HGM.L Regulatory News (HGM)

27 April 2011 - Highland Gold Mining Limited ("Highland Gold" or the "Company" AIM: HGM) announces its final results for the full year ended 31 December 2010.

FINANCIAL HIGHLIGHTS

2010 Key Events

·; Company met production guidance by producing 200,028 oz of gold and gold equivalents, a 23% increase on 2009

·; EBITDA of US$121.3 million (2009: US$57.1 million) was 112.4% higher than the previous year due to higher production and realized prices

·; At US$496 per ounce in 2010, total cash costs at MNV were well contained (2009: US$486) considering the higher royalties paid due to the higher gold price

·; Novo continued to ramp up mining and processing with a steady decrease in cash costs of US$597 in 2010

·; JORC compliant audit supports GKZ reserve at Belaya Gora of 0.82 million oz

·; Commissioning of mining at Belaya Gora

·; Continued to develop the ore processing flow sheet for Taseevskoye

·; Development accelerated at two advanced stage exploration projects (Unkurtash and Lyubov)

·; New acquisitions in 2010 included Blagodatnoye and Belaya Gora Flanks

·; Cash, short term deposits and short term investments were US$222.5 million at 31 December 2010, after the early repayment of US$66.2 million of debt in 2010

Post Year End

·; Group currently debt free after early repayment of all outstanding loans

·; Initial C1+C2 reserves of 1.71 million oz at Unkurtash are with Kyrgyzstan GKZ for approval

CHAIRMAN'S REPORT

Stronger, Growing, Efficient and Responsible

I am delighted to be able to report to you on an exceptional year of achievement at every level of your Company. These achievements include the commissioning of mining operations at our third mine at Belaya Gora, the production of over 200,000 ounces of gold hitting our stated target for the year and the significant progress we made with our development and exploration projects. This progress has enabled us to repay all our debt early as we are generating strong operating cash flows. While our growth strategy clearly focuses on both organic and M&A development, I am pleased to report that excellent progress has been made with our organic project development portfolio. We see these assets as key to the continued creation of additional shareholder value. Our growth strategy will require a significant deployment of capital. The current and expected cash positions are favorable, allowing Highland to bring its projects into operating mines and allow us to continue to assess M&A opportunities, under accretive conditions.

Our restructuring of operations over the last two years has transformed your Company and we are therefore moving into a period of sustained growth with an exciting portfolio of projects. This has been reflected in the improved performance of our share price which rose by over 100% in 2010 while in comparison over the same period the gold price rose only 26% and we firmly believe that our on-going commitment on delivering results on all fronts should support an improved market valuation. With our current projects, we are aiming to increase production to between 210,000-220,000 ounces in 2011.

The Company's stated strategy of increasing the productivity of our existing mines and pushing forward our development and exploration projects continues apace. Whilst I will leave reporting the detail of our production to our Chief Executive Officer Valery Oyf under his Operational Review, I would like to highlight some of the exciting prospects that the Company has in its pipeline.

We are continuing with our near mine exploration efforts at MNV which are showing promising results from both the Pebble Prospect and other exploration targets on the mine's property. We believe these efforts will provide a more robust resource for the life of mine. The trucking of ore from nearby Belaya Gora to MNV commenced and, whilst the project development of a stand-alone processing plant at Belaya Gora, we will continue to move ore to MNV until that operation is up and running in the second half of 2012 according to our plan. This strategy will generate a seamless integration to our production profile.

In line with our capital allocation and project development discipline, we continued to study the Taseevskoye project. We are proceeding with further test work in order to advance the project and we expect to give fuller details on this project by the end of this year. We now feel that all the key risks have been well identified and the associated mitigating strategies are being developed and engineered.

Towards the end of 2010 we were able to announce very good progress at Unkurtash in Kyrgyzstan and therefore we intend to spend a further US$20 million at the site during 2011 to move the project forward. An application for registration of a preliminary (C1+C2) category reserves of 1.71 million oz was submitted and is under review by the State Committee on Reserves of the Kyrgyz Republic (GKZ). Further as you will note later, our total allocation of funds towards our exploration projects is at an unprecedented level for the Company. This is a true reflection of our degree of confidence with the geological potential of our assets. The initial audit for Unkurtash in order to comply with JORC standards is planned to be completed in H2 2011.

