HGM.L Regulatory News (HGM)

23 April 2014 - Highland Gold Mining Limited ("Highland Gold", the "Company" or the "Group" AIM: HGM) announces its final audited results for the year ended 31 December 2013.

FINANCIAL HIGHLIGHTS

*Further information on this restatement can be found in selected policies and notes to the financial information. 

Eugene Shvidler, Chairman of Highland Gold Mining, commented: "During 2013 management extended the Company's resource base, oversaw further organic expansion and continued to implement appropriate financial disciplines and production efficiencies. The latter measures, applied throughout the Group's operations, served to mitigate the effects of an adverse trading climate. One of the highlights was the first gold pour at our Belaya Gora processing plant which, with ramp-up to nameplate capacity under way, will make an important contribution to the sizeable increase in overall production budgeted for 2014. We completed the purchase of the Kekura property and this, together with the Klen project, also situated in the Chukotka region, will remain at the forefront of our exploration and development agenda. Your Board believes that the accomplishments of 2013 and our strategy in respect of 2014 will significantly further the medium and long-term realisation of the Company's growth potential."

2013 KEY EVENTS

· Group wide production rose 8% to a record 233,696 oz of gold and gold equivalents (2012: 216,885 oz). This is in line with our guidance estimate and represents the combined contribution from the Group's three mines: Mnogovershinnoye (MNV), Novoshirokinskoye (Novo) and Belaya Gora

· Total cash costs recorded a sharp decline to US$611 per ounce (2012: US$671 per ounce) and remained highly competitive versus peer group. All-in sustaining cash costs decreased to US$842 (2012: US$894)

· Group JORC compliant resources registered a 32% increase to 17.3 Moz (compared with 13.2 Moz stated at 31 December 2012) as a result of the Kekura licence purchase and independent resource audit updates at MNV and Unkurtash

· The Group's assets remained unimpaired despite significant declines in metal prices

· First gold poured at Belaya Gora

· Interim dividend of 2.5 pence per share paid in October 2013 (2012: Interim special dividend of 4.8 pence per share)

· Lost Time Incident (LTI) rate was reduced to 0.28 in 2013 compared with 0.31 in 2012

· ISO 14001 (2004) certification awarded in respect of the environmental management systems at MNV and Russdragmet (RDM) LLC, the Moscow-based management company

POST YEAR EVENTS

· Final dividend of 2.5 pence per share recommended, making a total distribution of 5.0 pence for the year to 31 December 2013 (2012: 7.8 pence)

2014 TARGETS

· Total production in 2014 is expected to increase to more than 300,000 oz of gold and gold equivalents (derived from MNV, Novo and Belaya Gora)

· Ramp-up of the Belaya Gora plant to nameplate capacity

· MNV - maintain stable production and rigorous cost controls

· Novo - improve efficiencies and drive further increases in plant throughput

· Chukotka - ongoing development of the Klen and Kekura projects

· Exploration - focus on near mine exploration programme and delineating upside of the Chukotka projects

CONFERENCE CALL DIAL-IN DETAILS

The Company will hold a conference call on Wednesday, 23 April 2014 hosted by Valery Oyf, CEO, to discuss the final results. The conference call will take place at 10.00 UK time (13.00 Moscow). The link for the online registration is set out below:

http://emea.directeventreg.com/registration/33515642

For further information please contact:

The Annual General meeting will be held on 27 May 2014

www.highlandgold.com

CHAIRMAN'S STATEMENT 

I am pleased to report that your Company achieved significant progress across much of its operational base during the financial year to 31 December 2013, the benefits of which are reflected in our performance.

This time last year I emphasised the importance the Board attached to the improvement of efficiencies at all levels, including the optimisation of production operations. Our focus in this regard was rewarded with an 8% advance in overall production to a record 233,696 oz of gold and gold equivalents in respect of the year under review, thereby achieving our guidance estimate.

This year we are budgeting for a further increase in output to more than 300,000 oz of gold and gold equivalents. Our production estimate is based on expectations of the combined output from our three mines in Russia: Mnogovershinnoye (MNV), Novoshirokinskoye (Novo) and Belaya Gora.

A notable milestone during 2013 was the first pour of gold at the Belaya Gora processing plant followed by the commencement of ramp-up which will continue in 2014. In addition the design provision that allows for carbon-in-leach (CIL) treatment of gravity tailings is being exercised, a measure that will enhance overall gold recoveries.

At full capacity the Belaya Gora plant is expected to process approximately 1.5 million tonnes of ore per annum to give an annual yield of between 75,000 and 110,000 oz of gold. This represents the Company's second construction of a major processing plant following upon the commissioning of the Novo complex in 2009.

The US$212 million acquisition of the Kekura licence, which follows upon 2012's purchase of the Klen/Verkhne-Krichalskaya properties in the Chukotka region, represents an integral aspect of the Company's prospective production pipeline. Our current plans envisage an open-pit output of between 180,000 - 220,000 oz of gold per annum.

We are delighted to have established our credentials in Chukotka, a fast growing region renowned for its favourable investment climate, and the advancement of the Kekura and Klen properties will remain at the forefront of our project development schedule during 2014.

