68 in 2003 to 28.81 in2004 and resulted in an additional US$2.9 million charge to cost of sales in2004. MNV cost of sales increased by US$ 8.8 million driven by an increase incost of materials of US$3 million, increased salaries of US$1.6 million, changein work in progress of US$1 million and increased depreciation of US$2 millionresulting from the full year charge on assets purchased at the end of 2003. Ofthe US$3 million increase in cost of materials, US$1 million relates to anincrease in the prices of hypochlorite, which is used for neutralization of thetailings. Increase in the cost of metals and other chemicals also significantlyaffected the cost of sales at MNV. During 2004 certain VAT balances relating to years prior to 2002 have beenidentified and considered not recoverable. These balances have been written offleading to a charge of US$0.9 million to cost of sales. Administrative expenses increased by US$3.2 million from US$8.3 million toUS$11.5 million. Of these costs, the major component was an increase of US$1.8million associated with the growth of our Moscow office, in line with theanticipation of the expansion of our business activities. Expenses relating tothe Jersey office operation were in line with 2003. 2004 EBITDA amounted to US$25.6 million compared with US$32.7 million in 2003 adecrease of 21%. Notwithstanding the reduced EBITDA cash from operatingactivities increased to US$10.5 million compared to US$7.6 million in 2003. Thiswas achieved through a lower cash outflow relating to working capital movements(US$15.2 million in 2004 comparing with US$25.1 million in 2003). In 2004 the Group incurred US$5.8 million of interest compared with US$3.8million in 2003 reflecting the higher average debt levels during 2004 used tofinance the Group's development projects. Cash interest paid increased to US$4.8million from US$2 million. As a result of changes outlined above the profit before tax decreased by 42%from US$24.6 million to US$14.2 million. Although the Group statutory taxamounted to only US$2.2 million, deferred tax movements and one off write offsincreased the total tax charged to the profit and loss account to US$9.2 millionresulting in an effective tax rate of 64.8% compared to 26.7% in 2003. Of the increase the most significant single item involved the write off ofUS$2.9 million of deferred tax asset relating to tax losses accumulated atDarasun during 2004. Under Russian tax rules the company will be able to offsetaccumulated tax losses against future taxable profits over a 10 year period, butthe recovery in each year will be restricted to 30% of taxable profits. Giventhe early stage of Darasun's development and in line with general accountingpractice, management does not consider it is prudent to carry the full amount ofdeferred tax asset. Consequently the portion of the asset which is not expectedto be recovered within three years has been written off. Similar write offstotalling US$1.4 million related to deferred tax assets accumulated at Mayskoyeand Novo have been made in 2004. Together these write-offs raised the effectiverate by 30.2%. The strengthening of the Russian rouble gave rise to currency gains on thetranslation of dollar denominated borrowings and added another 8.8% to theeffective tax rate. Other permanent differences, including non deductibleexpenses, accounted for a further 6.1% increase. These increases were offset bylower tax rates in Cyprus and Jersey reducing the effective tax rate by 7%. Management will continue to monitor the deferred tax assets arising in differentdevelopment projects and assess the timing and certainty of their recoverabilityin line with general accounting practice. The application of this policy maylead to deferred tax assets previously written off being recognised again infuture, or further write offs of deferred tax assets, notably in the case ofprojects at early stages of development. At the half year the company paid US$0.01 per share in dividends (US$0.015 in2003) and now proposes to pay another US$0.01 per share (US$0.015 in 2003).Total dividends for 2004 will amount to US$2.7 million compared with US$3.5million in 2003. During 2004 the Group spent a total of US$107.8 million on capital investmentsincluding US$26.8 million relating to the acquisition of the Taseevskoye licenseand US$69.2 million for construction and acquisition of tangible assets for theGroups projects (US$56.8 million in 2003). In addition the Group made its secondpayment for the acquisition of the Mayskoye license amounting to US$11.5million. The Group expects to receive 50% of the acquisition price for theTaseevskoye deposit from Barrick Gold once the ownership transfer is finalized. Almost all of the capital expenditure was financed from two equity issues. InJanuary 2004 the Group issued 9.3 million shares to Barrick Gold Corporationraising US$ 38 million net of expenses and later in December 2004 the Groupraised another US$94 million from a placement of 27.4 million shares at GBP 1.90per share. The net debt of the Group decreased from US$66.4 million at the end of 2003 toUS$37.7 million at the end of 2004. As at this date the net debt comprisedUS$40.8 million of cash in bank, US$70.9 million of loans and US$7.6 million oflong term liabilities including finance lease obligations. The decrease in netdebt was caused by an increase in cash balances of US$35.4 million, an increasein loans of US$5.0 million and an increase in long term liabilities of US$ 1.7million. In 2004 the Group concentrated on changing its debt profile and improving thequality of its Balance Sheet. At the end of 2004 the Group signed a syndicatedloan with Commerzbank for US$80 million with repayments structured over 3.5years. The first US$25 million was drawn in December 2004 with a second trancheof US$39 million received in February 2005. The proceeds were used to refinanceexisting debt. The remaining US$16 million is available to the Group uponachieving certain level of production at Darasun mine. Subsequent to the yearend, in April 2005 the Group issued a Russian Rouble bond for 750 millionRoubles (US$26.8 million) at 12% interest payable quarterly with a maturity of 3years and a repayment option in 1.5 years. The biggest increase in working capital during 2004 came from an increase ininventory of US$8.6 million, an increase in debtors of US$2.4 million and anincrease in VAT of US$5 million. Debtors represent mostly prepayments formaterials and supplies used in development of the Group's projects. Most of theincrease in VAT relates to VAT on