In accordance with international best practice the Company has committed to audit all current and future GKZ reserves in order to provide Reserves and Resources statements that will be JORC compliant.

Our efforts to increase production whilst keeping costs to a minimum, is working well. We are one of the few mining companies today to be keeping costs in check. Affected by higher royalties due to the stronger gold price total cash costs at MNV increased slightly and amounted to US$496/oz (2009: US$486/oz). At Novoshirokinskoye, our second operating mine, costs continued to improve as we proceeded with ramp up. Of equal importance was the early repayment of our debt and maintenance of sufficient cash resources to develop our growth strategy without recourse to the equity and debt markets. This leaves us with the option to acquire new resources in order to accelerate the Company's growth.

The confidence that we have in the growth of your Company is further supported by our continued positive outlook for the gold price, and we are convinced that our on-going efforts to contain costs and maximise efficiencies, will benefit the Company going forward.

While the Company's strategy is to fully leverage the existing mining and processing infrastructure by lowering our mining cut-off grade through operational effectiveness and by adding new ounces through exploration, pushing our development projects towards production and continuing to explore for new assets is well on track. Your Company is in good health and achieving its objectives.

We are fortunate to have a very strong Board with its mix of mining expertise, supported by Barrick Gold Corporation of Canada ("Barrick"), and Russian knowledge and influence coming from our major shareholder Millhouse, placing us in an enviable position to take advantage of the growth potential in the markets in which we operate, being Russia and regional countries.

In September 2010, Mr James (Jim) Mavor was appointed to the Board of Directors to serve as a non-executive director. Mr Mavor holds the position of Vice President and Treasurer at Barrick and is based at their head office in Toronto. He brings a wealth of mining financial and treasury expertise to the Company.

In June 2010, we announced the resignations from the Board of Directors, of non-executive directors Ivan Koulakov, who wished to pursue other interests, and Nick Nikolakakis, who had resigned from Barrick and therefore was no longer eligible as their appointee. We take the opportunity to wish both Ivan, who still has a major interest in the Company and Nick well in their future endeavours and to thank them both for their assistance and support over many years and welcome Jim whose appointment has already been effective.

Finally, I would like to thank the Board, management and all our employees for an excellent result, as well as our shareholders for their continued support. Whilst appreciating that we are in the mining space and the risks that are associated with that, I continue to have great confidence in our ability to achieve our targets in the year ahead.

CHIEF EXECUTIVE OFFICER'S REPORT

ON TARGET AND DELIVERING GROWTH

As planned, 2010 has been a year where the Company has delivered on target at all operating, development and exploration properties. Our flagship Mnogovershinnoye mine continued to perform well and exceeded targets while the addition of our second mine, Novoshirokinskoye, increased overall gold production with the first concentrates being delivered in February 2010. Initial oxide ore mining commenced at Belaya Gora in November.

Licenses for exploration and mining rights at Blagodatnoye (30 kms SW of Belaya Gora in the Khabarovsk Region) and Belaya Gora Flanks (an area of 33 sq km surrounding the Company's Belaya Gora deposit) were acquired in February and July respectively. These have provided new resource targets to support the potential for ongoing growth of operations in the Khabarovsk region, while our exploration successes at Unkurtash in Kyrgyzstan and Lyubov (SW of our Taseevskoye project) in the Chita region of Russia provided organic resource growth opportunities and confidence in establishing a strong pipeline for future operations.

A full year on year increase in gold production of 23% led to stronger revenues and improved margins as we continued to keep our cash costs in check. In 2011 we see a continuation of these positive trends with the Company now operating at three mines, progressing major projects at Taseevskoye, Unkurtash and Lyubov and having a substantially strengthened exploration portfolio to its credit.

CORPORATE & SOCIAL RESPONSIBILITY

Highland Gold is dedicated to ensuring that social responsibility is at the core of our operations. With this aim in mind we have continued efforts in developing partnership relations with local communities in the regions where we operate. We have helped to maintain and upgrade the infrastructure in the villages and towns where our employees live and demonstrated a responsible attitude in settlement of taxes and fees due to local and state budgets. We have also been active in developing various social and cultural facilities, helping senior citizens' organisations, as well as participating in regional environmental protection projects. 