In line with this strategy, the Company's exploration activities during 2013 were also focused on the Kekura and Verkhne-Krichalskaya projects and substantial drilling programmes, designed to upgrade and expand existing mineral resources, were completed on budget.

A 32% increase in the Group's JORC compliant resources to 17.3 Moz compared with 13.2 Moz as at 31 December 2012, primarily reflected the inclusion of Kekura's asset base. Two independent updates raised the values of the resources at both Unkurtash and MNV.

We continued to focus on the optimisation of cost management techniques. Our success in this regard is reflected in a 9.0% reduction in total cash costs to US$611 per ounce in 2013 - a figure which remains highly competitive in terms of peer group comparison. Our all-in sustaining cash costs recorded a 5.8% decline from US$894 in 2012 to a similarly competitive US$842.

As stated, the Board's policy with regard to dividend payments is to make regular distributions, with the level of such dividends dependent upon various factors including the strength of the balance sheet, the gold price, cash flows and capital requirements. In the light of such considerations, the Board is recommending the payment of a final dividend of 2.5 pence per share which, taking into account the interim dividend of 2.5 pence per share, gives a total distribution of 5.0 pence per share in respect of 2013 compared with 7.8 pence per share in 2012.

The health and safety of our employees must be of paramount importance and, in addition to the rigid implementation of appropriate rules and precautions across the Group, we place considerable emphasis on the need to educate personnel and engender a sense of personal responsibility for site safety. To this end, various training courses were held throughout the year. We are encouraged by a fall in the Lost Time Incident (LTI) rate (defined as the number of lost time incidents for every 200,000 man hours worked) to an historic low of 0.28 in 2013 compared with 0.31 in 2012. There can, however, be no room for complacency.

On behalf of the Board I would like to welcome Colin Belshaw who was appointed an additional Independent Non-Executive Director of the Board with effect from 10 September 2013. We are delighted to be able to draw on Mr.Belshaw's wealth of international mining experience and expertise.

In summary, two of the key events during 2013, the acquisition of the Kekura deposit and the first gold pour at Belaya Goya, aptly illustrate the Company's pursuit of both acquisitive and organic growth: a policy that is ongoing. Your Board has every confidence that the strategies outlined above, supported by experienced management and a sound balance sheet, leave the Company well placed to further its development into a highly profitable mid-tier producer within the Russian gold mining industry.

It gives me much pleasure, on behalf of the Board, to thank all our employees for the hard work and dedication that was central to our achievements during 2013.

CHIEF EXECUTIVE OFFICER'S REPORT 

In 2013 the Company achieved its production guidance and was able to decrease costs despite adverse market conditions. The commencement of gold production at the Belaya Gora plant together with the purchase of the Kekura gold deposit represented important developments both of which are integral to the Company's growth strategy.

CORPORATE & SOCIAL RESPONSIBILITY

Our Company remains committed to its obligations in terms of social responsibility. In the regions where we conduct our operations we have established and are maintaining good working relationships with local communities and the respective authorities. During 2013, as in prior years, we continued to participate in various socioeconomic programmes which encompass sport, culture, health and education.

Through the due payments of all appropriate taxes and charges to local and state budgets, our Company contributes to the well-being of the communities concerned. During the year under review, we extended our Social Partnership Agreements with the Governments of the Khabarovsk and Zabaikalsky regions. Pursuant to this we provided our usual assistance in respect of the construction and renovation of educational and medical facilities and the general improvement of public amenities.

HEALTH, SAFETY & ENVIRONMENT

The provision of a safe working environment, the management of production risks, the training of personnel and the encouragement of a sense of personal responsibility for site safety remained key priorities throughout 2013. The Lost Time Incident ("LTI") rate (defined as the number of lost time incidents for every 200,000 man hours worked) was reduced to a level of 0.28 in 2013 compared with 0.31 in 2012. A total of 1,342 employees attended introductory (1 day) safety training courses, 322 employees participated in industrial safety certification through RosTechNadzor, 693 employees participated in a work performance / production safety course (3-5 days) and 520 employees completed industrial safety certification training courses (7-30 days). To ensure that specific operating skills were maintained, 32 employees completed a vehicle driving skills course (22 hours), while 21 employees received training in the use of personal protective equipment. 

The Company's environmental compliance remains in good standing with the regulatory authorities. In September 2013, the first ISO 14001 compliant external audit successfully appraised the environmental management system operating at MNV and Russdragmet (RDM), our Moscow-based management company, and confirmed the Company's compliance with environmental requirements. The Company continued its efforts towards rolling out and implementation of an accredited environmental management system (ISO 14001 compliant) at Belaya Gora with final auditing and compliance expected in September 2014. To this end, 24 Belaya Gora and MNV employees received in-house environmental audit training developed by an external environmental consultant. A total of 121 MNV and Belaya Gora employees received environmental safety training, including three MNV specialists who attended a five-day environmental safety course at the University of Khabarovsk.

