26 Apr 2006 07:07
Highland Gold Mining Limited26 April 2006 Highland Gold Mining Limited announces Final Results for the twelve months to 31 December 2005 Highlights +----------------------------+----------+------------+| | FY 2005| FY 2004|+----------------------------+----------+------------+| | US$000s| US$000s|+----------------------------+----------+------------+| | (unless| (unless|| | stated)| stated)|+----------------------------+----------+------------+|Production (ounces) | 160,216 | 199,896 |+----------------------------+----------+------------+|Turnover | 75,955 | 82,062 |+----------------------------+----------+------------+|EBITDA | 4,787 | 25,610 |+----------------------------+----------+------------+|Operating profit (loss) | (3,097) | 18,784 |+----------------------------+----------+------------+|Profit (loss) before tax | (9,407) | 14,229 |+----------------------------+----------+------------+|Net profit (loss) | (7,174) | 5,011 |+----------------------------+----------+------------+|Earnings (loss) per share | (4) | 4 ||(cents) | | |+----------------------------+----------+------------+|Total assets | 374,219 | 337,017 |+----------------------------+----------+------------+|Net cash flow from | 7,751 | 10,455 ||operations | | |+----------------------------+----------+------------+|Capital expenditure | 56,143 | 69,168 |+----------------------------+----------+------------+|Dividend per share (cents) | Nil| 2 |+----------------------------+----------+------------+ *) EBITDA equals to cash generated from operating activity. • Gold production for 2005 was 160,216 ounces (MNV 140,038; Darasun 20,178) • Significant turnaround during the second half at MNV • Commissioned the Darasun mill in September 2005 • Expanded partnership with Barrick Gold - the Taseevskoye JV was established subject to certain Russian regulatory approval. • Taseevskoye production capacity extended by licences for Sredne-Golgotayskoye and ZIF-1 tailings • Obtained exploration licences for Belaya Gora, Sovinoye and Malo-Fedorovskoye • JORC resource calculations for Mayskoye and Taseevskoye completed • US$50 million equity subscription by Barrick Gold • Rouble bond issued equivalent to US$26.8 million to fund further development • Strengthened board and management team Commenting on today's results, James Cross, Chairman said: "While 2005 was clearly a difficult year for Highland Gold, we have made anumber of key management appointments and introduced new processes and controlswhich are already having a beneficial impact on the business. In 2006, we expectto complete our restructuring programme and further the development andexploration projects we have in partnership with Barrick Gold" The Company will hold a conference call on Wednesday, 26 April 2006,hosted byIvan Koulakov, Deputy Chairman and Henry Horne, Managing Director to discuss thefinal results. The conference call will take place at 10:00 am UK time (1:00 pmMoscow). To participate in the conference call, please dial one of the followingnumbers: 0800 953 1444 U.K. toll-free number1866 220 1452 USA toll-free number+44 (0) 1452 542 300 International dial in number -A replay of the conference will be available after the call's completion for aperiod of one week by calling one of the numbers below and quoting Conference ID8509755#: 0800 953 1533 U.K. toll-free number1866 247 4222 USA toll-free number+44 (0) 1452 550 000 International dial in number A copy of the presentation will be available on www.highlandgold.com. Financial Calendar Post 2005 Annual Report 12 May 2006Annual General Meeting 07 June 20062006 Interim Announcement September 20062006 Interim Report and Accounts October 2006. Enquiries: London:+44 (0) 207 851 6400 Moscow:+7 (495) 777 5529 +7 (495) 723 5836 E-mail:info@highlandgold.com Henry Horne, Managing Director Dimitry Yakushkin, Director of Communications Highland Gold Mining Limited trades under the ticker, HGM.L www.highlandgold.com Chairman's statement In 2005 Highland Gold focused primarily on improving the performance of existingoperations and progressing work on our future projects. The Company furtheredits acquisition programme with considerable success. PRODUCTION For our core asset MNV, located in the Khabarovsk region, the year startedpoorly with a serious drop in production. The Board considered it necessary toissue a production update in June. An independent assessment of the miningoperations highlighted a significant lack of underground development and overburden stripping at both MNV and Darasun. After the implementation of newprocedures and cost controls in the second half of 2005, coupled with theappointment of managerial personnel with world wide experience, we were able torecover from the first half operating setbacks. Although the overall productionat MNV fell by approximately 25% when compared to 2004, production in the secondhalf was almost 70% higher than the first half of 2005. Based on thisperformance we are confident of this mine's future and have set a productionrange of between 150,000 oz to 160,000 oz for 2006. Throughout 2005 our management team persisted in its efforts to bring Darasun,our second major operation located in the Chita region, into full production.Though this work is still not complete and will continue in 2006, the Darasunmill was successfully commissioned after rectifying the initial technicaldifficulties in the second half of the year. Key staff with mining andmetallurgical skills have been appointed at Darasun and an experienced geologistwill join the team in May. This will complete the implementation of ourmanagement restructuring plans for 2006 and should result in a markedimprovement of production at the mine. The problems experienced earlier resultedin lower than expected production, most of which was achieved during the lastfew months of 2005. This resulted in a significant cash drain on the Company andproductivity improvements especially in the underground operations, are now animmediate priority. Furthermore, in addition to production shortfalls problemsin reconciling mill throughput were experienced. This prompted the Board tocommission an independent security audit in addition to appointing new securitypersonnel. PROJECT DEVELOPMENT Further progress has been made on assessing our three major projects,Taseevskoye, Mayskoye and Novoshirokinskoye. At Taseevskoye good progress wasmade with the preparatory work. We are in the process of finalising the jointventure arrangements with Barrick Gold and have progressed towards a detaileddevelopment plan and budget for 2006. Last year we were successful in obtainingexploration and production licences for the Sredne-Golgotayskoye deposit locatednear Taseevskoye which we hope will enhance the overall potential of theoperation. In addition we acquired the rights to retreat mill tailings fromprevious production. Further data was received regarding the future development of our two otherprojects, at Mayskoye and Novoshirokinskoye. For Mayskoye we received anindependent JORC resource estimate, carried out additional drilling on the siteand continued with camp construction. . At Novoshirokinskoye, external consultants and a newly appointed in-housespecialist are reviewing the development of this deposit. The outcome of thisprocess will be announced in the foreseeable future. EXPLORATION During the year we made further progress in the development of our explorationportfolio by acquiring 3 sites with future potential in each of thegold-producing districts where we are currently operating .This process hasstrengthened our presence in these areas and Barrick Gold have confirmed theirparticipation rights in all of these prospects. RESULTS In 2005 Highland Gold has shown an after tax loss of US$7.2 million as a resultof difficulties experienced at MNV and the delay in the production build-up atDarasun. Furthermore production costs particularly consumables and energy havecontinued to increase. Whilst we are likely to continue to see cost inflation atMNV, costs at Darasun should start to improve as production increases andoverall production costs for the Company should show an improving trend. Administration expenses increased mainly as a result of the appointment of anumber of experienced executives.. From a cash flow perspective, although, theCompany generated almost US$20.8 million less cash from operations when comparedto 2004, a total of US$128.0 million was raised which enhanced the financialposition. These funds were raised by the issue of new shares to Barrick Gold ata value of US$48.9million, medium term debt of US$ 65.8 million and US$ 13.3million received from the partial disposal of the Taseevskoye project to BarrickGold . The Board has reviewed a dividend policy which remains unchanged and the Boardis unable to recommend a final dividend in respect of the financial year 2005. The Company has formulated a restructuring plan, which is being implementedduring 2006. This plan is designed to improve productive processes, cut costs,add additional world class expertise and concentrate on improving theinfrastructure of the current operations. It is further intended to finalisemine plans and feasibility studies for those projects we assess worthy ofcontinued development. CHANGES TO THE BOARD In February 2006 Henry Horne was appointed as the new managing director. At thesame time Henry became a director of our Moscow based operating companyRUSSDRAGMET. Henry Horne, with 25 years of experience in the mining industry, succeededDmitry Korobov who had been with our Company since its inception in 2002. Dmitryplayed an important role over the years in the group's progress and in providingthe operational infrastructure necessary for developing our assets in Russia.Dmitry left the Company to pursue other interests. I would like on behalf of theBoard to express our gratitude to Dmitry for his contribution to the Company andfor his loyal and professional work over many years. BARRICK GOLD The blend of Russian with Western expertise has been successfully demonstratedin the development in 2005 of our relations with our strategic partner BarrickGold. As I noted earlier we are optimistic about the prospects of ourTaseevskoye joint venture. Barrick Gold is actively participating with us inconstructing and implementing a programme to develop a number of social projectsin the town of Baley which will be the centre of the Taseevskoye operation. Onbehalf of the board and management I wish to extend our thanks to Barrick Goldfor the technical assistance afforded us during 2005. HEATH, SAFETY AND ENVIRONMENT A priority for our Company remains the need to increase the safety awareness ofall our employees about safety regulations by building a culture ofresponsibility and involvement in safety, health and the environment. Despitethese efforts, it is with regret that I report that we had two fatalities one atMNV in 2005 and another in Darasun in 2006. I wish