The main focus of our effort is on jointly initiating territorial social development programmes with regional and local authorities. Working together, Highland Gold Mining and the local authorities define critical areas for the local community to apply the joint welfare efforts. During 2010, and in addition to the Social Partnership Agreement in place with the Nikolaevsk district authorities, we have signed a similar agreement at a higher level - with the Government of the Khabarovsk Region. Our Company participates in development and implementation of regional socioeconomic welfare programmes in the field of education, health, culture and sports as well as improving living standards for the local population.

Similar assistance on a smaller scale has been provided by the Company to the local communities at our exploration projects, in particular at Lyubov in the Zabaikalsky region of Russia and the Unkurtash deposit in Kyrgyzstan.

Financing of the regional social charity foundation "Illustrated books for visually impaired children" provided dozens of children with complimentary specialised printing materials. We facilitate development and social integration of physically challenged children of the Khabarovsk Region through financing of the charity project "White Steamship". Preserving the cultural and historic heritage of Russia we fund the projects of the Zabaikalsky Museum of the Decembrists. Nonrecurring charity assistance is provided to various organizations of the Baley (Taseevskoye) district in the Zabaikalsky Region.

HEALTH, SAFETY & ENVIRONMENT

At year-end 2010 the Highland Gold group employed 2,791 employees (including 100% of the personnel at Novoshirokinskoye) in comparison to 2,435 employed during 2009. Staffing increases continued at the Novoshirokinskoye Mine and Belaya Gora's project activities increased its human resource throughout the year.

Efforts to improve on health and safety remained on target at all sites within the HGM Group and the full year lost time injury rate (LTI rate is the number of lost time injuries for every 200,000 man hours worked) decreased to 0.37 in 2010, a 33% improvement in comparison to the LTI rate in 2009 (0.55). 1,258 employees attended introductory (1 day) safety training, 477 employees went through a course of introductory hazardous work (5 days) safety training and 111 employees were involved in industrial safety certification and training courses. In spite of the overall improvements in safety Group wide, we regret to announce the fatality of a contract employee in July 2010, who was engaged in building repair works at our warehousing facility in Nikolaevsk-na-Amure in the Khabarovsk region. In March 2011 a company employee suffered a fatal road accident while delivering a light vehicle to our facility at Nikolaevsk-na-Amure in the Khabarovsk region.

Environmental audit procedures were implemented for all sites of the Company during the year which assisted with ensuring that environmental compliance remained in good standing with all regulatory authorities. 68 employees at MNV and Taseevskoye attended environmental safety requirement training with another 24 MNV employees taking environmental risk and assessment training in addition to 42 employees passing their best practices of environmental protection training.

Highland Gold has also initiated efforts for the implementation of accreditation of its environmental management system (ISO 14001 compliant) Group wide with compliance audits expected for YE 2012.

OPERATIONS

MNOGOVERSHINNOYE (MNV), Khabarovsk region, Russia

In 2010 mining operations continued at the Upper and Flank open pits where ore production exceeded the target at 701,962 tonnes and waste stripping of 1,933,948 m³ was marginally reduced relative to the previous year. The Intermediate, Northern, and Deer underground zones combined contributed 490,934 tonnes of ore production while underground development achieved 6,725 metres. Off-balance ore from old surface stockpiles continued to be tested for economic potential and then hauled to the plant site as additional low grade stockpile.

Retrofit and upgrading initiatives continued within the Process Plant. The aim of the upgrade is to improve throughput while maintaining recovery levels. A record 1,144,459 tonnes of ore were processed in 2010 providing a 5.8% increase year-on-year. Recoveries were slightly lower at 87.6% for the full year and related to increased throughput. Both milling and gravity circuit upgrades are expected to be commissioned during Q1 2011.

PRODUCTION COSTS

Cash operating costs in 2010 were US$414 per ounce (2009: US$425), total cash costs were US$496 per ounce (2009: US$486), total production costs were US$597 per ounce (2009: US$578).

CAPITAL COSTS

During 2010 the Company invested US$14.6 million at MNV. This included: capital construction (US$5.8 million), purchase of equipment (US$7.1 million), exploration (US$1.7 million).

OUTLOOK

Initiatives of capital equipment replacements in the open pit and underground operations along with milling and gravity circuit retrofits and upgrades in the processing plant will contribute to steady production at current levels while helping to keep maintenance operating costs in check.