OPERATIONS

MNOGOVERSHINNOYE (MNV), Khabarovsk region, Russia

Overall production at MNV was in line with the Company's targets. Although, as expected, we witnessed a gradual decline in processed grades during the reporting period, the stable performance of other key production factors enabled us to achieve our production plans. Process plant throughput amounted to 1,328,181 tonnes of ore, while the recovery rate remained strong at 92% to yield 145,259 oz of gold. Improvement of the plant's cyanidation process was achieved through the installation and commissioning of a mechanical agitator.

PRODUCTION COSTS

Cash operating costs in 2013 totalled US$557 per ounce, total cash costs amounted to US$647 per ounce (2012-restated: US$638 per ounce) and total production costs were US$858 per ounce (2012-restated: US$843 per ounce).

CAPITAL COSTS

During 2013 a total of US$17.4 million was invested at MNV. This included: capitalised expenditures and construction (US$5.0 million), purchase of equipment (US$11.0 million) and exploration (US$1.4 million).

OUTLOOK

In order to mitigate the effects of the decline in grades an increase in throughput is planned with ca. 1,350,000 tonnes of ore expected to be produced in 2014.

An independent JORC resource audit was carried out at the MNV mine, providing a 79% increase in its resources compared to those stated as at 31 December 2012. This will support the current life of mine plan and extend the mining operation until 2017. Management will also work on the conversion of MNV's resource base into mineable reserves.

NOVOSHIROKINSKOYE (Novo), Zabaikalsky region, Russia

During 2013 underground ore production and processed ore throughput both achieved their respective targets. Production amounted to 81,361 oz of gold equivalents which represents a substantial 26% increase compared with the previous year. An upgrade of the milling circuit served to increase efficiency.

Average processed grades in the second half of the year were 25% higher than those for the corresponding period of 2012 and 14% above those for the first half of 2013. This increase was in line with the mining plan and was achieved following the successful completion of the required development work.

Full year 2013 development amounted to 8,478 metres, thereby exceeding the comparable figure for 2012 by 14%.

* approximate Au equivalent 

mined ore metal content breakdown = Au 3.4 g/t, Ag 66.5 g/t, Pb 2.2%, Zn 1.1%

PRODUCTION COSTS

Cash operating costs in 2013 totalled US$486 per ounce, total cash costs amounted to US$542 per ounce (2012: US$676 per ounce) and total production costs were US$774 per ounce (2012: US$929 per ounce).

CAPITAL COSTS

During 2013 a total of US$9.4 million was invested at Novo. This included: capitalised expenditures and construction (US$3.5 million) and purchase of equipment (US$5.9 million).

OUTLOOK

Anticipated ore production in 2014 will amount to 550,000 tonnes. Plant adjustments, to facilitate the increased throughput and the development of deeper elevations, will be conducted during the year.

BELAYA GORA, Khabarovsk region, Russia

Plant construction was completed during the year, followed by commencement of ramp-up, including testing to determine optimum operating conditions. While operating in testing mode the plant produced 7,077 oz of gold. Open-pit operations focused on the Pologaya zone in order to prepare ground for mining in 2014 and optimise haulage.

* Ore toll processed at the MNV plant

PRODUCTION COSTS

Cash operating costs of 215 oz of gold sold in H1 2013 totalled US$635 per ounce and total cash costs amounted to US$1,426 per ounce (2012-restated: US$1,695 per ounce). The costs of gold produced during the start-up works and sold during the second half of 2013 (7,060 oz) were capitalised to the cost of construction.

CAPITAL COSTS

During 2013 a total of US$56.8 million was invested at Belaya Gora. This included: capitalised expenditures and construction (US$56.5 million) and exploration (US$0.3 million).

OUTLOOK

We expect to process ca. 1.1 - 1.2 million tonnes of ore at the Belaya Gora plant during 2014. In line with this we will utilise the design facility that allows for carbon-in-leach (CIL) treatment of gravity tailings, a procedure that will enhance overall gold recoveries. The objective will be to achieve all nameplate technological parameters.

DEVELOPMENT PROJECTS

Klen - Chukotka region, Russia

Activity at Klen during 2013 largely focused on the development and completion of design documentation which is currently under review by state agencies. The project-related capex estimates are also under review. Site preparation work gathered momentum during the second half of the year: roads were constructed to facilitate vehicle access and transportation around the site, storage facilities were created, work commenced on the development of a water reservoir, accommodation was provided for builders and a reliable data network was established. The focus in 2014 will be on exploration: targeting the discovery of satellite deposits within the surrounding Verkhne-Krichalskaya licence with the objective of improving the resource base and the economics of the future Klen operation. This will be accompanied by further project design development.

CAPITAL COSTS

During 2013 a total of US$38.9 million was invested at Klen.

Kekura - Chukotka region, Russia

At Kekura, potentially a high grade open pit operation, further metallurgical studies were initiated on a number of samples taken from throughout the ore body to define ore characteristics and spatial distribution in order to develop an optimal processing route. The latter part of the year also witnessed site layout proposals accompanied by preliminary project work. Test work was carried out on the pilot plant.

Ongoing work at Kekura will include the extension and upgrading of the existing resources, and the completion of metallurgical test work and engineering design, thereby leading to a bankable feasibility study. The work planned during 2014 will essentially facilitate the completion of all technical requirements with regard to a GKZ reserve registration update, targeted for early 2015.

