HGM.L Regulatory News (HGM)

HIGHLAND GOLD MINING LIMITED

12 April 2019

Full Year 2018 Audited Results

Highland Gold Mining Limited ("Highland Gold" or the "Company", AIM: HGM) is pleased to present its final audited results for the year ended 31 December 2018.

FINANCIAL HIGHLIGHTS

* In line with guidance issued by the World Gold Council, the formula used to define the all-in sustaining cash costs measurement 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.

** Total cash costs include mine site operating costs such as mining, processing, administration, royalties and production taxes but are exclusive of depreciation, depletion and amortisation, capital and exploration costs. Total cash costs are then divided by ounces sold to arrive at the total cash costs of sales.

*** EBITDA is defined as operating profit/(loss) excluding depreciation and amortisation, impairment losses, movement in ore stockpiles obsolescence provision, movement in raw materials and consumables obsolescence provision, result of disposal of a non-core entity and gain on settlement of contingent consideration.

**** Net debt is defined as cash and cash equivalent less interest-bearing loans and borrowings and liabilities under finance lease. The figure does not include debt, lease and cash assumed as part of the Valunisty acquisition. Please refer to the Financial Review for further details.

The data described in notes 1, 2 and 4 provide additional information and are non-GAAP measures.

· Total 2018 production of 269,500 oz of gold and gold equivalent, a slight decrease of 1% from 272,274 oz in 2017 and within the guidance range of 265-275k oz

· Total Cash Costs held steady at US$ 506 per oz (2017: US$ 507), while All-In Sustaining Costs rose slightly to US$ 682 (2017: US$ 664) due to higher G&A and supporting capital expenditure

· 2018 EBITDA edged down by 1% to US$ 153.1 million (2017: US$ 155.3 million), in line with the change in production, while EBITDA margin for the year was stable at 49%, the same as in 2017

· Cash generation remained strong with net cash flow from operations rising 4% to US$ 136.2 million (2017: US$ 131.0 million)

· Two interim dividends of £0.06 and £0.05 per share, respectively, paid with respect to 2018 for a total payout to date of US$ 46 million (2017: US$ 46 million).

OPERATING HIGHLIGHTS

· A strong operational year at MNV was coupled with the completion of a new JORC-compliant reserve audit that extended the project's life of mine to 2029

· Belaya Gora output rose driven by better recoveries, and a pre-feasibility study was published regarding upgrades to the processing plant and the processing of ore from the nearby Blagodatnoye deposit

· Work on the Novo 1.3 mtpa expansion continued, but output at the mine declined due to lower grades and recoveries

· The acquisition of the Valunisty mine and related properties closed in December 2018

· Construction of the Kekura project commenced following the completion of a definitive feasibility study

KEY TARGETS FOR 2019

· Continue to advance projects designed to improve operations at existing mines - near-mine exploration at MNV, mine and mill expansion at Novo, and processing plant upgrades at Belaya Gora

· Ramp-up construction at Kekura and begin initial stripping and mining at the site

· Integrate the recently-acquired Valunisty mine and related operations and begin studies on potential upgrades to its operations

· Roll-out new programmes for health & safety, operational efficiency and continuous improvement across each of the Company's operating units

· Total production of gold and gold equivalent in 2019 is expected to be in the range of 290,000-300,000 oz

POST YEAR EVENTS

· Third interim dividend of £0.024 per share approved by the Board of Directors

· Kekura and Klen were included on the list of companies which can be granted 'residency' status within the Chukotka Advanced Special Economic Zone (ASEZ), a programme offering beneficial tax incentives

· The Annual General meeting will be held on 23 May 2019

CONFERENCE CALL DIAL-IN DETAILS

The Company will hold a simultaneous webcast and conference call to discuss the results, hosted by CEO Denis Alexandrov, on 12 April 2018 at 10:00 UK time (12:00 Moscow).

This event will be streamed online and it is recommended that you listen via your computer. The link for online registration is: https://digital.vevent.com/index.jsp?eid=7846&seid=30.

To register to participate by telephone and to receive local dial-in numbers, please follow this link: http://emea.directeventreg.com/registration/9483166.

FOR FURTHER INFORMATION PLEASE CONTACT:

***

Commenting on the 2018 results, Executive Chairman Eugene Shvidler said:

Highland Gold is committed to growth, both organic and acquisitive, and I am pleased to report that 2018 and the early months of the current financial year have witnessed significant developments on that front. The Company's recent corporate highlights, namely the purchase of the Valunisty gold mine and the seven-year 'Life of Mine' extension of MNV, as well as the ramp-up of construction at Kekura, reflect key aspects of our overall strategy to capitalise on Highland's valuable and substantial asset base.