NOVOSHIROKINSKOYE (NOVO), Zabaikalsky region, Russia

Since commissioning in October 2009, both the underground mine and process plant continue to ramp up production levels. During February 2010 initial concentrates were delivered for sale with full year production standing at 397,075 tonnes processed producing approximately 28,672 ounces of gold and gold equivalents (representing Highland's 48.3% share).

Ore production at 345,737 tonnes and waste development at 6,364 metres remained on target as additional ore blocks are accessed and prepared for production.

*Au + Au equivalents (calculated)

PRODUCTION COSTS

Cash operating costs in 2010 were US$544 per ounce, total cash costs were US$597 per ounce, total production costs were US$679 per ounce.

CAPITAL COSTS

In 2010 US$3.3 million was invested at Novo representing our 48.3% share.

OUTLOOK

The mine will continue ramping up operations during 2011 and is expected to produce ca. 450,000 tonnes of ore with 550,000 tonnes targeted as nameplate capacity. Technical studies will continue to investigate the potential for productivity improvements throughout the mining and processing operations.

BELAYA GORA, Khabarovsk region, Russia

As the result of identified synergies between Belaya Gora and MNV located 66kms away, a decision was taken to mobilise men and equipment to commence selective mining operations for delivery of oxide ore to the MNV processing plant early in H2 2010. Due to permit requirements mining commenced in November and resulted in 10,791 tonnes being milled yielding 1,000 oz of gold with a stockpile of ore being accumulated.

CAPITAL COSTS

In 2010 US$7.7 million was invested at Belaya Gora. This included: capitalised expenditures and construction (US$5.0 million), purchase of equipment (US$2.6 million), exploration (US$0.1 million).

OUTLOOK

Oxide ore will continue to be mined during 2011 providing approximately 5% to 8% of the total ore feed to the MNV process plant. This is expected to continue through the construction phase and start up of stand-alone production at the planned Belaya Gora processing facility at which time ore will be treated at the new plant.

DEVELOPMENT PROJECTS

TASEEVSKOYE, Zabaikalsky region, Russia

In 2009 the mining of a 360 tonne bulk sample from an open-pit excavation allowed the Company to perform further metallurgical testing in order to better define the viability of pressure oxidation, bio-oxidation or ultra fine grinding given the refractory nature of the Taseevskoye ore. The work was concluded during H2 2010. These results have now provided management with the needed guidance to undertake a semi-industrial pilot test using a gravity - flotation concentration - pressure oxidation (POX) processing route. Given the specific technical requirements of the processing plant, the mine plan will be optimized in 2011 to ensure the integration of the respective production schedules, which will drive the project economics.

Upon conclusion of these milestones management expects to be in a position to finalize the full feasibility study and to provide a recommendation to the Board by the end of the year.

CAPITAL COSTS

In 2010 we spent US$2.2 million in capital investments at Taseevskoye.

EXPLORATION

Our work programmes in 2010 continued to yield promising results and further corroborated our confidence in the potential of our exploration projects. While the focus remains on our most advanced exploration projects Unkurtash in Kyrgyzstan and Lyubov in Russia, both nearing the development stage, we also seized opportunities to acquire new quality properties to sustain a foundation for organic growth for the Company. All in all in 2010 we spent US$11.5 million on exploration including near-mine works at MNV which represents almost a 1.5 times increase compared to 2009.

UNKURTASH, Kyrgyzstan

At our flagship exploration project in Kyrgyzstan, 2010 saw continued exploration activities at the three adjoining prospects Unkurtash, Sarytube and Karatube. The prospects are located within an elongated gold mineralised zone which is covered entirely by our licenses and measures approximately 4,000 metres on strike, 250-500 metres in width and has a proven vertical extent of at least 350 metres. In 2010 we completed over 13,000 metres of reverse circulation (RC) and core drilling in addition to underground exploration at Unkurtash where 430 metres of old workings were rehabilitated and 142 new metres developed. Drilling results continue to support the potential for hosting a large open-pit mineable stockwork-type resource at Unkurtash in addition to a smaller satellite deposit at Karatube. Metallurgical testwork completed to date for the two targets supports conventional processing scenarios with expected recoveries in the range of 82 to 90%.