CAPITAL COSTS

During 2013 a total of US$14.7 million was invested at Kekura.

Taseevskoye - Zabaikalsky region, Russia

At Taseevskoye, project design documentation for first and third ore bodies was completed during the second half of the year. Following approval by various regulatory bodies the project design is now under review by the State Examination Board. The cut-off grade study for the Baley ZIF 1 tailings was prepared. In 2014 work will focus on project design documentation.

CAPITAL COSTS

During 2013 a total of US$4.4 million was invested at Taseevskoye.

Lyubov - Zabaikalsky Region, Russia

Based on the reserves approved in Q4 2012, the design documents for the Evgraf prospect were completed. The project was approved by various regulatory bodies and is currently being reviewed by the State Examination Board. In 2014 the Company expects to receive the results of a project review conducted by state authorities.

CAPITAL COSTS

During 2013 a total of US$0.3 million was invested at Lyubov.

EXPLORATION

The Company's exploration activities in 2013 were focused on our Chukotka projects while we also maintained our operational priority of near-mine exploration at MNV. Group JORC compliant resources registered a 32% increase to 17.3 Moz (compared with 13.2 Moz stated at 31 December 2012) as a result of the Kekura licence purchase and an independent resource audit update at both Unkurtash and MNV.

During the year the Company completed a total of more than 45,000 metres of drilling primarily at Klen, Kekura and the MNV Western Flank licence. The Company's overall expenditure on exploration projects including Unkurtash and Belaya Gora Flanks amounted to US$16.0 million in 2013, compared with a $20.5 million spend in 2012.

Mnogovershinnoye - Khabarovsk region, Russia

Throughout 2013 the Company continued to pursue its near-mine exploration efforts at MNV designed to identify additional resources in order to enhance the life of the open-pit mine. In the course of these efforts we successfully delineated new resources at the Pebble, Quiet and Watershed prospects.

Whereas mining at Pebble started in the first half of 2013, mining at the Watershed prospect commenced in the second half of the year. Diamond core drilling activity in respect of underground resource conversion totalled 6,152 metres during H2 2013, in line with budget.

At the Western Flank Mnogovershinnoye licence, immediately adjacent to the mine operations and hosting the Chaynoye prospect, the Company completed 2,440 metres of diamond core drilling. Results corroborate historic exploration data and geological modelling currently underway indicates the potential for an open-pit mineable resource. Further exploration works planned in 2014 will evaluate the resource potential of the entire licence area and will include a geochemical survey with a follow-up trenching programme.

Verkhne Krichalskaya - Chukotka region, Russia

The Verkhne-Krichalskaya (VK) exploration and mining licence incorporates the Klen licence and is believed to hold good upside potential with regard to the Klen operation. The Company's previous exploration programme defined several gold anomalies and exploration targets at VK. In H1 2013 the Company focused on two targets and completed an initial shallow-depth reconnaissance drilling programme totalling 7,350 metres. Drilling results received in H2 2013 delineate several zones with an elevated grade of gold mineralisation, in part comparable to the Klen deposit grade. A detailed geochemical survey was also completed in H2 2013 at selected targets with results expected in Q1 2014. A follow-up drilling programme planned for 2014 at several zones is designed to define continuity of gold mineralisation along strike and depth.

Kekura - Chukotka region, Russia

Following the acquisition of the Kekura project in Q2 2013, the Company completed a 35,000 metre diamond core drilling programme in 2013 designed to upgrade resources and complete requirements for future additional reserve registration with the Russian GKZ. Drilling results obtained from comprehensive "metallic screen" fire assays are in line with the previous resource model in terms of average grade and width of gold intersects. Resource modelling is in progress and will be followed by an independent JORC-compliant resource audit. Exploration works planned for 2014 will facilitate the completion of specific requirements for GKZ compliance including several thousand metres of infill drilling and additional technical studies. Exploratory prospecting on the greater licence area will include geochemical surveys at selected targets and the evaluation of several promising near-mine gold prospects.

Unkurtash - Kyrgyzstan

The Unkurtash project includes three distinct prospects, Unkurtash, Sarytube and Karatube, located within the Company's single Kassan licence (63 km²). An independent JORC compliant resource audit, undertaken earlier in 2013, updated the project's total resource by ca. 0.68 Moz to approximately 3.7 Moz.

In order to facilitate registration of the entire Unkurtash project's C1+C2 category reserves with the Kyrgyz GKZ, the Company completed a reserve calculation update during H2 2013. Project economics will be refined through additional metallurgical studies in 2014 and, in agreement with the regulatory authorities, submission of the necessary documentation for reserve registration to GKZ is targeted for Q4 2014.

Belaya Gora Flanks - Khabarovsk region, Russia

The Belaya Gora Flanks licence encapsulates the Belaya Gora deposit and represents near-mine exploration potential which could serve to increase Belaya Gora's open-pit resource base. In 2013 the Company resumed field-based exploration at the property and allocated 1,000 metres of trenching and 350 metres of diamond core drilling at two exploration targets (Pavlovsky, Kolchanka). Results of field work completed at the Pavlovsky target in H1 2013 revealed gold mineralisation of significant grade with shallow continuity at depth. No field work was conducted at the Kolchanka target or at the nearby Blagodatnoye licence. Exploration work at Belaya Gora Flanks and Blagodatnoye in 2014 will include data analysis and report compilation.