Looking to the future, we are confident that the ongoing implementation of our strategy, together with the maintenance of rigorous cost disciplines and the roll-out of a new programme for operational efficiency and continuous improvement, will continue to serve shareholders well in the ensuing years.

OPERATIONAL REVIEW

PRODUCTION STATISTICS

* Calculated in gold equivalent (gold equivalent is calculated based on average factual prices for the period)

Metal grade of mined ore = Au 3.12 g/t, Ag 48.20 g/t, Pb 1.24 %, Zn 0.48 %)

KHABAROVSK REGION, RUSSIA

Mnogovershinnoye (MNV)

MNV recorded a near 10% increase in gold production to 112,607 oz in 2018 compared with 102,502 oz in 2017, thereby raising its share of the Company's overall production from 38% to close on 42%. This was achieved despite a 30% plus decrease in processed ore tonnage during Q1 due to a damaged feed trunnion that temporarily put one of the two mills out of commission. The decline was reduced to 4.6% in respect of the full year following an 18% year-on-year increase in Q4.

The average grade rose 14.5% to 2.92 g/t in 2018 although open-pit ore grade registered a 35% increase in Q4 versus Q4 2017 as grade-control drilling exposed higher grade blocks at the Central ore body. The recovery rate held firm at 92.3% (2017: 91.36%).

Over the course of 2018, Micon International Co Limited conducted an independent updated audit of Mineral Resources and Ore Reserves at the Mnogovershinnoye (MNV) mine in compliance with the JORC code (2012). The audit took into account data from near-mine exploration conducted at MNV in 2017, as well as updated mining parameters.

The new Ore Reserve estimate, published in January 2019, supports the extension of MNV's life of mine to the year 2029 versus the previous forecast of 2022. Furthermore, a significant increase in Mineral Resources creates the potential to add substantially more reserves in the future.

Management's focus on near-mine exploration continued throughout 2018, as did the evaluation programme in relation to the mine's historic rock waste dumps.

During 2018, over 69 thousand tonnes of ore at a grade of 1.04 g/t were taken from the waste dumps for processing. Since the programme commenced in 2016, a total of 1.12 M tonnes of ore has been identified and 675,000 tonnes processed at an average grade of 1.09 g/t.

Stage 1 of the mine's broad grade-control drilling programme was completed in 2018. Exploration activity involved drilling from the surface to confirm the location of mineralization zones and also from the underground workings below such zones. Based on these drilling results, revised Russian-standard reserve estimates were developed, submitted to regulators GKZ and approved in December 2018.

Diamond exploration drilling in 2018 was performed at the Deep, Quiet, Intermediate, Northern and Deer ore bodies. Drilling totalled 15,355 metres, encompassing 230 holes. Geochemical prospecting work was completed during the year in respect of two of the Company's greenfield licences adjacent to MNV, namely Kulibinskaya and Zamanchivaya. 

At Kulibinskaya, 56,245 m3 of trenching and 1,054 metres of diamond drilling duly facilitated sample testing and logging.

Trenching activity at Zamanchivaya covered 15,324 m3. Diamond drilling in areas with elevated gold grades, as identified by trench sampling, totalled 2,223 metres.

An avalanche that occurred in December blocked the entrance to the underground mine via Adit #1. As a result, mining activities were refocused on areas accessed by other entrances, and on open-pit operations.

PRODUCTION COSTS

Total cash costs amounted to US$600 per oz (2017: US$617 per oz) while all-in sustaining costs were US$757 per oz (2017: US$741 per oz).

CAPITAL COSTS

A total of US$20.2 million was invested at MNV in 2018. This included capitalised expenditures and construction (US$7.8 million), purchase of equipment (US$10.5 million) and exploration (US$1.9 million).

OUTLOOK

Ongoing exploration activity and a continuation of the waste appraisal programme during 2019 will be supported by budget allocation of over US$4 million.

Priority exploration targets for 2019 include the Deer, Central, Intermediate, and Deep ore bodies, the Burlivaya zone, the Kulibinskaya and Zamanchivaya licences and a third adjacent greenfield site, Vilkinskaya, acquired in Q3 2018.

Expectations are that MNV's JORC-compliant reserves will be further updated in 2019.

Belaya Gora

Ore mining at Belaya Gora almost doubled to more than 2 million tonnes in 2018 as operations reverted from stockpiles to open-pit. Processing volume declined by circa 7% versus 2017, partly reflecting efforts to improve recovery rates which advanced from 2017's 72.5% to 74.8%.