A pre-feasibility study, submitted in late 2010, for registration of a preliminary C1+C2 category reserves of 1.71 million oz at the Unkurtash and Karatube targets is under review by the State Committee on Reserves of the Kyrgyz Republic (GKZ), an audit in compliance with JORC standards is planned to be completed in H2 2011.

For 2011 a substantial increase in budgeted annual exploration expenditure to $20 million underpins the Company's confidence in tapping the total potential of this project. Over 50,000 metres of RC and core drilling has been allocated at the three targets in addition to 3,000 metres of underground exploration development planned at Unkurtash during 2011.

Despite the political events that took place in the first half of 2010 in Kyrgyzstan our operations, as well as that of other major producers in the country, have been unaffected and continue to operate normally. The Company remains confident that the country will maintain its stable investment climate and continue on its path of creating wealth from its natural resources.

LYUBOV, Zabaikalsky region, Russia

At Lyubov, we completed a resource definition drilling programme targeting stockwork-type gold mineralisation hosted within the Evgraf granite stock and its surrounding shales. The programme was designed to convert previously defined prognostic P1 resources into the C1+C2 category at the Evgraf target. Due to good drilling progress and with the aim of accelerating the project towards reserve registration, we decided mid-year to double the originally allocated drilling volume of 6,000 metres to a total of 12,000 metres. Drilling results are in line with a C1+C2 resource model for Evgraf containing up to 1 million ounces of gold at an average grade in the range of 1.6 - 1.8 g/t and at cut-off grades between 0.5 - 0.7 g/t (unaudited in-house estimate).

Metallurgical test work results support conventional processing options including heap leaching which we will further corroborate by additional independent test work planned for completion throughout 2011.

Lyubov is now nearing the development stage and during 2011 the Company plans to complete additional drilling and other work, which will fulfil critical requirements for a pre-feasibility study. Together with a reserve calculation, this is planned to be submitted for approval to the State Committee on Reserves of the Russian Federation (GKZ) towards the end of 2011. A JORC compliant resource audit is expected prior to the year end 2011.

MNOGOVERSHINNOYE, Khabarovsk region, Russia

At MNV we continued with our near-mine exploration programme which is directed at discovering additional reserves for open-pit exploitation over the short term. The focus in 2010 was on surface exploration which included more than 6,200 metres of drilling at 4 exploration targets within the MNV license area. As a positive result, pit optimisation is now underway for the Pebble (Valunistoye) prospect estimated to host 190,000 oz of gold contained in open-pit mineable ore grading between 3.0 - 5.0 g/t. Pebble is part of the 2 kilometre long Quiet (Tikhoye) - Pebble zone where positive drilling results obtained from other targets warrant follow-up work in 2011 and highlight the exploration potential that still remains at MNV.

Maximising the mine life at MNV is a top priority for the Company and consequently we have stepped up our exploration programme at MNV for 2011 to include 8,000 metres of surface drilling with an additional 16,000 metres allocated to underground exploration.

BLAGODATNOYE, Khabarovsk region, Russia

Located close to the Belaya Gora mine, the Blagodatnoye property was acquired in public auction in H1 2010 and has a reported prognostic resource estimate of 161,000 oz of gold. The prospect features stockwork-type gold mineralisation with reported average gold grades in the range of 1.5-2.0 g/t. In H2 2010 we completed a resampling programme of old trench workings which has returned positive results defining several continuous intercepts of gold mineralisation confirming previous results.

With the prospect that this property could become a significant contribution to Highland Gold's strategic hub in the Khabarovsk region the exploration programme planned for 2011 aims to increase the reported resource substantially and includes 10,000 metres of drilling to confirm continuity of mineralisation at depth.

BELAYA GORA FLANKS, Khabarovsk region, Russia

In H2 2010 we acquired in public auction the Belaya Gora Flanks (BGF) license which encapsulates the Belaya Gora deposit and represents excellent near-mine exploration potential to increase the resource base there. The BGF licence area was partially explored in the past and historical data notes a reported prognostic resource estimate of 200,000 oz of gold. The area hosts several known prospects with linear zones of vein-type and stockwork gold mineralisation with reported grades ranging between 1 g/t and 3 g/t and noted highlights up to 20 g/t.

The exploration programme in 2011 includes trenching and a 5,000 metre drilling programme for verifying and expanding the known mineralised prospects as well as testing of unexplored areas.