construction that will be claimed back oncethe construction is complete. During 2004 the Group continued its no hedge policy in relation to the goldprice. Given the recent volatility in the Rouble/ dollar exchange rate the Groupis considering the possibility of currency hedges. Denis Alexandrov Finance Director HIGHLAND GOLD MINING LIMITED "This Preliminary Announcement is a summary of the Groups full Annual Report andAccounts and was approved by the Board on 18 April 2005. The report of theauditors on the full accounts for the year ended 31 December 2004 was signed onthat same date, and was unqualified. These financial statements have beenprepared on the same basis as the accounting policies disclosed in the 31December 2003 Annual Report and Accounts." Consolidated Profit and Loss Account ------------------------------------------------------------------------------- 12 months ended 12 months ended 31 December 31 December 2004 2003 US$000 US$000-------------------------------------------------------------------------------Turnover 82,062 71,578Cost of sales (51,810) (35,400)-------------------------------------------------------------------------------GROSS PROFIT 30,252 36,178Administrative costs (11,468) (8,286)-------------------------------------------------------------------------------GROUP OPERATING PROFIT 18,784 27,892Bank interest receivable 56 323Interest payable and similar charges (5,843) (3,846)Foreign exchange gains/(losses) 1,232 263-------------------------------------------------------------------------------PROFIT ON ORDINARY ACTIVITIES BEFORETAXATION 14,229 24,632Tax on profit on ordinary activities (9,218) (6,583)-------------------------------------------------------------------------------PROFIT FOR THE FINANCIAL PERIOD 5,011 18,049 Dividends (2,672) (3,456)-------------------------------------------------------------------------------PROFIT RETAINED FOR THE FINANCIAL PERIOD 2,339 14,593-------------------------------------------------------------------------------RETAINED EARNINGS BROUGHT FORWARD 20,660 6,067-------------------------------------------------------------------------------RETAINED EARNINGS CARRIED FORWARD 22,999 20,660------------------------------------------------------------------------------- There is no material difference between the reported profit and the historicalcost profit for the period to 31 December 2004. There are no recognised gains and losses other than the profit attributable toshareholders of the company of $5,011,000 in the year ended 31 December 2004 andthe profit of $18,049,000 in the year ended 31 December 2003. Consolidated Balance Sheet ------------------------------------------------------------------------------ At 31 December At 31 December 2004 2003 US$000 US$000------------------------------------------------------------------------------FIXED ASSETS Intangible assets - negative goodwill (8,796) (8,074)Tangible assets 224,214 146,017------------------------------------------------------------------------------ 215,418 137,943CURRENT ASSETS Stocks 41,953 27,811Debtors 37,356 23,609Deferred costs 1,526 1,751Cash at bank and in hand 40,764 5,361------------------------------------------------------------------------------ 121,599 58,532 CREDITORS: amounts falling duewithin one year (83,931) (76,517)------------------------------------------------------------------------------NET CURRENT ASSETS /(LIABILITIES) 37,668 (17,985) TOTAL ASSETS LESS CURRENTLIABILITIES 253,086 119,958 CREDITORS: amounts falling dueafter more than one year (23,098) (30,734)PROVISIONS FOR LIABILITIES ANDCHARGES (19,714) (12,222) MINORITY INTERESTS - EQUITY (338) (1,445)------------------------------------------------------------------------------ 209,936 75,557------------------------------------------------------------------------------EQUITY SHAREHOLDERS' FUNDS Called up share capital 233 162Share premium 186,704 54,735Profit and loss account 22,999 20,660------------------------------------------------------------------------------ 209,936 75,557------------------------------------------------------------------------------ Approved by the Board on 18 April 2005 Consolidated Cash Flow Statement ------------------------------------------------------------------------------ 12 months ended 12 months ended 31 December 31 December 2004 2003 US$000 US$000------------------------------------------------------------------------------CASH GENERATED FROM OPERATING ACTIVITY 25,610 32,743------------------------------------------------------------------------------Changes in working capital (15,155) (25,141)------------------------------------------------------------------------------NET CASH INFLOW FROM OPERATING ACTIVITIES 10,455 7,602------------------------------------------------------------------------------RETURNS ON INVESTMENT AND SERVICING OF FINANCEInterest received 56 323Interest paid on bank loans (4,386) (1,573)Interest paid on finance leases (468) (786)------------------------------------------------------------------------------NET CASH OUTFLOW FROM RETURNS ONINVESTMENT AND SERVICING OF FINANCE (4,798) (2,036)------------------------------------------------------------------------------TAXATION Russian profits tax refund (paid) 491 (5,339)------------------------------------------------------------------------------CAPITAL EXPENDITURE AND FINANCIAL INVESTMENTPayments to acquire tangible fixed assets (69,168) (56,883)------------------------------------------------------------------------------NET CASH OUTFLOW ON CAPITAL EXPENDITUREAND FINANCIAL INVESTMENT (69,168) (56,883)------------------------------------------------------------------------------ACQUISITIONS AND DISPOSALS Purchase of subsidiary undertakings (11,885) (11,986)Net cash acquired with subsidiary undertakings - 401Acquisition of Taseevskoye rights (26,785)------------------------------------------------------------------------------NET CASH OUTFLOW ON ACQUISITIONS AND DISPOSALS (38,670) (11,585)------------------------------------------------------------------------------Equity dividends paid (2,997) (2,763)------------------------------------------------------------------------------NET CASH OUTFLOW BEFORE FINANCING (104,687) (71,004)------------------------------------------------------------------------------FINANCING Issue of ordinary share capital 140,515 -Share issue costs (7,261) -Receipt of short term loans 105,788 44,110Receipt of long term loans 31,000 40,000Repayment of borrowings (131,770) (32,040)Loan arrangement fees - (540)Related Shares:
HGM.L