to convey on behalf of theBoard and management our condolences to the families of these employees. In all our mining projects we strive to support and sustain the communities inthe environs of our operations. This is a core priority for us as a Company andserves as a basis for constructive and open dialogue with regional and localauthorities. In support of the Federal Government's policy to promote theeconomic and social development of Eastern Siberia and Russia's Far East,Highland Gold has increased its direct investment in these regions. In summary we had a disappointing start to 2005, as detailed in the AnnualReport. With the remedial action now taken Highland Gold's second half has seenimproved results and this trend is continuing. A number of new people have andare due to join us in the near future, with a strong emphasis on world wideexpertise, whose efforts will initially be focused on the Darasun operation. Weanticipate further positive developments with our strategic partner, BarrickGold, in a number of joint ventures, including progressing Taseevskoye. We areformulating plans on the Mayskoye project, and now have a small team developingour exploration projects. With the continued improvements in the economicclimate in Russia and the gold price Highland Gold is well placed to benefitfrom these developments in the future. Lastly I would like to thank the board for their invaluable input and supportduring a most difficult period in the development of the Company. James Cross Chairman MANAGING DIRECTOR'S REPORT The year 2005 was for Highland Gold a difficult year with important changes inmining and management. These were aimed at achieving recovery from productionsetbacks in the first half of the year whilst creating a solid base for futuredevelopment and growth of the Company. The changes already implemented duringthe latter part of 2005 brought encouraging results and we will continueimplementing further improvements throughout 2006. Our people In order to build a team capable of meeting the present, as well as the futurechallenges facing the Company we strengthened our management team by employingnew managers with proven track records to key positions. In this respect, Iwould like to note the appointments which have already taken place. Mr. Scott Yelland joined the Company in June 2005 as Chief Operating Officer.Mr. Yelland holds a Masters degree in mining engineering from the CamborneSchool of Mines and has experience over 22 years at mines in the UK, Ghana,Spain, Brazil, Australia and Russia where he has been employed by companies suchas Rio Tinto, Ashanti Goldfields and Kinross Gold. Mr. Russell Tremayne joined in August 2005 as Group Mining Engineer. Mr.Tremayne is a mining engineer with over 30 years experience, and has heldpositions at mines in the UK, Portugal, Zimbabwe, Greece, Bulgaria and Brazil. Mr. Nigel Clark joined in September 2005 as Group Planning Engineer. He has over15 years experience in the mining and civil engineering industries and hasworked in the UK, Australia, Canada and Eastern Europe being recently awarded amasters degree in Mining Geomechanics from the University of New South Wales,Australia. Mr. Alexander Gorbunov was promoted to Managing Director at the Darasun mine. Hehas over 20 years experience in the mining industry. Prior to this appointmentMr. Gorbunov was the Metallurgical Manager at MNV. Having been employed as a consultant for Highland Gold Mr. Noel Devine hasjoined the Company from April 2006 as Director Projects. His responsibilitieswill be managing and developing all present and future Highland Gold projects. Mr.Rob Wienand has joined Highland Gold in April 2006 as Head of Mining atDarasun. He graduated as a mining engineer from Witwatersrand University, SouthAfrica and acquired his mining experience in South Africa, Peru and Bulgaria insuch companies as Anglo Gold and Dundee Precious Metals. Mr. Paul Clarke will be joining us in May as Group Technical Director. He has aBachelors degree in mining engineering from Cardiff University, Wales with32-years worldwide mining experience. He held the position of Mine Manager atKumtor mine in Kyrgyzstan and was also instrumental in the design andconstruction of the mine. Mr. Alexander Arisanov will be joining us shortly as Highland Gold's Ore ReserveManager. He has a Masters degree in geology and has been the Chief Geologist atChelopech Mining EAD - a copper-gold operation situated in central Bulgaria. In order to add expertise within the group we will continue to attract capableprofessionals to join our Company in management positions at all levels. As of December 31, 2005 Highland Gold employed a total of 3,616 employees. Acost optimisation program was launched late 2005 at MNV where the headcount isbeing reduced and we are currently in the process of implementing the same atour Darasun operation as well as at the various Highland Gold administrationoffices. Our staff optimisation plan for 2006 includes reducing employees at MNVby approximately 14% and at Darasun by 10%. The headcount at RDM ManagementCompany will also be reduced by approximately 30%. During 2005 we implemented various programmes to improve the professionaldevelopment and skills of our employees. We have successfully launched a CareerDevelopment programme at MNV where we have selected promising, talented youngspecialists with the aim to develop and then promote them into managementpositions. A similar programme will be implemented at the Darasun mine in 2006. As a result of all these changes, we are looking with confidence at the futureof our mining operations and projects across Russia. Operations During 2005 the Company operated two mines, MNV in the Khabarovsk region andDarasun in the Chita region. •Mnogovershinoye mine (MNV) Serious and focused efforts undertaken by management led to the re-establishmentof MNV as a stable functioning operation by the end of the second half of 2005which partially offset the weak performance during the first half of the year. Mine development 2005 MNV, our core asset and main producing mine, located in the north of theKhabarovsk region experienced operating setbacks in the first half of the year.During the latter part of 2004 and the first half of 2005 there were significantshortfalls in critical mine development in both the open pit and undergroundoperations. This was due to lack of planning, improper use of equipment,shortage of critical spares and consumables and personnel qualification issues.All these factors were reinforced by extremely bad weather during the firstmonths of 2005. This led to a shortfall in production in the first half of 2005- an almost 50% decrease compared to the same period in 2004. Led by a new management team, the focus in the second half of 2005 was to reviewand reassess the short and medium term production schedules and to ensure thatrealistic recovery plans were established and implemented, the main objectivebeing to return MNV to the original budgeted production levels by the end of2005 and ensuring consistent production levels in 2006. Following a review by HGML and Barrick Gold specialists of the MNV open pitoperations, a recovery plan was established, incorporating a significant wastedevelopment program, ensuring that the open pit was developed in a safe andproductive manner. During the second half of the year, over 2.1Mt of waste and217Kt of ore were mined at an average grade of just under 6.0g/t Au.Encouraging signs were also observed in the improvement of the open pitequipment utilisation and productivity, with a significant improvement inproduction drilling. The underground operation performed well in the second half of the year,producing over 215Kt at 7,2g/t Au (Budget: 6,4g/t Au). One of the main reasonsfor this improvement was the introduction of a Boart Longyear Stopemasterunderground drill rig, which enables parallel drilling with small diameterholes, effectively reducing damage to the host rock and decreasing dilution.Underground development plans have been reviewed and revised accordingly,ensuring that "critical path" development headings are prioritised, to meet the2006 production targets. Processed tonnes for 2005 were 9.2% below budget, with 875,361 tonnes processedagainst a budget of 965,000 tonnes. There were encouraging signs in the secondhalf of the year, with an average of 84,000tpm processed. Processed grades forthe year averaged 5.5g/t Au against a target of 6.5g/t Au, the shortfall beingpartially attributed to the processing of lower grade, oxidised stockpile ore,resulting in a lower feed grade to the mill and poorer recoveries, primarily inthe first part of the year. The implementation of new procedures and controls at MNV had already startedshowing positive results at the beginning of the second half of the year and bythe end of 2005 the mine achieved a recovery in production. Recovered gold inthe last five months increased more than 70 % on a monthly basis compared to thefirst seven months. MNV - Operations Summary +--------------------------------+-------------+---------------+---------------+| | Unit | 2005 | 2004 |+--------------------------------+-------------+---------------+---------------+|Mine Development | | | |+--------------------------------+-------------+---------------+---------------+|Underground | 000 m3 | 79.9 | 86.6 |+--------------------------------+-------------+---------------+---------------+|Underground | Metres | 8,461 | 8,377 |+--------------------------------+-------------+---------------+---------------+|Open Pit - waste stripping | 000 m3 | 1,464 | 1,509 |+--------------------------------+-------------+---------------+---------------+|Open Pit - waste stripping | 000 tonnes | 3,865 | 3,984 |+--------------------------------+-------------+---------------+---------------+| | | | |+--------------------------------+-------------+---------------+---------------+|Ore mined | | | |+--------------------------------+-------------+---------------+---------------+|Underground | Tonnes | 396,330 | 389,506 |+--------------------------------+-------------+---------------+---------------+|Open Pit | Tonnes | 374,387 | 413,543 |+--------------------------------+-------------+---------------+---------------+|Total ore mined | Tonnes | 770,717 | 803,049 |+--------------------------------+-------------+---------------+---------------+|Stockpiled ore | Tonnes | 104,644 | 124,320 |+--------------------------------+-------------+---------------+---------------+|Ore processed | Tonnes | 875,361 | 927,369 |+--------------------------------+-------------+---------------+---------------+| | | | |+--------------------------------+-------------+---------------+---------------+|Gold grade | | | |+--------------------------------+-------------+---------------+---------------+|Underground | g/tonne | 6.39 | 8.51 |+--------------------------------+-------------+---------------+---------------+|Open Pit | g/tonne | 5.42 | 