Qualified Persons Statement: 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 more than 16 years' 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

Our principal objective in 2014 is to drive the Company into a higher production league as signalled by our forecast of an increase in output to more than 300,000 ounces of gold and gold equivalents. In order to achieve this, management will continue to focus on optimisation of the Group's operational base, with the emphasis on further efficiency improvements at each of our three producing assets. Parallel with this, our project development and exploration programmes, designed to underwrite future production, will continue on schedule.

FINANCIAL REVIEW

The Group's financial performance in 2013 gives cause for satisfaction, particularly when viewed against the adverse trading background. Our investments of prior years in the expertise of highly qualified managers and more efficient mining procedures, together with the across the board cost reduction programme initiated in 2012, brought important rewards during the year under review.

All of the Group's key financial parameters in respect of 2013 were in line with the best comparables in the industry, as illustrated by the significant declines in total cash costs* and all-in sustaining cash costs** (detailed below) to levels which are the lowest in the Russian gold mining sector and fully competitive on a world basis. Satisfaction can also be taken from the fact that the Group's assets remained unimpaired, despite the sharp falls in metal prices, a factor that serves to underline the quality of the Group's long-term resources.

The Group's overall revenue was US$304.2 million in 2013 compared with US$351.8 million in 2012. This 13.5% decline reflected the fall in precious and other metal spot market prices during the period, despite higher sales volumes of gold and gold equivalents. The Group sold 237,271 ounces of gold and gold equivalents in 2013 compared with 215,917 ounces in 2012. MNV's share of sales at 147,893 oz showed a 0.6% increase versus 2012, while Novo's share at 82,102 eq. oz registered a significant 27.3% advance. Belaya Gora, undergoing a period of start-up works, produced 7,077 ounces and sold 7,060 ounces in 2013. The related revenues were netted off with costs of sales and capitalised into the cost of the plant. The Group did not carry out any hedging activity in 2013.

The average price of gold realised by MNV and Belaya Gora (net of commission) decreased by 15.4% to US$1,405 per ounce in 2013 compared with US$1,660 per ounce in 2012. The average price of gold equivalents realised by Novo in 2013 was US$1,076 per eq. oz, 23.7% below the level achieved in 2012. The average price at Novo is based on the spot price for metals contained in the concentrates (gold, lead, zinc and silver) net of the fixed processing and refining costs at the Kazzinc plant. The Group's average realised price of gold and gold equivalents amounted to US$1,291 per oz in 2013 compared with US$1,586 per oz in 2012, a decline of 18.6%.

In 2013 the Group adopted IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine. This led to a US$4.3 million reduction in the previously reported cost of sales in respect of 2012. Further information on this restatement can be found in Note 3 in the Annual Consolidated Financial Statements.

Following upon various cost reduction exercises the increase in the Group's cost of sales was limited to 1.2%, or US$2.3 million of US$203.6 million in 2013 (2012-restated: US$201.3 million). This was largely due to a 10.2% increase in salaries and wages at MNV and Novo, the principal operating entities, which in turn reflected the Group's policy of employing highly qualified personnel in order to drive efficiencies. Belaya Gora's revenues and costs, which related to the start-up activities required to bring the plant into production, were netted off and capitalised into the cost of construction in progress.

Total Group cash costs decreased by 9.0% to US$611 per oz in 2013 (2012-restated: US$671 per oz). Total cash costs at MNV were effectively maintained at US$647 per oz (2012-restated: US$638 per oz) despite the increase in salaries and wages and the processing of ore with grades down by 7.5% (3.7 g/t in 2013 vs 4.0 g/t in 2012). Total cash costs at Novo decreased to US$542 per eq. oz (2012: US$676 per eq. oz) largely reflecting the ore grades which were 22.4% higher in 2013 versus 2012. A 4.1% increase in the processed volume yielded benefits in terms of economies of scale.

All-in sustaining costs (AISC) per ounce sold decreased from US$894 per ounce in 2012-restated to US$842 per ounce in 2013 - in line with the AISC of the world's principal gold producers and are the lowest in Russia.

As a result of reduced sales revenues due to lower metal prices, the Group's EBITDA (defined as operating profit excluding depreciation, amortisation, movement in ore stockpile obsolescence provision and result of disposal of a non-core entity) declined by 25.8% to US$132.7 million in 2013 compared with US$179.0 million in 2012-restated. The EBITDA margin (defined as EBITDA divided by total revenue) decreased from 50.9% to 43.6%.

Despite the decrease in metal prices, the Group's assets remained unimpaired. For impairment testing the Group used the following average price assumptions for the whole life of mine: gold at US$1,200 per ounce, silver at US$22 per ounce, lead at US$1,950-2,100 per tonne and zinc at US$1,850 per tonne.

In 2013 the Group recorded a net finance income of US$7.8 million compared with US$24.2 million in 2012. This largely reflected the reassessment of fair value on coupon bonds and shares and lower levels of interest earned on deposits.