ISKA, Khabarovsk region, Russia

Iska features strong geological similarities with Belaya Gora and several occurrences of previously known gold prospects underline the potential of this grass root exploration property. As part of the 2010 exploration programme a previously drilled alunite deposit on the property was re-sampled and tested for gold but returned unsatisfactory results.

In 2011 we continue our analysis of the area to determine further steps for exploring the property.

Exploration Outlook

While 2010 saw a significant increase in exploration spending compared to previous years the exploration budget for 2011 is considerably more and allocates US$30 million in order to advance both new and existing exploration projects rapidly towards the development stage. More than 80,000 metres of drilling have been committed for 2011 at 5 projects but the bulk of the drilling works has been allocated to Unkurtash owing to its large size and promising potential.

Mr. Werner Klemens, Head of Exploration at Highland Gold has reviewed and verified the information contained in this release with respect to reserve and resource matters. Mr. Klemens holds a Ph.D. in Geology from the University of Toronto. He has 13 years of experience in mineral exploration and is a fellow of the Geological Association of Canada. A rigorous quality assurance programme complying with international standards is in effect at all exploration projects and includes duplicate sampling, insertion of standards and check assaying at external laboratories.

CONCLUSION

Highland's asset portfolio delivered an excellent performance in 2010 and the Company aims to add to this success with ongoing and continuous improvement initiatives as well as organic growth. Our resource will grow as a result of exploration fast tracking where such project is deemed of strategic importance. Accelerating such assets into production remains a near to medium term goal as well as propelling the Company towards mid-tier gold producer status.

CHIEF FINANCIAL OFFICER'S REPORT

Highland Gold posted a profit of US$122.3 million in 2010 compared to US$78.8 million in 2009. The main reasons for this were increased operating activity resulting in a gross profit of US$119.4 million compared to US$63.5 million in 2009 and the further reversal of an impairment loss at the Novoshirokinskoye project amounting to US$52.8 million (2009: US$22.7 million).

Revenue for the Group in 2010 was US$243.6 million compared to US$164.7 million in the prior year. The increase was due to our "no hedge" policy which allowed the Group to fully participate in stronger gold prices and also to the increase in production at MNV as a result of various mine initiatives implemented in 2010. The average price per ounce of gold sold was US$1,232 which represents a 27.8% increase compared to 2009.

The Group's costs of sales increased by 22.7%, or US$23.0 million compared to the prior year due to the recognition of the cost of sold concentrates at Novoshirokinskoye (2009: US$nil).

In spite of the general inflation rate in the Russian Federation of 8.8% and the appreciation of the Rouble against the US dollar by 4.4% in 2010, cash operating costs per ounce at MNV were reduced by 2.6% to US$414 in 2010 (2009: US$425 per ounce). Recapitalisation of equipment in the open pit, underground and process plant operations have helped in keeping costs contained as older less efficient equipment was retired. Total cash costs were affected by higher royalties due to the stronger gold price in 2010. As a result, at MNV they increased to US$496 per ounce (2009: US$486 per ounce).

Cash operating costs at Novoshirokinskoye were US$544 per ounce in 2010 while the total cash costs including royalties and other production taxes were US$597 per ounce. The reduction of total cash costs in H2 2010 (H1 US$721 per ounce) was a result of productivity improvements in both mining and process operations.

The Group's EBITDA in 2010 increased by 112.4% to US$121.3 million compared to US$57.1 million in 2009. The increase was a result of higher revenue from gold sales at MNV (increased by 26.3%) and a positive EBITDA at Novoshirokinskoye amounting to US$15.4 million.

As a result of a reassessment of the economic model for the Novoshorokinskoye joint venture project (HGML share 48.3%) the reversal of the impairment charge amounting to US$52.8 million (2009: US$22.7 million) was recognized in the Group's accounts in 2010. The main triggers for this were stronger world metal prices (gold, silver, lead and zinc) and the optimisation of mining, processing and overhead costs. The reversal of the impairment charge reflected the increase of the book value of the property, plant and equipment of the Novoshirokinskoye mine for the same amount.