6.43 |+--------------------------------+-------------+---------------+---------------+|Stockpile | g/tonne | 2.49 | 4.83 |+--------------------------------+-------------+---------------+---------------+|Average grade | g/tonne | 5.51 | 7.09 |+--------------------------------+-------------+---------------+---------------+| | | | |+--------------------------------+-------------+---------------+---------------+|Recovery rate | % | 90.3 | 92.2 |+--------------------------------+-------------+---------------+---------------+| | | | |+--------------------------------+-------------+---------------+---------------+|Gold production | Ounces | 140,038 | 195,026 |+--------------------------------+-------------+---------------+---------------+ Production costs Our Cash Operating Costs of US$ 275 per ounce rose by 46.5 per cent comparedwith 2004. This was mainly attributable to the decrease in production in thefirst half of the year, lower than planned grades due to lack of development toaccess higher grade mining blocks, increased overburden stripping and continuedincrease in prices for materials, mostly mill reagents and fuel. These increasesaffected total cash costs (US$ 306), which rose due to higher royalties as aresult of the increased gold prices (average price US$ 450 per ounce). Our totalproduction cost was US$ 357 per ounce. MNV Production Costs per Ounce +------------------------------+---------------------+------------+------------+| | Unit | 2005 | 2004 |+------------------------------+---------------------+------------+------------+|Cash Operating Cost | US$ per ounce | $275 | $187 |+------------------------------+---------------------+------------+------------+|Total Cash Cost | US$ per ounce | $306 | $215 |+------------------------------+---------------------+------------+------------+|Total Production Cost | US$ per ounce | $357 | $250 |+------------------------------+---------------------+------------+------------+ MNV - Mining Activities +------------------------------------------+--------------------+--------------+|Tonnes | 2005 | 2004 |+------------------------------------------+--------------------+--------------+|Underground | | |+------------------------------------------+--------------------+--------------+|Southern | - | 101,736 |+------------------------------------------+--------------------+--------------+|Northern | 184,496 | - |+------------------------------------------+--------------------+--------------+|Central | 156,559 | 108,631 |+------------------------------------------+--------------------+--------------+|Deer | 20,467 | 27,649 |+------------------------------------------+--------------------+--------------+|Flank | 28,265 | 38,237 |+------------------------------------------+--------------------+--------------+|Intermediate | 6,543 | 61,082 |+------------------------------------------+--------------------+--------------+|Ore from development | Incl in above| 52,171 |+------------------------------------------+--------------------+--------------+|Total Underground ore | 396,330 | 389,506 |+------------------------------------------+--------------------+--------------+|Underground % of total mined ore | 51.4% | 48.5% |+------------------------------------------+--------------------+--------------+| | | |+------------------------------------------+--------------------+--------------+|Open Pit | | |+------------------------------------------+--------------------+--------------+|Upper | 374,387 | 413,543 |+------------------------------------------+--------------------+--------------+|Flank | - | - |+------------------------------------------+--------------------+--------------+|Total Open Pit ore | 374,387 | 413,543 |+------------------------------------------+--------------------+--------------+|Open Pit % of total mined ore | 48.6% | 51.5% |+------------------------------------------+--------------------+--------------+| | | |+------------------------------------------+--------------------+--------------+| Total | 770,717 | 803,049 |+------------------------------------------+--------------------+--------------+ Capital costs During 2005 the Company invested US$ 8.0 million at MNV. This included US$ 5.8million for the purchase of additional production equipment including dumptrucks for the open pit, underground trucks, loaders and drill rigs including aStopemaster drill rig. US$ 0.2 million was spent on the replacement of ITequipment, US$ 1.1 million for capital exploration works and US$ 0.9 millionrelated to other construction work at the site. Outlook MNV will remain the main source of cash flow for the Company in 2006. In orderto maintain stable production at the mine, our team will continue to implementvarious improvement measures in areas of safety, supervision, maintenance andlogistics. Notably we count on increasing productivity from present availableequipment and bringing in new efficient machines, improving rock controltechniques and stockpiling medium grade ore in the mill stockyard to ensureprocess continuity during bad weather. A second Boart Longyear Stopemaster drillrig has been ordered and is due on site in June, which will increase theunderground production drilling capacity. This year's underground developmentprogramme also includes ramp development down to new horizons, identified byexploration drilling in the Northern and Reindeer zones. Open pit optimisation studies and associated open pit design works have beenstarted in 2006, and will incorporate optimisation studies at a gold price of$500. This study will be completed by late April. Other initiatives include, the construction of a central workshop, replacing thelarge number of small, poorly equipped workshops scattered all over the site,and the introduction of a number of mobile equipment maintenance contracts, allof which should help to further reduce the operational costs in 2006. During2006 the warehouse at Nikolaevsk-na-Amur will be consolidated and relocated toMNV, which will increase efficiencies and reduce labour and stockholding. Special attention will be paid to increasing awareness of health and safetyissues followed by proper training, tuition and guidance of our employees. Wewill continue with our team building efforts on all levels and improve personnelqualifications and skills whilst at the same time reducing the number ofemployees by continuing our manpower optimisation plan. We continue toexperience cost inflation and there is ongoing development required to accessthe higher grade ore blocks. Our gold production target for the mine in 2006 isin the range of 150,000 oz to 160,000 oz. The production for the second half of2005 and first three months in 2006 has confirmed that this target is realisticand achievable. •Darasun Mine Production problems at Darasun were identified and addressed by our newmanagement team and partially resolved during the fourth quarter of 2005. Thisapproach will be intensified during 2006 and all efforts will be made to achieveprofitability. Mine development After several shut downs over the course of 2005, the installation of new millmotors, a number of technological changes including changes to the grindingcircuit configuration we were able to complete the commissioning of the DarasunMill late in the second half of 2005. The processing plant started runningstably from mid January 2006. Another area of attention at Darasun was overall mine supervision. As a resultof the shortfall in development in the second half of 2004 and in 2005, plannedproduction levels in the underground and open pits were not achieved, resultingin the mill processing large quantities of low grade, heavily oxidisedhistorical stockpile material. In order to implement up-to-date mining standards and controls a new managementteam has been established at Darasun, using some expertise from MNV. We havealso enlisted the close support from two Barrick Gold specialists to assist theDarasun management in addressing technical problems at the metallurgical plantand analytical laboratory. A number of initiatives were started in the underground operations including,the back filling of waste underground, the replacement of timber support withmechanised support, using Ammonium Nitrate based explosives and the replacementof old hand held drilling equipment with modern equipment and drillingconsumables. We also completed an open pit optimisation study of the Talatui deposit inco-operation with Barrick Gold specialists which showed some encouragingresults. The block model has provisionally identified over 1.4Mt of ore, atmineable grades of over 6 g/t Au which will equate to a mine life in excess ofseven years. Darasun - Operations Summary +-------------------------+-----------------+----------------+----------------+| | Unit | 2005 | 2004 |+-------------------------+-----------------+----------------+----------------+|Mine Development | | | |+-------------------------+-----------------+----------------+----------------+|Underground | 000 m3 | 27,454 | 36,017 |+-------------------------+-----------------+----------------+----------------+|Underground | Metres | 3,922 | 5,170 |+-------------------------+-----------------+----------------+----------------+|Open Pit - waste | 000 m3 | 1,546 | 304 |+-------------------------+-----------------+----------------+----------------+|Open Pit - waste | 000 tonnes | 4,328 | 608 |+-------------------------+-----------------+----------------+----------------+ +---------------------+------------------+-------------------+-----------------+| Processing | Units | 2005 | 2004 |+---------------------+------------------+-------------------+-----------------+|Ore processed | Tonnes | 207,593 | 31,309 |+---------------------+------------------+-------------------+-----------------+|Grade | g/t Au | 4.54 | 5.92 |+---------------------+------------------+-------------------+-----------------+|Recovery rate | % | 68.8 | 80.2 |+---------------------+------------------+-------------------+-----------------+|Gold Produced | Grade, g/t | 20,178 | 4,870 |+---------------------+------------------+-------------------+-----------------+ Completion of the 2005 metallurgical balance identified discrepancies betweenthe geological and processing grades. Further investigations revealed that partof the discrepancy related to the previous year, therefore the 2005 opening orestockpile grades were adjusted. Additional adjustments to correct the gold inprocess were made which impacted on the headgrade and recovery figurespreviously reported. One of the main reasons was inaccurate geological sampling,which is currently being addressed Production costs Our Cash Operating Costs for the last four production months of 2005 at Darasunaveraged US$1,171 per ounce. This was due to Darasun's low production, very highmining costs and fixed administrative costs. Low grades in the milling circuitcontributed considerably to the increase in cost per ounce of gold produced.Total cash costs