A foreign exchange loss of US$2.8 million (2012: US$4.4 million - gain) resulted from the settlement of foreign currency transactions and the translation of monetary assets and liabilities denominated in currencies such as Russian Roubles and Pounds Sterling into US Dollars. The foreign exchange loss primarily reflected a 7.8% devaluation of the Russian Rouble during 2013.

The income tax charge amounted to US$27.4 million in 2013 compared with US$31.5 million (restated) for the corresponding period of 2012. The tax charge comprises US$26.8 million in respect of current tax expenses (MNV: US$23.1 million; Novo: US$3.7 million) and US$0.6 million in respect of deferred tax. The effective tax rate increased from 20.0% in 2012 to 33.3% in 2013, largely due to an increase in non-deductible expenses (including inventory write-down and foreign exchange losses) and differences in the Russian tax and IFRS depreciation charges.

In 2013 the Group recorded a net profit after tax amounting to US$54.7 million (2012-restated: US$126.4 million) and earnings per share of US$0.167 (2012-restated: US$0.388).

Cash inflow from the Group's operating activities during 2013 was US$94.7 million compared with US$137.6 million (restated) in 2012. MNV and Novo generated positive cash flow.

The Group invested US$143.7 million in capital expenditure during the year to 31 December 2013, compared with US$125.0 million in 2012. Capital expenditure in 2013 comprised US$17.4 million at MNV, US$9.4 million at Novo, US$56.8 million at Belaya Gora, US$38.9 million at Klen, US$14.7 million at Kekura and US$6.5 million in respect of other exploration and development projects. The required capital expenditure was funded by operating cash inflow and debt. On 29 March 2013, the Group acquired 100% of ZAO Bazovye Metally, which holds the mining and exploration rights to the Kekura gold deposit and the surrounding licence area, for a consideration of US$212.0 million which was settled in full in 2013. The US$11.0 million amount relating to the construction agreement, which represented part of this transaction, was partially settled. The total consideration was funded via a debt facility.

The Group's net debt position as at 31 December 2013 amounted to US$251.2 million compared to a net cash position as at 31 December 2012 of US$52.6 million. The net debt is defined as cash at bank, deposits and bonds, decreased by any bank borrowings. The ratio of net debt to EBITDA is 1.9 which is in line with the Board's policy.

* Rounding of figures may result in computational discrepancies.

EVENTS AFTER THE REPORTING PERIOD

In March 2014 the Group signed a new financing agreement with Gazprombank in respect of a US$100.0 million facility with a maximum 4.0% interest rate with the draw period set until March 2016. This facility, which is repayable in installments between March 2016 and March 2017, will be used to finance development and operating activities within the Group.

In the first quarter of 2014 the Group fully repaid the Gazprombank loan drawn down in 2012 and held at a 5.0% interest rate with maturity in October 2015.

DIVIDENDS

The Group paid an interim dividend of GBP 0.025 per share (2012: an interim dividend of GBP 0.025 per share and a special dividend of GBP 0.023 per share, making a total of GBP 0.048 per share) which resulted in an aggregate interim dividend payment of US$13.0 million (2012: US$25.1 million). The interim dividend was paid on 18 October 2013.

The Board has recommended a final dividend of GBP 0.025 per share which, taking into account the interim dividend paid in October 2013, gives a total dividend of GBP 0.05 per share for the year (2012: GBP 0.078 per share). The final dividend will be paid on 30 May 2014 to shareholders on the register at the close of business on 2 May 2014 (the record date). The ex-dividend date will be 30 April 2014.

* Total cash costs include mine site operating costs such as mining, processing, administration, royalties and production taxes, but are exclusive of depreciation, depletion and amortization, capital and exploration costs. Total cash costs are then divided by ounces sold to arrive at the total cash costs of sales. This data provides additional information and is a non-GAAP measure.

** In line with guidance issued by the World Gold Council, the formula used to define all-in sustaining cash costs measure commences with total cash costs per ounce sold and then adds sustaining capital expenditures, corporate general and administrative costs, mine site exploration and evaluation costs and environmental rehabilitation costs. This data seeks to represent the total costs of producing gold from current operations, and therefore it does not include capital expenditures attributable to projects or mine expansions, exploration and evaluation costs attributable to growth projects, income tax payments, interest costs or dividend payments.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the year ended 31 December 2013

The Group does not have any items of other comprehensive income or any discontinued operations.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

as at 31 December 2013

The financial statements were approved by the Board of Directors on 22 April 2014 and signed on its behalf by:Alla Baranovskaya and Olga Pokrovskaya.CONSOLIDATED STATEMENT OF CASH FLOWS

for the year ended 31 December 2013

SELECTED POLICIES AND NOTES TO THE FINANCIAL INFORMATION

Corporate information

The consolidated financial statements of Highland Gold Mining Limited for the year ended 31 December 2013 were authorised for issue in accordance with a resolution of the directors on 21 April 2014.

Highland Gold Mining Limited is a public company incorporated and domiciled in Jersey. The registered office is located at 26 New Street, St Helier, Jersey JE2 3RA. Its ordinary shares are traded on the Alternative Investment Market ("AIM").