The total amount of the foreign exchange loss for the year ended 31 December 2010 was US$1.8 million (2009: gain of US$20.4 million) resulting from the settlement of foreign currency transactions and from the transfer of monetary assets and liabilities denominated in foreign currencies such as Russian Roubles and Pounds Sterling into our functional currency (US$). The foreign exchange loss was affected by a slight devaluation of the Russian Rouble closing rate by 0.77% in 2010 (2009: devaluation by 2.94%) and the devaluation of the Pound Sterling by 2.87% (2009: strengthening by 9.12%). US$1.2 million of the total foreign exchange loss (2009: gain of US$21.0 million) was attributable to the movement and translation of the Pound denominated deposits. 

Finance income increased to US$13.4 million in 2010 (2009: US$7.8 million) while the finance costs were up to US$20.3 million (2009: US$4.0 million). The main change was due to the fair value re-assessment of the loans given to the Novoshorokinskoye joint venture by the Group and its partner Kazzinc, and the negative fair value movement of bonds acquired by the Group in 2009-2010. All borrowing costs related to the bank loans were capitalised both in 2010 and 2009 as the Group used the borrowed facilities to finance works on its development projects.

The income tax charge was US$22.0 million in 2010 compared to US$7.1 million the prior year. The tax charge consists of US$19.7 million of current tax expenses (US$19.4 million at MNV and US$0.3 million at RDM), adjustments in respect of the prior year income tax of US$0.1 million and of US$2.4 million as a deferred tax charge.

The Group's cash inflow from operating activities in 2010 was US$94.6 million compared to US$45.1 million in 2009. The cash flow contribution was a result of higher revenues from gold sales at MNV and from sales of concentrates at Novoshirokinskoye.

Highland Gold continued to advance its development project pipeline having invested US$36.9 million in capital expenditures (2009: US$32.0 million) including US$3.3 million at Novoshirokinskoye and US$2.2 million at Taseevskoye. Due to upgrades to mobile equipment and fixed plant the Group invested US$14.6 million at MNV. US$16.8 million was invested in advancing the Company's exploration projects and other Group entities.

The net financing cash outflows were US$72.9 million in 2010 (2009: outflow of US$61.6 million). The Group completed an early repayment of bank loans in the amount of US$66.2 million, paid bank interest of US$2.9 million and made the lease payments of US$0.5 million.

Cash, short term deposits and bonds at 31 December 2010 were US$222.5 million versus US$243.0 million at 31 December 2009 while the net cash position of the Group totaled US$219.5 million versus US$176.4 million at 31 December 2009. The net cash of the Group includes cash at bank, deposits and bonds, increased by 51.7% in loans given by the Group to the Novoshirokinskoye project offset by 48.3% of the Novoshirokinskoye receipt from Kazzinc (US$1.7 million) and decreased by bank borrowings (US$4.7 million). The positive change of US$43.1 million in the net cash position was mainly a result of the higher cash inflows from operating activities.

After the year end, in January 2011 the Group made an early repayment of US$4.7 million to MDM Bank. After this repayment Highland Gold has no outstanding bank debt.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the year ended 31 December 2010

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

as at 31 December 2010

The financial statements were approved by the Board of Directors on 26 April 2011.

CONSOLIDATED CASH FLOW STATEMENT

for the year ended 31 December 2010

Selected Accounting Policies and Notes to the Financial Statements.

Basis of preparation

The financial information for the year ended 31 December 2010 has been extracted from the audited 31 December 2010 consolidated financial statements as approved on 26 April 2011. The consolidated financial statements have been prepared on a historical cost basis except for financial instruments that have been measured at fair value. The consolidated financial statements are presented in US dollars, which is the Group's functional and presentation currency. All values are rounded to the nearest thousand (US$000) except when otherwise indicated.

Statement of compliance

The consolidated financial statements of Highland Gold Mining Limited and all its subsidiaries (the "Group") have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union and Companies (Jersey) Law 1991.

Basis of consolidation

The consolidated financial statements comprise the financial statements of Highland Gold Mining Limited and all its subsidiaries as at 31 December each year.

Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases.

The financial statements of the subsidiaries are prepared for the same reporting year as the parent company, using consistent accounting policies.

All intra-group balances, transactions, income and expenses and profits and losses resulting from intra-group transactions that are recognised in assets, are eliminated in full.