were US$1,214 per ounce and total costs were US$1,326 per ounceof gold produced. Capital costs During 2005 we invested US$ 17.7 million in the Darasun operations. The majoritems included US$ 9.2 million of development costs that were capitalised(salaries, electricity, fuel and overheads), US$ 6.2 million for the purchase ofequipment and machinery, US$ 1.0 million for mill reconstruction, US$ 0.5million for exploration and US$ 0.8 million for other capital expenditures. Outlook The all important objective during 2006 is to turn the Darasun operation toprofitability in the second half of the year. Our 2006 production target for Darasun is in the range of 50,000 to 55,000 oz ofgold. We will continue to address all aspects of the operation, rectifying anyunresolved problems and strengthening the local management team by introducingtwo mining and one geology expatriate to the operation during mid April and May.We will continue with management changes and increase our employee skillsdevelopment efforts. The main objectives for 2006 are to achieve our underground targets, ensuringthat minimum mining widths are maintained and, that the planned modifications tothe existing stoping methods are implemented. We plan to add two Knelson concentrators to the processing circuit during April2006, which will help improve recoveries of the coarser gold fractions presentin the Teremki underground ore and the Talatui open pit ore. Our already introduced manpower optimisation plan will be enhanced whilstvarious identified and easy-to-implement cost control measures, which willprovide quick returns, will be pursued and implemented. Projects •Taseevskoye The Taseevskoye project progressed well and according to plan in 2005, in closecooperation with our joint venture partner Barrick Gold. At the beginning of the year Highland Gold's strategic partner Barrick Gold,exercised their participation rights to the project and acquired 50% of theasset. The licence of the deposit was transferred to a new company OOOTaseevskoye which will be owned by Highland Gold and Barrick Gold once certainRussian regulatory approvals have been received. A company office was set up inthe town of Baley to oversee the development of the project and to developrelationships with the local community. Several public hearings and meetingswith townspeople have been organised in order to approach and resolve varioussocial, housing and environmental issues linked to the re-starting of mining andmining related operations. Consultants have provided a resource estimate in accordance with JORCrequirements. After the review of the previous feasibility study, undertaken bythe former licence holders, this updated resource figure gave an indicatedresource of 25.2 million tonnes at a grade of 3.35g/t Au and an inferredresource of 4.8 million tonnes at a grade of 4.2g/t Au at a 1g/t Au cut-offgrade. We have started a scoping study which will be finalised by an externalcontractor Akver Kvaerner and have also confirmed the ore treatment process. Weexpect to release the results of the scoping study during 2006. Additional potential was added to the Taseevskoye project with the acquisitionin 2005 by Highland Gold of the Sredne Golgotayskoye deposit, which is locatedonly thirteen kilometers from the present project, as well as the tailings ofthe previous Baley ZIF-1 processing plant. Again Barrick Gold has exercised its50% participation rights in both acquisitions. Sredne Golgotayskoye containsRussian C1-C2 resources of 646,000 tonnes grading 15.5 g/t Au, whilst the ZIF-1tailings contain an estimated gold resource of 485,000 oz at a grade of 1.02 g/tAu. Capital costs We invested US$ 0.2 million at Taseevskoye in 2005. These expenses were relatedto work done on the recalculation of the resource base to JORC standards,setting up the company's office in the town of Baley and preparation works forexploration drilling to better define the Taseevskoye resources. Outlook In 2006 we plan to complete and finalise the scoping study of the project andstart work on the pre-feasibility study. Two phases of exploration drillingworks are planned: • The first phase is necessary for the scoping study and will becarried out during the first half of 2006, which will consist of 4,500 metres ofdiamond drilling. • The second phase will consist of 25,500 metres of diamond drilling,and the results of this work will be used for the pre-feasibility study We will also start pit de-watering tests and preparations. This includes 5,000metres of drilling and test pumping for hydrological study purposes. At present we have a 3D model of the Taseevskoye orebody, designed by SnowdenMining Industry Consultants, which is based on assay results from a combinationof recent and historical samples. A 3D model of the ZIF-1 tailings and theSredne Golgotayskoye deposit will be designed and the resources converted toJORC Standards. A more detailed 3D model based on historical and new sampleswill be developed for the pre-feasibility study In order to address the social and environmental issues at Taseevskoye we arepreparing a Resettlement Action Plan (RAP) and an Environmental ImpactAssessment (EIA). Outside consultant, Synergy Strategies Group, have beenengaged to assist us in this process. •Mayskoye The bankable feasibility study on the Mayskoye project is to be completed bynext year. Ore Resources Micon International re-classified the Russian resource estimates according tothe JORC requirements. A total of 6.89 million tonnes, at an average grade of11.52g/t (2.553million oz.), were classified according to JORC standards asmeasured and indicated resources with 15.03 million tonnes, at an average grade9.88g/t (4.77million oz.), being classified as inferred resources, at cut-offgrades of 5.0 g/t. The potential of converting a considerable amount of the inferred resources intoindicated resources, as well as the potential of identifying additional mineableorebodies was provided by Micon International, who has recommended an infilldrilling programme. This infill drilling programme commenced in the latter partof 2005 and the initial drill cores are being sent to an accredited assaylaboratory for analysis, results of which we expect to announce soon. The orebodies included in the re-classification exercise are relatively shallow,generally less than 600 meters below surface and all are open-ended at depth.Most of the orebodies being investigated are also open-ended on strike. A numberof additional orebodies have been identified, but were not included in theexercise as insufficient information was available on these additionalorebodies. These will be explored at a later date. Micon International carried out twin-drilling and chip sampling exercises toverify the Russian assay results. Even though, as is to be expected, there werevariations in individual check assay results, the overall average assay resultsobtained by Micon International compared closely with those obtained with theRussian drilling and chip sampling. Capital costs We have invested US$ 15.0 million in 2005 at Mayskoye. The major items includedUS$ 9.8 million of development costs (salaries, electricity, fuel andoverheads), US$ 2.7 million for the purchase of bulldozers, trucks and a DIAMEC252 exploration drill rig, US$ 1.1 million for exploration works in preparationof the feasibility study and US$ 1.4 million for capital construction of themine infrastructure Outlook A considerable amount of work has been done over the years on evaluatingalternative mining and metallurgical options for Mayskoye. This work has beenanalysed in detail by management and will form a valuable base for thefeasibility study and will also assist in fast-tracking the study. Extensivemetallurgical test-work has been carried out on Mayskoye ore in Russia, China,Australia and South Africa. All of these tests have confirmed that the Mayskoyeore responds exceptionally well to a Bi-oxidation process, with an average of95% of the contained gold in the sulphide ore reporting to a sulphide floatconcentrate, with gold recoveries from the oxidised ore ranging from 94% to 96%.The bankable feasibility study is being compiled by Akver Kvaerner. Emphasis will continue to be placed on the infilling drilling programmecurrently underway, in order to increase the volume of measured and indicatedresources to a target of between 10 and 12 million tonnes by the end of 2006. •Novoshirokinskoye Review of the revenue realization scenarios for Novoshirokinskoye to becompleted soon whilst various other options are being considered. At the end of 2005, the Board decided to conduct a review of the strategicoptions available for Novoshirokinskoye. The economic viability of the minedepends on optimising the revenue realisation from the gold-polymetallic depositand the review is focusing on various scenarios including the possibility ofexporting the lead and zinc concentrates produced. This would require a grant ofannual government export quotas. The export of concentrate is an alternative tothe construction of a capital intensive and high operating cost Flash Smelter. During 2005 we took the opportunity to increase the potential ofNovoshirokinskoye by acquiring at a cost of US$141,000 a similar deposit, Vosdvizhinskoye which islocated 60 km from Novoshirokinskoye. The C1 Russian resources ofVosdvizhinskoye are estimated at 850,000 tonnes of ore grading at 5.0% lead,4.6% zinc, 100 g/t silver and 0.4 g/t gold. The strategic review for Novoshirokinskoye is ongoing and no conclusions haveyet been reached. Capital costs We invested US$15.0 million at Novoshirokinskoye during 2005. The major itemsincludedUS$ 7.5 million in development costs (salaries, electricity, fuel andoverheads), US$ 1.2 million for the purchase of equipment including a DIAMEC 252exploration drill rig, US$ 2 million for exploration drilling and US$ 4.3million for capital construction of mine infrastructure (buildings, waterreticulation system, electricity supply network, boiler-houses and others). • Exploration During 2005 Highland Gold acquired various quality exploration projects. For each of these acquisitions, Barrick Gold exercised their 50% participationrights according to the 2004 Participation Agreement between Highland Gold andBarrick Gold. Belaya Gora (Khabarovsk region) The Belaya Gora gold deposit is located 55 kilometers north of the town ofNikolaevsk-na-Amur and 66 kilometers to the south of our present MNV operation.The acquisition was made pursuant to a public auction at a price of Rb16.5million (US$580,000). The deposit lies within 5 kilometers of an existing highvoltage power line and is accessible all year around by a well maintained roadthat connects MNV to the town of Nikolaevsk-na-Amur and its port and airportfacilities. The project has a long history of exploration and was exploredduring the 1970s and early 1980s with geophysics, trenching and a large amountof drilling and underground development on