The principal activity is building a portfolio of gold mining operations within the Russian Federation and Kyrgyzstan.

Basis of preparation

The consolidated financial statements have been prepared on a historical cost basis except for financial instruments carried at fair value through profit or loss and assets and liabilities acquired in business combination that have been measured at fair value. The consolidated financial statements are presented in US dollars, which is the parent company's functional and the Group's 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 the 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.

A subsidiary is an entity, including an unincorporated entity such as a partnership, that is controlled by another entity (known as the parent). 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, unrealised gains and losses resulting from intra-group transactions are eliminated in full.

IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine

IFRIC 20 now clarifies when an entity should recognise production phase waste removal (stripping) costs (production stripping costs) incurred in relation to a surface mining operation, as an asset. Such an asset will be referred to as a stripping activity asset. The interpretation is effective for annual reporting periods beginning on or after 1 January 2013 and has impacted the way in which the Group accounts for production stripping costs.

The Group has adopted IFRIC 20 effective 1 January 2013. Upon adoption of IFRIC 20, the Group assessed the deferred stripping balance as at 1 January 2012 and determined that this balance can be associated with identifiable components of ore bodies. Therefore no adjustments were made as at 1 January 2012.

The adoption of IFRIC 20 has resulted in increased capitalisation of stripping costs and reduced cost of sales in 2012. If the Group had not adopted the standard, the net income and capitalised stripping costs for current and comparative periods would have decreased. The quantitative impact of adopting IFRIC 20 on the consolidated financial statements for the year ended 31 December 2012 is presented in the tables below.

Adjustments to the consolidated statement of comprehensive income:

Adjustments to the consolidated statement of financial position:

Adjustments to the consolidated cash flow statement:

Business combinations

Acquisition of ZAO Bazovye Metally

On 29 March 2013, the Group acquired from Union Mining Holdings Limited a 100% share in ZAO Bazovye Metally (Kekura) which holds the mining and exploration rights to the Kekura gold deposit and surrounding licence area. Kekura's resource base will contribute to the long-term production profile of the Group and represents a solid foundation for the Group's further growth.

The Group determined that this transaction represents a business combination.

From total consideration of US$222.8 million, US$189.3 million was paid in cash and US$17.7 million represented the fair value of the loan payable assigned to the Group. This amount of US$207.0 million was funded via a new debt facility with Gazprombank.

The amount of US$17.1 million, representing the carrying value of the loan assigned at the date of acquisition, was paid on 29 March 2013.

The additional payment of US$5.0 million is the amount of contingent consideration payable in December 2013 as long as there are no third-parties' claims. It was recognised at the fair value of US$4.9 million, a 2.6% discount factor was applied. This part of contingent consideration was settled in full in 2013.

In addition, at the acquisition date up to US$11.0 million of contingent consideration was payable in the second half of 2013 upon the successful launch of the pilot plant which is nearing completion. It was recognised at the fair value of US$10.9 million, a 2.2% discount factor was applied. As at 31 December 2013 up to US$10.5 million remained outstanding and are expected to be paid in 2014.

Assets acquired and liabilities assumed

The estimated fair value of the identifiable assets and liabilities of Kekura at the date of acquisition were as follows:

The goodwill balance of US$16.8 million is the result of the requirement to recognise a deferred tax liability calculated as the difference between the tax effect of the fair value of the assets and liabilities acquired and their tax bases. Goodwill is allocated entirely to the development and exploration company (Kekura). None of the goodwill recognised is expected to be deductable for income tax purposes.

Accounts receivable and other debtors were partly received in 2013 and the Group expects the remaining balance to be received during 2014.

From the date of acquisition, Kekura has contributed US$0.0 million to revenue and loss of US$0.4 million to the profit before income tax of the Group in 2013. If the combination had taken place at the beginning of the year 2013, revenue of the Group in 2013 would have been US$304.2 million and profit before income tax of the Group would have been US$54.7 million.

Prior year acquisition of OOO Klen

On 9 July 2012, the Group acquired a 100% share in OOO Klen from Aristus Holdings Limited in order to improve the proven and probable reserves base and to increase the gold and gold equivalents production.

This transaction is classified as a related party transaction. The Directors of the Company, having received approval from the Company's nominated adviser, Numis Securities Limited, consider that the terms of the said transaction are fair and reasonable insofar as the shareholders of the Company are concerned.

The Group determined that this transaction represents a business combination.

From total consideration the amount allocated to loan was US$15.4 million based on the fair value of the loan. The payment was made on 16 July 2012.

Assets acquired and liabilities assumed

The estimated fair value of the identifiable assets and liabilities of Klen as at the date of acquisition was as follows:

The goodwill balance is the result of the requirement to recognise a deferred tax liability calculated as the difference between the tax effect of the fair value of the assets and liabilities acquired and their tax bases.

From the date of acquisition in 2012, Klen has contributed US$0.0 million to revenue and loss of US$0.3 million to the profit before income tax of the Group in 2012. If the combination had taken place at the beginning of the year 2012, revenue of the Group in 2012 would have been US$351.8 million and profit before income tax of the Group (restated) would have been US$158.0 million.