Reclassifications

Some reclassifications were made in the statement of financial position items as at 31 December 2009 and 1 January 2009 to keep the presentation form consistent with 2010 presentation. As a result of the reclassifications, exploration and evaluation assets were decreased by US$0.1 million (1 January 2009: US$nil), mine properties were decreased by US$nil (1 January 2009: US$0.1 million), property, plant and equipment was decreased by US$1.3 million (1 January 2009: US$1.9 million) and other non-current assets were increased by US$1.4 million (1 January 2009: US$2.0 million). Salaries payable were decreased by US$0.6 million (1 January 2009: US$0.7 million) with the simultaneous increase to other taxes payable by US$0.6 million (1 January 2009: US$0.7 million) due to allocation of social taxes related to outstanding vacations.

Segment information

For management purposes, the Group is organised into business units based on the nature of their activities, and has four reportable operating segments as follows:

·; Gold production;

·; Polymetallic concentrate production;

·; Development and exploration; and

·; Other.

Management monitors the gold production segment, namely Mnogovershinnoye and Belaya Gora, for the purpose of making decisions about resource allocation and evaluating the effectiveness of its activity. To keep the presentation form consistent with 2010 presentation, Belaya Gora was reclassified from the development and exploration segment to the gold production segment in segment information for 2009 given it began production during 2010.

The polymetallic concentrate production segment, namely Novoshirokinskoye, was commissioned in October 2009. Management analyses it separately due to the nature of its activities differs from the gold production process.

The development and exploration segment contains the holders of the licenses being in the development and exploration stage.

The "other" segment includes head office, management company, trade house and other costs which have been aggregated to form the reportable segment.

Segment performance is evaluated based on EBITDA (defined as operating profit/(loss) excluding depreciation and amortisation, impairment gain/(loss) and WIP write-down). The development and exploration segment is evaluated based on the life of mine models in connection with the capital expenditure spent during the reporting period.

The following tables present revenue, EBITDA, profit and loss and asset information for the Group's operating segments. The Highland Gold financing (including finance costs and finance income), income taxes and foreign exchange gains/(losses) are managed on a group basis and are not allocated to operating segments. Non-current financial assets include long-term loans given to jointly controlled entity that are not allocated to operating segments.

Revenue from two customers was greater than 10% of total revenues.

*Capital expenditure is the sum of exploration and evaluation assets, mine properties and property, plant and equipment.

**Current assets include corporate assets not directly attributable to operating segments. Such unallocated assets include corporate cash and cash equivalents of US$168 million (2009: US$197 million), investments of US$55 million (2009: US$46 million), inventories of US$47 million (2009: US$43 million), trade and other receivables of US$32 million (2009: US$21 million), and other assets of US$6 million (2009: US$8 million).

*Capital expenditure is the sum of exploration and evaluation assets, mine properties and property, plant and equipment.

All revenue and assets are located in CIS.

Novo reversal of impairment

In 2010 Novoshirokinskoye commenced concentrates sales and continued to ramp up the production plant throughout the year.

In 2010 the Group performed a reassessment of the economic model for Novoshirokinskoye based on the updated production data, increased metal prices and discount rate. As a result of the model improvement, an impairment reversal was recognised.

The reversal of the impairment charge amounting to US$52.8 million (2009: gain of US$22.7 million) was made in 2010 to reflect the Board's revised valuation of the Novoshirokinskoye mine. The main triggers for this were stronger world metal prices (gold, silver, lead and zinc), optimisation of mining processing and overhead costs in 2010 and 2009. The reversal of the impairment charge reflected the increase of the book value of the property, plant and equipment of the Novoshirokinskoye mine for the same amount.

The calculation of fair value is most sensitive to the following assumptions:

·; Production volumes;

·; Discount rates;

·; Metal prices; and

·; Operating costs.

Estimated production volumes are based on detailed life of mine plans and take into account development plans for the mines agreed by management as part of the long-term planning process.

The future cash flows of the Novoshirokinskoye mine were discounted using a pre-tax discount rate of 12.85% (2009: 12.73%). The discount rate is derived from the Group's weighted average cost of capital adjusted for 2% (2009: 3%) of risk specific to Novo. The impairment charge and subsequent reversal are attributable to the Polymetallic concentrate production segment.

Income tax

 Events after the reporting period

After the year end, in January 2011 the Group made an early repayment of US$4.7 million to MDM bank. After this repayment Highland Gold has no outstanding bank debt.