three horizons. The C2 resources ofthe deposit, estimated in accordance with Russian methodologies at a cut-offgrade of 2.73 g/t Au, amount to 466,000 ounces of gold at a grade of 3.0 g/tAu. Highland Gold considers this resource to be highly sensitive to the choiceof cut-off grade. Our preliminary target for Belaya Gora is to develop a nearsurface, bulk tonnage resource that is amenable to heap leaching. Outlook We will conduct topography, geophysics and geochemical mapping in the area,complete 500 metres of trenching and 1,200 metres of diamond drilling. Theresults of the drilling will be assessed and will form the basis of a newlycreated database. Lubov (Chita region) This project combines the exploration and mining rights for the MaloFedorovskoye deposit which we acquired ourselves, with the rights for thecontiguous Lubavinskoye deposit which was offered to us by Barrick Gold, to beincluded in a joint venture. These two deposits form the Lubov Project, locatedin the Chita region, 400 kilometers to the southwest of the city of Chita and 25kilometers north of the Mongolian border. These acquisitions were made pursuantto public auctions at a total cost of Rb66.4 million (US$2.33 million). TheProject is accessible by road and links to the State electrical power grid.Historic exploration and mining activities had always been oriented towardshigh-grade veins, though in the late 1990s the exploration focus on the propertywas shifted towards developing a near surface, bulk tonnage resource that wouldbe amenable to heap leaching. This work was conducted on a 350 meters portion ofa 10 kilometer strike length and resulted in Russian C2+P1 resources to a depthof 120 meters of 230,000 ounces of gold at a grade of 2.1 g/t Au. Outlook Works will consist of geophysical and geochemical research in the area ofapproximately 130 square kilometers, 1,200 meters of diamond drilling and 1,000metres of trenching. Bulk samples from deep horizons will be taken for heapleach test works. Sovinoye (Chukotka region) The Sovinoye deposit is located in the Chukotka region, 100 kilometres west ofthe village of Shmidt Cape (Population: 570) and 350 kilometres to the east ofPevek. The acquisition was made pursuant to a public auction at a price of Rb5.0million (US$ 177,000). The project has a long history of exploration and wasextensively explored for high grade veins from the 1970s through to the mid1980s with 25,000 metres of trenching, 96 drill holes and 2,700 metres ofunderground development. The P1 resources of the deposit estimated in accordancewith Russian methodologies amount to 11 million ounces of gold at a grade of 2.2g/t AU. Following a review of the historic data on Sovinoye, Highland Gold hasre-interpreted the geological model away from the high-grade vein system into abulk tonnage, open pit model. Outlook Our plans for 2006 include 2,183 metres of trenching and 3,000 metres of diamonddrilling. We plan to take three bulk samples for assaying, reassess results andcontinue building an accurate database. • Safety, Health and Environment Though we were able to decrease the number of work related accidents in 2005, itis with deep regret that we report two fatalities, one of which occurred at MNVduring 2005 and the other at Darasun in February 2006. We are determined to doall we can to ensure the safety of our employees in order to avoid suchtragedies in the future. During 2005 we increased the responsibility of our managers concerning safetyissues and started implementing a safety awareness program throughout ourorganization. Based on current Russian legislature, international safetystandards and world best practice, as well as cooperation and assistance fromour Barrick Gold partners, we have formalized a safety policy and adopted aSafety Management Plan (SMP). During 2005 more than 1,300 of our employees attended special courses on safetyand over 120 employees participated in the "Courageous Leadership Training"course together with our colleagues from Barrick Gold. These courses providedvaluable insight to best practices and laid a solid foundation for the rolloutof the Highland Gold Safety Action Plan. We will continue to improve Health, Safety and Environmental standards at allour operations and projects, ensuring that our employees receive suitabletraining and guidance and that we exceed the minimum compliance laid down byRussian legislation. We are also focusing on continuously improving healthcare for our employees byproviding them with regular medical check-ups and vaccinations. Additionalmedical equipment was purchased to assist in meeting the basic primaryhealthcare needs of our employees at each of our operations. We in Highland Gold believe that it is our obligation to have a soundenvironmental policy and we therefore have applied strict controls to enforcecompliance with all existing Russian regulations by all our operations. There were no environment related incidents at MNV during 2005, we continued toincrease the height of the tailing dam on site, decreased the industrial use offresh water by 20% and were able to considerably improve the use of recycledwater at our processing facility to 91%. At Darasun we received official authorization for work at the Talatui pit inaccordance with environment standards, as well as a permit to work withhazardous waste. We were also able to increase the use of recycled water at theoperation to 77%. Our work on the implementation of a new environmental risk management programfor the Company continued and should be fully implemented during 2006. Theobjective is to minimize the possibility of accidents, introduce an action planin case of emergencies and to rollout an environmental monitoring program. •Corporate and Social Responsibility We also continued our strategic support of different forms of social activity inthe regions where we operate. We provided financial aid to a specialist schoolfor blind and visually impaired children in the Moscow region; to the generalschool and a children's school of art at Mnogovershinnoye in the Khabarovskregion. In 2004-2005 we also donated money to the UN/UNESCO program "Illustratedbooks for blind children". In the city and region of Chita in line with theSocial partnership agreement between our Company and the regionalAdministration, we provided financial help to a number of non-profitorganizations such as the Chita municipal social orphanage for children, theChita volleyball team, the regional Theater union and the boarding school forvisually impaired children in the city of Petrovsk Zabaikalsky. We alsocontributed to the regional program "2005 - a year of sport and physicalculture". We are also proud to be one of the sponsors and corporate members ofthe newly founded Society of Friends of the Moscow Kremlin Museums, one of themajor historical and cultural centers of Russia. The role of the Company in the development of the local economy andinfrastructure is also reflected by the US$15.5 million (in 2004 US$11.3) incumulative taxes which were paid to the local budgets in the regions where weoperate. •Conclusion Although 2005 was a difficult year for Highland Gold we are confident that wehave laid the foundation to secure the long term future of the business. We havealmost overcome many of our operational and technical challenges and havepositioned ourselves positively within the Russian gold mining industry. Theexploration assets we obtained during 2005 will broaden our future operationalbase and will add critical mass to our existing operations. We have also forgeda closer relationship with our strategic partners, Barrick Gold, and theinterchange of technical expertise and know-how is flowing freely between thetwo parties. My management team and I sincerely thank all our employees for their support anddedication during the last year and we are confident in our ability to masterthe future challenges. Henry Horne Managing Director Finance Director Review Turnover in 2005 decreased by US$6.0 million (7.4%) from US$82.0 million toUS$76.0 million. The Group sold 162,179 oz of gold at an average price of US$451per oz compared with 197,306 oz sold in 2004 at an average price of US$406 peroz. Together with revenues coming from other Group entities of US$2.8 million in2005 (US$1.9 million in 2004) this resulted in consolidated turnover of US$76.0million in 2005 and US$82.0 million in 2004. The reduction in turnover was attributed to the following factors: a decrease inMNV gold sales resulting in a US$20.5 million drop in revenue, partially offsetby an 11% increase in the average gold price resulting in an additional US$6.4million of turnover; Darasun contributed US$8.1 million of turnover (2004:US$0.9 million); and an increase in other sales of US$0.9 million. At the sametime, cost of sales and administrative expenses increased by 28.6% and 8.5%respectively leading to a decrease in operating profit from a profit of US$18.8million in 2004 to a loss of US$3.1 million in 2005. The majority of theincrease in costs is attributable to the commissioning of the Darasun operationwhich contributed a net operating loss of US$9.1 million for 2005 compared witha loss of US$5.2 million in 2004. The cost of sales increase by US$14.8 million was driven primarily by anincrease in costs related to MNV production of US$2.4 million (from US$41.0million in 2004 to US$43.4 million in 2005), an increase in cost of salesrelated to the Darasun operation of US$11.0 million (from US$3.1 million in 2004to US$14.1 million in 2005), an increase in royalties of US$0.4 million due tobetter gold prices and an increase to other expenses of US$1.0 million includingVAT write off. During 2005 US$0.9 million of VAT balances relating to yearsprior to 2003 were identified as not recoverable, and were written off. The increase in MNV cost of sales of US$2.4 million is mostly explained by anincrease in the cost of materials of US$1.0 million, the cost of electricity ofUS$0.6 million, increase in amortization of US$0.7 and other expenses of US$ 0.4million. That was partially offset by a reduction in wages of US$0.3 million. Prior to the commissioning of the Darasun mill in September 2005, the majorityof operating expenses in excess of revenues were capitalized. Following thecommissioning and the commencement of the production phase, all operatingexpenses are recorded through cost of sales. Such treatment resulted in US$3.2million of operating expenses being recorded during the first eight months of2005, compared to US$10.9 million during the last 4 months. Administrative cost increased by US$0.9 million from US$11.5 million to US$12.4million. This increase includes US$1.5 million of expenses accrued in relationto the share option scheme adopted by the Group in the second half of 2005.There were no such expenses included into 2004 profit and loss. During 2005 the Group generated US$4.8 million cash from operations comparedwith US$25.6 million in 2004 - a decrease