Segment information

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

· Gold production;

· Polymetallic concentrate production;

· Development and exploration; and

· Other.

The gold production reportable segment comprises two operating segments, namely Mnogovershinnoye (MNV) and Belaya Gora (BG) at which level management monitors its results for the purpose of making decisions about resource allocation and evaluating the effectiveness of its activity.

The polymetallic concentrate production segment, namely Novoshirokinskoye (Novo), is analysed by management separately due to the fact that the nature of its activities differs from the gold production process.

The development and exploration segment contains the entities which hold the licenses being in the development and exploration stage: Klen, Taseevskoye, Unkurtash, Lubov. Following the acquisition on 29 March 2013, the development and exploration segment also includes the results and balances of Kekura.

The "other" segment includes head office, management company, trade house and other companies 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 movement in ore stockpile obsolescence provision). 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 and asset information for the Group's reportable segments. The segment information is reconciled to the Group's profit for the year.

The Highland Gold finance costs, finance income, income taxes, foreign exchange gains/(losses), other non-current assets and current assets are managed on a group basis and are not allocated to operating segments.

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

In 2013 the gold and silver revenue reported in the gold production segment was received from sales to Gazprombank (US$209.5 million) and MDM Bank (US$1.8 million) in the territory of the Russian Federation.

In 2012 the gold and silver revenue reported in the gold production segment was received from sales to Gazprombank (US$107.9 million), VTB Bank (US$91.7 million), Sberbank (US$51.9 million) and MDM Bank (US$2.4 million) in the territory of the Russian Federation.

In 2013 the concentrate revenue reported in the polymetallic concentrate production segment in the amount of US$88.3 million was received from sales to Kazzinc (2012: US$90.9 million) in the territory of the Republic of Kazakhstan.

Other third-party revenues in both 2013 and 2012 were received in the territory of the Russian Federation.

Inter-segment revenues mostly represent management services.

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

** Current assets include corporate cash and cash equivalents of US$7.9 million, investments of US$50.2 million, inventories of US$71.0 million, trade and other receivables of US$53.6 million and other assets of US$8.3 million. Eliminations relate to intercompany accounts receivable.

*** Capital expenditure - addition in 2013 - includes additions to property, plant and equipment of US$205.1 million less prepayments previously made for property, plant and equipment of US$30.7 million.

**** Non-cash capital expenditure includes unpaid accounts payable of US$8.6 million, inventories of US$1.0 million sold to contractor and capitalised interest of US$9.3 million.

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

** Current assets include corporate cash and cash equivalents of US$7.3 million, investments of US$54.1 million, inventories of US$67.0 million, trade and other receivables of US$50.4 million and other assets of US$7.2 million. Eliminations relate to intercompany accounts receivable.

*** Capital expenditure - addition in 2012 - includes additions to property, plant and equipment of US$106.5 million and prepayments given for property, plant and equipment of US$34.7 million, including US$32.3 million relating to the construction of a stand-alone process plant at BG.

**** Non-cash capital expenditure includes capitalised interest of US$0.1 million.

All assets for both 2013 and 2012 are located in the Russian Federation and in the Kyrgyz Republic.

Income tax

The major components of income tax expense for the years ended 31 December 2013 and 2012 are:

Deferred income tax

Deferred income tax at 31 December relates to the following:

Entity-specific deferred tax positions are presented below:

No deferred tax benefits are recognised in relation to site restoration provisions and obsolescence provisions. Restoration expenses are tax deductible when incurred. However, it is not certain that there will be sufficient income towards the end of the mine's life against which the restoration expenditure can be offset and therefore future tax relief has not been assumed.

The amount of the deductible temporary differences for which no deferred tax asset has been recognised in respect of the site restoration provision at 31 December 2013 is US$18.6 million (31 December 2012: US$13.4 million).

No deferred tax benefit is recognised in relation to the provision for obsolete inventory. These materials are unlikely to be used for production purposes in the future and therefore future tax relief is not assumed. The amount of the deductible temporary differences for which no deferred tax asset has been recognised in respect of the obsolescence provision at 31 December 2013 is US$14.1 million (31 December 2012: US$11.7 million).

The amount of the deductible temporary differences for which no deferred tax asset has been recognised in respect of the tax losses at 31 December 2013 is US$7.9 million (31 December 2012: US$4.8 million). The non-recognition of tax losses is due to insufficient expected future income against which these losses could be offset.

According to Russian tax legislation, tax losses expire if not utilised within 10 years of accruing. In 2012 the income tax in Kyrgyzstan was decreased to zero for entities engaged in gold mining and gold selling.

The temporary differences associated with investments in subsidiaries, for which deferred tax liability in respect of withholding tax on dividends has not been recognised aggregate to US$456.5 million (2012: US$389.1 million). No deferred tax liability has been recognised in respect of these differences because the Group is able to control the timing of the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future.

The total deferred tax liabilities arising from these temporary differences should be between US$0 and US$22.8 million (2012: US$0 and US$19.5 million), depending on the manner in which the investments are ultimately realised.

Profits arising in the Company for the 2013 and 2012 years of assessment will be subject to Jersey tax at the standard corporate income tax rate of 0%.