of 81%. At the same time net cash fromoperating activities decreased by only 26% to US$7.8 million compared to US$10.5million in 2004. This was achieved through a reduction in working capital ofUS$3.0 million in 2005 compared to an increase of US$15.2 million in 2004. In 2005 the Group incurred US$6.8 million of interest compared with US$5.8million in 2004 reflecting the higher average debt levels during 2005. Cashinterest paid increased to US$5.2 million from US$4.9 million. In 2005 the Groupearned US$1.8 million of interest on cash placed in short term deposits. Thisresulted in a net interest expense of US$3.4 million in 2005 compared to US$4.8million in 2004. As a result of the changes outlined above, the profit before tax decreased froma profit of US$14.2 million to loss of US$9.4 million. The tax on profitamounted to an income of US$2.2 million in 2005 compared with a tax expense ofUS$9.2 million in 2004, resulting in a net loss after tax of US$7.2 million forthe year ended 31 December 2005 (net profit of US$5.0 million for 2004). The 2004 profit tax charge included a write off of US$2.9 million of deferredtax assets relating to tax losses accumulated at Darasun during 2004. UnderRussian tax rules at that time the Group would be able to offset accumulated taxlosses against future taxable profits over a 10 year period, but the recovery ineach year would be restricted to 30% of taxable profits. Given the early stageof Darasun's development and in line with general accounting practice,management did not consider it was prudent to carry the full amount of deferredtax asset. Consequently the portion of the asset which was not expected to berecovered within three years was written off. Similar write offs totaling US$1.0million related to deferred tax assets accumulated at Mayskoye and Novo weremade during 2004. Together these write-offs amounted to US$4.0 million andraised the effective rate by 27.4% in 2004. During 2005 tax legislation has changed, allowing companies to offsetaccumulated tax losses against 50% of taxable profits in 2005, 70% in 2006, and100% thereafter, compared with just 30% before that. Following this change inlegislation, management now believes that the Group will be able to recoverfurther accumulated taxable losses, resulting in the recognition of US$4.0million of prior year losses previously not recognised. The Group did not declare any dividends for the 2005 financial year, but inaccordance with new UK GAAP rules dividends must be recorded in the period theyare approved by the shareholders, as opposed to when they are proposed.Accordingly, changes have been made to Financial Statements of 2004 and 2005 toreflect this change in accounting rules. During 2005 the Group invested US$56.1 million into the construction andacquisition of assets (US$69.2 million in 2004). This includes investments intoMayskoye of US$15.0 million, Novo of US$15.0 million, Darasun of US$17.7million, MNV of US$8.0 million and other group entities of US$0.4 million. Inaddition the Group made its last payment for the acquisition of the Mayskoyelicence totaling US$11.5 million, paid US$2.0 million for acquisition of otherexploration licences, repaid US$62.8 million of debt, paid US$2.5 million ofprofit tax, paid US$1.5 million of dividends and US$5.3 million of net interest,bringing total cash outflow for other than on operating activities to US$141.7million for the year 2005. This outflow was financed by existing cash reserves of US$6.0 million andUS$135.7 million of cash inflow that included US$7.7 million coming fromoperating activity, a US$13.3 million prepayment received for the partialdisposal of the Taseevskoye project to Barrick Gold, and US$48.9 million of netproceeds from new share issue. In addition the Group received US$65.8 million ofnew debt including US$26.8 million (RUR750 million) of rouble denominatedcorporate bond and US$39.0 million of the Commerzbank syndicated loan arrangedat the end of 2004. The net debt of the Group increased from US$37.7 million at the end of 2004 toUS$47.0 million at the end of 2005. This increase in net debt was caused by adecrease in cash balances of US$6.0 million, an increase in loans and othercreditors of US$6.7 million, the repayment of US$4.2 million of the capitalelement of finance leases and other movements of US$0.8 million. In 2005 the Group continued to concentrate on changing its debt profile andimproving the quality of its Balance Sheet. In April 2005 the Group issued aRussian rouble bond for 750 million roubles, which equals to US$26.8 million atthat date. The bond has a three year life with a put option given to bondholders at the end of 18 month period when a new interest rate will be set up bythe Group. The existence of this put option, which is excisable in October 2006,has resulted in this bond being classified as short-term. Should anybond-holders exercise this option, the Group would seek to on-sell the bonds. As the Group spent roubles raised through the bond issue it entered into aseries of forward contracts to hedge its net rouble liability position into USdollars. This hedge resulted in the rouble denominated liability of thecorporate bond being carried at to US$26.3 million at year end. At the same timethe Group continued its no hedge policy in relation to the gold price. HIGHLAND GOLD MINING LIMITED Consolidated Profit and Loss Account +--------------------------------------+-----------------+-----------------+| | 12 months ended| 12 months ended|| | 31 December 2005| 31 December 2004|+--------------------------------------+-----------------+-----------------+| | US$000| US$000|+--------------------------------------+-----------------+-----------------+| | | Restated|+--------------------------------------+-----------------+-----------------+|Turnover | 75,955 | 82,062 |+--------------------------------------+-----------------+-----------------+|Cost of sales | (66,605) | (51,810) |+--------------------------------------+-----------------+-----------------+|GROSS PROFIT | 9,350 | 30,252 |+--------------------------------------+-----------------+-----------------+|Administrative | | ||costs | (12,447) | (11,468) |+--------------------------------------+-----------------+-----------------+|GROUP | | ||OPERATING | | ||(LOSS) / | | ||PROFIT | (3,097) | 18,784 |+--------------------------------------+-----------------+-----------------+|Bank interest | | ||receivable | 1,849 | 56 |+--------------------------------------+-----------------+-----------------+|Interest | | ||payable and | | ||similar | | ||charges | (6,804) | (5,843) |+--------------------------------------+-----------------+-----------------+|Foreign | | ||exchange | | ||gains/(losses) | (1,355) | 1,232 |+--------------------------------------+-----------------+-----------------+|(LOSS) / | | ||PROFIT ON | | ||ORDINARY | | ||ACTIVITIES | | ||BEFORE | | ||TAXATION | (9,407) | 14,229 |+--------------------------------------+-----------------+-----------------+|Tax on profit | | ||on ordinary | | ||activities | 2,233 | (9,218) |+--------------------------------------+-----------------+-----------------+|(LOSS) / | | ||PROFIT FOR THE | | ||FINANCIAL | | ||PERIOD | (7,174) | 5,011 |+--------------------------------------+-----------------+-----------------+| | | |+--------------------------------------+-----------------+-----------------+| | | |+--------------------------------------+-----------------+-----------------+|Basic earnings | | ||per share | | ||(US$) | (0.047) | 0.042 |+--------------------------------------+-----------------+-----------------+|Diluted | | ||earnings per | | ||share (US$) | (0.047) | 0.042 |+--------------------------------------+-----------------+-----------------+ The Group does not have any recognised gains and losses other than the loss ofUS$7,174,000 (2004: profit US$5,011,000). Consolidated Balance Sheet +--------------------------------------------+--------------+--------------+| |At 31 December|At 31 December|| | 2005| 2004|+--------------------------------------------+--------------+--------------+| | US$000| US$000|+--------------------------------------------+--------------+--------------+| | | Restated|+--------------------------------------------+--------------+--------------+|FIXED ASSETS | | || | | |+--------------------------------------------+--------------+--------------+|Intangible assets - negative | | ||goodwill | (8,796) | (8,796) |+--------------------------------------------+--------------+--------------+|Tangible assets | 277,174 | 226,099 |+--------------------------------------------+--------------+--------------+| | 268,378 | 217,303 |+--------------------------------------------+--------------+--------------+|CURRENT ASSETS | | || | | |+--------------------------------------------+--------------+--------------+|Stocks | 41,930 | 40,068 |+--------------------------------------------+--------------+--------------+|Debtors | 28,198 | 37,356 |+--------------------------------------------+--------------+--------------+|Deferred costs | 2,143 | 1,526 |+--------------------------------------------+--------------+--------------+|Cash at bank and in hand | 33,570 | 40,764 |+--------------------------------------------+--------------+--------------+| | 105,841 | 119,714 |+--------------------------------------------+--------------+--------------+| | | |+--------------------------------------------+--------------+--------------+|CREDITORS: amounts falling due | | ||within one year | (101,716) | (82,458) |+--------------------------------------------+--------------+--------------+|NET CURRENT ASSETS /(LIABILITIES) | 4,125 | 37,256 || | | |+--------------------------------------------+--------------+--------------+| | | || | | |+--------------------------------------------+--------------+--------------+|TOTAL ASSETS LESS CURRENT | | ||LIABILITIES | 272,503 | 254,559 || | | |+--------------------------------------------+--------------+--------------+| | | |+--------------------------------------------+--------------+--------------+|CREDITORS: amounts falling due | | ||after more than one year | (610) | (23,098) |+--------------------------------------------+--------------+--------------+|PROVISIONS FOR LIABILITIES AND | | ||CHARGES | (17,572) | (19,714) || | | |+--------------------------------------------+--------------+--------------+|MINORITY INTERESTS - EQUITY | (282) | (338) |+--------------------------------------------+--------------+--------------+| | 254,039 | 211,409 |+--------------------------------------------+--------------+--------------+| | | || | | |+--------------------------------------------+--------------+--------------+|EQUITY SHAREHOLDERS' FUNDS | | || | | |+--------------------------------------------+--------------+--------------+|Called up share capital | 255 | 233 |+--------------------------------------------+--------------+--------------+|Share premium | 236,483 | 186,704 |+--------------------------------------------+--------------+--------------+|Profit and loss account | 17,301 | 24,472 |+--------------------------------------------+--------------+--------------+| | 254,039 | 211,409 |+--------------------------------------------+--------------+--------------+ Company Balance Sheet +-------------------------------------------+--------------+--------------+| |At 31 December|At 31 December|| | 2005| 2004|+-------------------------------------------+--------------+--------------+| | US$000| US$000|+-------------------------------------------+--------------+--------------+| | | Restated|+-------------------------------------------+--------------+--------------+|FIXED ASSETS | | || | | |+-------------------------------------------+--------------+--------------+|Investments | 30,754 | 30,722 |+-------------------------------------------+--------------+--------------+| | 30,754 | 30,722 |+-------------------------------------------+--------------+--------------+|CURRENT ASSETS | | || | | |+-------------------------------------------+--------------+--------------+|Debtors | 218,729 | 123,992 |+-------------------------------------------+--------------+--------------+|Short term deposit | 5,000 | |+-------------------------------------------+--------------+--------------+|Cash at bank and in hand | 10,800 | 37,206 |+-------------------------------------------+--------------+--------------+| | 234,529 | 161,198 |+-------------------------------------------+--------------+--------------+| | | |+-------------------------------------------+--------------+--------------+|CREDITORS: amounts falling due | | ||within one year | (14,165) | (2,019) |+-------------------------------------------+--------------+--------------+|NET CURRENT ASSETS | 220,364 | 159,179 |+-------------------------------------------+--------------+--------------+| | | |+-------------------------------------------+--------------+--------------+|NET ASSETS | 251,118 | 189,901 |+-------------------------------------------+--------------+--------------+| | | |+-------------------------------------------+--------------+--------------+|EQUITY SHAREHOLDERS' FUNDS | | || | | |+-------------------------------------------+--------------+--------------+|Called up share capital | 255 | 233 |+-------------------------------------------+--------------+--------------+|Share premium | 236,483 | 186,704 |+-------------------------------------------+--------------+--------------+|Profit and loss account | 14,380 | 2,964 |+-------------------------------------------+--------------+--------------+| | 251,118 | 189,901 |+-------------------------------------------+--------------+--------------+ Profit for the period for the Company was US$11,413,000. Consolidated Cash Flow Statement +-------------------------------------------+--------------+--------------+| | 12 months| 12 months|| | ended 31| ended 31|| | December 2005| December 2004|+-------------------------------------------+--------------+--------------+| | US$000| US$000|+-------------------------------------------+--------------+--------------+|CASH GENERATED | | ||FROM OPERATING | | ||ACTIVITY | 4,787 | 25,610 || | | |+-------------------------------------------+--------------+--------------+|Changes in | | ||working | | ||capital | 2,964 | (15,155) || | | |+-------------------------------------------+--------------+--------------+|NET CASH | | ||INFLOW FROM | | ||OPERATING | | ||ACTIVITIES | 7,751 | 10,455 || | | |+-------------------------------------------+--------------+--------------+|RETURNS ON INVESTMENT AND SERVICING OF | | ||FINANCE | | |+-------------------------------------------+--------------+--------------+|Interest | | ||received | 1,849 | 56 |+-------------------------------------------+--------------+--------------+|Interest paid | | ||on bank loans | (4,792) | (4,386) |+-------------------------------------------+--------------+--------------+|Loan | | ||arrangement | | ||fees | (1,960) | |+-------------------------------------------+--------------+--------------+|Interest paid | | ||on finance | | ||leases | (452) | (468) |+-------------------------------------------+--------------+--------------+|NET CASH | | ||OUTFLOW FROM | | ||RETURNS ON | | ||INVESTMENT AND | | ||SERVICING OF | | ||FINANCE | (5,355) | (4,798) |+-------------------------------------------+--------------+--------------+| | | || | | |+-------------------------------------------+--------------+--------------+|TAXATION | | || | | |+-------------------------------------------+--------------+--------------+|Russian | | ||profits tax | | ||refund (paid) | (2,521) | 491 |+-------------------------------------------+--------------+--------------+| | | |+-------------------------------------------+--------------+--------------+|CAPITAL EXPENDITURE AND FINANCIAL | | ||INVESTMENT | | |+-------------------------------------------+--------------+--------------+|Payments to | | ||acquire | | ||tangible fixed | | ||assets | (56,143) | (69,168) |+-------------------------------------------+--------------+--------------+|NET CASH | | ||OUTFLOW ON | | ||CAPITAL | | ||EXPENDITURE | | ||AND FINANCIAL | | ||INVESTMENT | (56,143) | (69,168) |+-------------------------------------------+--------------+--------------+|ACQUISITIONS AND DISPOSALS | | |+-------------------------------------------+--------------+--------------+| | | |+-------------------------------------------+--------------+--------------+|Purchase of | | ||subsidiary | | ||undertakings | (11,500) | (11,885) |+-------------------------------------------+--------------+--------------+|Payments for | | ||acquisition of | | ||new geological | | ||licences | (2,015) | - |+-------------------------------------------+--------------+--------------+|Acquisition of | | ||Taseevskoye | | ||rights | - | (26,785) |+-------------------------------------------+--------------+--------------+|Cash received | | ||for partial | | ||disposal of | | ||Taseevskoe | 13,340 | - |+-------------------------------------------+--------------+--------------+|NET CASH | | ||OUTFLOW ON | | ||ACQUISITIONS | | ||AND DISPOSALS | (175) | (38,670) |+-------------------------------------------+--------------+--------------+| | | || | | |+-------------------------------------------+--------------+--------------+|Equity | | ||dividends paid | (1,473) | (2,997) || | | |+-------------------------------------------+--------------+--------------+| | | || | | |+-------------------------------------------+--------------+--------------+|NET CASH | | ||OUTFLOW BEFORE | | ||FINANCING AND | | ||MANAGEMENT OF | | ||LIQUID | | ||RESOURCES | (57,916) | (104,687) || | | |+-------------------------------------------+--------------+--------------+| | | || | | |+-------------------------------------------+--------------+--------------+|MANAGEMENT OF LIQUID RESOURCES | | || | | |+-------------------------------------------+--------------+--------------+|Increase in | | ||short term | | ||deposits | (16,464) | - |+-------------------------------------------+--------------+--------------+| | | || | | |+-------------------------------------------+--------------+--------------+|FINANCING | | || | | |+-------------------------------------------+--------------+--------------+|Issue of | | ||ordinary | | ||shares | 50,562 | 140,515 |+-------------------------------------------+--------------+--------------+|Share issue | | ||costs | (1,687) | (7,261) |+-------------------------------------------+--------------+--------------+|Receipt of | | ||short-term | | ||loans | - | 105,788 |+-------------------------------------------+--------------+--------------+|Receipt of | | ||long-term | | ||loans * | 65,849 | 31,000 |+-------------------------------------------+--------------+--------------+|Repayment of | | ||borrowings | (58,624) | (131,770) |+-------------------------------------------+--------------+--------------+|Receipt from | | ||sale and | | ||leaseback | | ||transactions | - | 5,264 |+-------------------------------------------+--------------+--------------+|Repayment of | | ||capital | | ||element of | | ||finance leases | (4,195) | (3,485) |+-------------------------------------------+--------------+--------------+|CASH INFLOW | | ||FROM FINANCING | 51,905 | 140,051 |+-------------------------------------------+--------------+--------------+|INCREASE | | ||/(DECREASE) IN | | ||CASH | (22,475) | 35,364 |+-------------------------------------------+--------------+--------------+| | | |+-------------------------------------------+--------------+--------------+|RECONCILIATION OF NET CASH FLOW TO MOVEMENT| | ||IN NET DEBT | | |+-------------------------------------------+--------------+--------------+|Increase/(decr | | ||ease) in cash | | ||and cash | | ||deposits | (6,011) | 35,364 |+-------------------------------------------+--------------+--------------+|Receipt from | | ||sale and | | ||leaseback | | ||transactions | - | (5,264) |+-------------------------------------------+--------------+--------------+|Repayment of | | ||capital | | ||element of | | ||finance leases | 4,195 | 3,485 |+-------------------------------------------+--------------+--------------+|Movements in | | ||loans and | | ||other | | ||creditors | (7,225) | (5,018) |+-------------------------------------------+--------------+--------------+|MOVEMENTS IN | | ||NET DEBT | | ||ARISING FROM | | ||CASH FLOWS | (9,041) | 28,567 |+-------------------------------------------+--------------+--------------+|Other movement | | ||in long term | | ||payables | 199 | 1,717 |+-------------------------------------------+--------------+--------------+|New finance | | ||leases and | | ||other | (618) | (1,580) |+-------------------------------------------+--------------+--------------+|Exchange | | ||differences | 188 | 39 |+-------------------------------------------+--------------+--------------+|MOVEMENT IN | | ||NET DEBT | (9,272) | 28,743 || | | |+-------------------------------------------+--------------+--------------+|NET DEBT AT | | ||BEGINNING OF | | ||PERIOD | (37,694) | (66,437) |+-------------------------------------------+--------------+--------------+|NET | | ||CASH/(DEBT) AT | | ||END OF PERIOD | (46,966) | (37,694) |+-------------------------------------------+--------------+--------------+ * includs US$ 39 million long term loan from Commerzbank, which was reclassifiedto short term loan due to breach of covenants as at 31 December 2005. A waiverhas subsequently been received in respect of this breach. Reconciliation of shareholders' funds +----------------------------------------+---------------+---------------+| |12 months ended|12 months ended|| | 31 December| 31 December|| | 2005| 2004|+----------------------------------------+---------------+---------------+| | US$000| US$000|+----------------------------------------+---------------+---------------+|Shareholders' | | ||funds at the | | ||beginning of | | ||period | 211,409 | 77,355 |+----------------------------------------+---------------+---------------+|Shares issued | | ||during the | | ||period | 50,562 | 140,000 |+----------------------------------------+---------------+---------------+|Share issue | | ||costs | (761) | (7,960) |+----------------------------------------+---------------+---------------+|Profit (loss) | | ||retained for | | ||the period | (7,171) | 2,014 |+----------------------------------------+---------------+---------------+|Shareholders' | | ||funds at end | | ||of period | 254,039 | 211,409 |+----------------------------------------+---------------+---------------+ Notes to the cash flow statement (a) Reconciliation of operating profit to net cash inflow fromoperating activities+---------------------------------------------+-------------+-----------------+| | 12 months| 12 months ended|| | ended 31| 31 December 2004|| |December 2005| |+---------------------------------------------+-------------+-----------------+| | US$000| US$000|+---------------------------------------------+-------------+-----------------+|Operating | | ||(loss) / | | ||profit | (3,097) | 18,784 |+---------------------------------------------+-------------+-----------------+|Depreciation, | | ||depletion and | | ||amortisation | 8,639 | 6,826 |+---------------------------------------------+-------------+-----------------+|Other non cash | (755) | - |+---------------------------------------------+-------------+-----------------+|Cash generated | | ||from operating | | ||activity | 4,787 | 25,610 |+---------------------------------------------+-------------+-----------------+|Changes in working capital: | | |+---------------------------------------------+-------------+-----------------+|Decrease/(incr | | ||ease) in | | ||debtors | 7,098 | (2,426) |+---------------------------------------------+-------------+-----------------+|Decrease/(incr | | ||ease) in | | ||stock | (1,862) | (8,637) |+---------------------------------------------+-------------+-----------------+|Decrease/(incr | | ||ease) in | | ||deferred costs | (617) | 225 |+---------------------------------------------+-------------+-----------------+|Increase/(decr | | ||ease) in | | ||creditors | 1,469 | (186) |+---------------------------------------------+-------------+-----------------+|Decrease/(incr | | ||ease) in VAT | | ||receivable | (4,101) | (5,032) |+---------------------------------------------+-------------+-----------------+|Decrease in | | ||provisions | 977 | 901 |+---------------------------------------------+-------------+-----------------+|Total changes | | ||in working | | ||capital | 2,964 | (15,155) |+---------------------------------------------+-------------+-----------------+|Net cash | | ||inflow from | | ||operating | | ||activities | 7,751 | 10,455 || | | |+---------------------------------------------+-------------+-----------------+ Earnings per share +-----------------------------------------------+--------------+--------------+| | 12 months| 12 months|| | ended 31| ended 31|| | December 2005| December 2004|+-----------------------------------------------+--------------+--------------+|Profit for the | | ||period | | ||attributable | | ||to | | ||shareholders | | ||(US$000) | (7,174) | 5,011 |+-----------------------------------------------+--------------+--------------+|Weighted | | ||average number | | ||of shares in | | ||issue | 153 012 018| 120,351,004 |+-----------------------------------------------+--------------+--------------+|Basic earnings | | ||per share | (0.047) | 0.042 |+-----------------------------------------------+--------------+--------------+|Weighted | | ||average number | | ||of shares in | | ||issue and | | ||shares that | | ||would be | | ||issued on the | | ||conversion | 156,442,467 | 120,351,004 |+-----------------------------------------------+--------------+--------------+|Diluted | | ||earnings per | | ||share | (0.046) | 0.042 |+-----------------------------------------------+--------------+--------------+ +------------------------------------+--------------+-------------+| | 2005 | 2004 |+------------------------------------+--------------+-------------+| | thoousands| thousands|+------------------------------------+--------------+-------------+|Basic weighted average number of | 153,012 | 120,351 ||shares | | |+------------------------------------+--------------+-------------+|Dilutive potential ordinary shares: | | |+------------------------------------+--------------+-------------+|Employee share options | 1,292 | - |+------------------------------------+--------------+-------------+|Warrants (Barrick Gold) | 2,139 | - |+------------------------------------+--------------+-------------+| | | |+------------------------------------+--------------+-------------+|Diluted weighted average number of | 156,443 | 120,351 ||shares | | |+------------------------------------+--------------+-------------+ Diluted loss per ordinary share has not been disclosed as inclusion ofunexercised options and warrants would be anti-dilutive in 2005. Post Balance Sheet events Breach of loan covenants As at the 31 December 2005, the Group was in breach of one of the loan covenantsattached to its long-term loan facility, and accordingly the US$30.8 million long-termportion of the facility was reclassified to "creditors: amounts falling due within one year". On the 20of April 2006, a waiver in respect of the breach was obtained for the relevant periodended 31 December 2005. Additional share issue On 14 February 2006 3,545,000 ordinary shares were issued under the Company'sUnapproved Share Option Scheme, to trade on the AIM market upon issuance. Theshares shall rank pari passu with the existing issued shares of the Company. Gazprom Bank facility On 6 April 2006 Gazprombank approved US$ 15 million loan facility for 2 yearsthat will be available to the Group upon fulfillment of certain preconditions. Transactions with Barrick Gold Barrick Gold has exercised its rights to acquire a 50% interest in two recentlyacquired mineral licences for a total amount of US $431,000. These rights weregranted to Barrick Gold Gold pursuant to the January 2004 ParticipationAgreement between the two companies and cover the Belaya Gora and Sovinoyeexploration. The Group has acquired the exploration and mining rights for the MaloFedorovskoye deposit and has conditionally accepted an offer from Barrick Goldto joint venture the contiguous Lubavinskoye deposit. On 20 January 2006 Taseevskoye Netherlands B.V. and H.B.Netherlands B.V. wereestblished were established for managing the joint venture projects of BarrickGold and the Group. Commitments and contingent liabilities Amounts contracted for but not provided for in the financial statements amountedto US$4,876,000 for the Group (at 31 December 2004 - US$5,106,000). During 2005 the tax authorities completed their audit of MNV, one of theCompany's producing subsidiaries for the period from 1st January 2002 to 31stDecember 2004. Certain claims have been raised by the tax authorities totalingapproximately US$ 1.5 million, which the Group is challenging through a lawsuit,as management does not believe these claims are justified. No amount have beenprovided for this amount. RECONCILIATION OF MNV TOTAL CASH COST PER OZ TO FINANCIAL STATEMENTS (UNAUDITED) +----------------+----------+---------+--------+----------+---------+---------+-----------+---------+| | 12 months| 6 months|6 months| 6 months| 6 months| 6 months| 6 months| 6 months|| | ended 31| ended 31|ended 30| ended 31| ended 30| ended 31| ended 30| ended 31|| | December| December| June| December|June 2004| December| June 2003| December|| | 2005| 2005| 2005| 2004| | 2003| | 2002|+----------------+----------+---------+--------+----------+---------+---------+-----------+---------+| | US$000| US$000| US$000| US$000| US$000| US$000| US$000| US$000|+----------------+----------+---------+--------+----------+---------+---------+-----------+---------+|Cost of sales | 66,605 | 41,210 |25,395 | 29,010 | 22,800 | 19,662 | 15,738 | 17,751 |+----------------+----------+---------+--------+----------+---------+---------+-----------+---------+|Administration | | | | | | | | ||expenses | 12,447 | 8,167 | 4,280 | 6,928 | 4,540 | 4,886 | 3,400 | 3,479 |+----------------+----------+---------+--------+----------+---------+---------+-----------+---------+|Depreciation, | | | | | | | | ||depletion and | | | | | | | | ||amortisation | (8,639) | (5,564) |(3,075) | (3,760) | (3,066) | (2,423) | (1,949) | (1,381) |+----------------+----------+---------+--------+----------+---------+---------+-----------+---------+|Management | | | | | | | | ||expenses not | | | | | | | | ||related to | | | | | | | | ||production at | | | | | | | | ||MNV | (8,930) | (6,337) |(2,593) | (5,377) | (3,545) | (3,219) | (1,401) | (819) |+----------------+----------+---------+--------+----------+---------+---------+-----------+---------+|Non cash | | | | | | | | ||adjustments | | | | | | | | ||(fair value, | | | | | | | | ||movement in | | | | | | | | ||provisions) | | | | (901) | - | 2,103 | - | (2,476) |+----------------+----------+---------+--------+----------+---------+---------+-----------+---------+|TOTAL | | | | | | | | ||OPERATING CASH | | | | | | | | ||EXPENSES | | | | | | | | ||INCLUDING | | | | | | | | ||PRODUCTION | | | | | | | | ||TAXES | 61,483 | 37,476 |24,007 | 25,900 | 20,729 | 21,009 | 15,789 | 16,554 |+----------------+----------+---------+--------+----------+---------+---------+-----------+---------+|Operating cost | | | | | | | | ||other than | | | | | | | | ||gold | | | | | | | | ||production | (2,415) | (1,618) | (797) | (481) | (683) | (992) | (95) | (474) |+----------------+----------+---------+--------+----------+---------+---------+-----------+---------+|Operating cost | | | | | | | | ||of Darasun | | | | | | | | ||mine | (14,643) |(10,885) |(3,758) | (3,236) | | | | |+----------------+----------+---------+--------+----------+---------+---------+-----------+---------+|Silver credits | (319) | (190) | (129) | (91) | (99) | (102) | (72) | (209) |+----------------+----------+---------+--------+----------+---------+---------+-----------+---------+|TOTAL CASH | | | | | | | | ||COSTS | 44,106 | 24, 783 |19,323 | 22,092 | 19,947 | 19,915 | 15,622 | 15,871 |+----------------+----------+---------+--------+----------+---------+---------+-----------+---------+|OUNCES SOLD | 144,371 | 88,945 |55,426 | 101,258 | 94,055 |103,950 | 88,928 | 88,817 |+----------------+----------+---------+--------+----------+---------+---------+-----------+---------+|TOTAL CASH | | | | | | | | ||COSTS PER | | | | | | | | ||OUNCE | 306 | 279 | 349 | 218 | 212 | 192 | 176 | 179 |+----------------+----------+---------+--------+----------+---------+---------+-----------+---------+ This information is provided by RNS The company news service from the London Stock Exchange
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