Total production of gold and gold equivalent edged up 2% to 44,085 oz in 2018: a 16% contribution to the Company's overall output.

An exploration programme on the Belaya Gora flanks licence was completed in 2018 with 105 holes and 8,268 metres drilled on the promising Kolchansky and Zayachy prospects. In addition, a further six holes totalling 600 metres were drilled in Q4 2018 to study the hydrogeological environment in the area.

Design work was initiated for the processing plant upgrade (see OUTLOOK) which will include the addition of a carbon-in-pulp (CIP) circuit to improve recoveries.

PRODUCTION COSTS

Total cash costs amounted to US$724 per oz (2017: US$861 per oz) while all-in sustaining costs were US$811 per oz (2017: US$1,029 per oz).

CAPITAL COSTS

A total of US$4.8 million was invested at Belaya Gora in 2018. This included capitalised expenditures and construction (US$3.4 million), purchase of equipment (US$0.5 million) and exploration (US$0.9 million).

OUTLOOK

A pre-feasibility study was published in early 2018 focused on new mining plans for Belaya Gora and Blagodatnoye. These included:

· A US$15 million upgrade to the processing plant designed to improve recoveries to a range of 86-91% for Belaya Gora ore and 90% for Blagodatnoye ore.

· Estimated capex of US$21 million to transfer mining activity from Belaya Gora to Blagodatnoye in 2023.

· Estimated annual production of over 55,000 oz of gold.

Work in 2019 will focus on advancing the processing plant upgrade project. Meanwhile, a report on the exploratory activity on the Kolchansky and Zayachy prospects, including reserve estimates, is expected in Q2 2019.

Blagodatnoye

In line with the Belaya Gora pre-feasibility study, it is anticipated that the Blagodatnoye deposit will supply additional ore to the upgraded processing plant at a later date.

In order to satisfy regulatory requirements, the Company submitted a Russian-standard feasibility study covering exploration parameters and a reserve estimate for Blagodatnoye to regulators in Q3 2018.

CAPITAL COSTS

A total of US$0.4 million was invested at Blagodatnoye in 2018. This represented a capitalised exploration and evaluation asset.

ZABAIKALSKY REGION, RUSSIA

Novoshirokinskoye (Novo)

Lower grades and recovery rates, particularly during Q4 2018, impacted adversely on gold equivalent production, which registered a sharp deterioration in Q4 and a near 11% decline to 112,808 oz for the full year: effectively the same as MNV's 42% contribution. Q4 grades reduced from 5.97 g/t to 4.07 g/t year-on-year which saw the full year average decline from 2017's 5.61 g/t to 5.26 g/t. Recoveries in respect of the full year fell from 85% to slightly above 80%. Ore processing was stable at some 833,000 tonnes versus 2017's 825,000 tonnes.

The decline in mined ore grades during the year, particularly in terms of lead content, reflected the movement of mining operations to lower horizons where anticipated reserve grades were not confirmed in certain blocks. The lower lead content, combined with an increase in the proportion of gold associated with pyrite, had a negative effect on recovery rates.

Throughout 2018, work continued on the mine's 1.3 Mtpa expansion project, designed to compensate for the expected lower ore grades. Stage 1 of the project involves upgrades to the mining complex. Highlights for the year included:

· Completion of the construction of foundation frames for the main fan unit building.

· Preparation, by way of underground development, for reconstruction of the skip hoist (loading boxes).

· Completion of the design for a water pumping station at the +637 m level followed by the commencement of assembly work.

· Completion of underground development to facilitate the construction of mud settling ponds at the +637 m level.

Stage 2 of the expansion project will increase throughput at the processing plant and is currently in the design phase.

PRODUCTION COSTS

Total cash costs amounted to US$323 per oz (2017: US$291 per oz) while all-in sustaining costs were US$388 per oz (2017: US$342 per oz).

CAPITAL COSTS

A total of US$13.7 million was invested at Novo in 2018. This included capitalised expenditures and construction (US$10.7 million), and purchase of equipment (US$3.0 million).

OUTLOOK

To address recent issues with metals grades, in-fill underground production drilling has been intensified alongside the completion of a reserve confirmation drilling programme projecting out five years. In order to improve recoveries, management is focusing on two fronts: 1) spiral flow separation, which would reduce the load on the gravity section and therefore increase recoveries, has been included in Novo's investment programme for 2019; and 2) ore sorting, utilising X-ray transmission (XRT) and/or dense media separation (DMS), which is under consideration as part of the design of Stage 2 of the expansion project. The latter would also serve to reduce capital costs.

Baley Ore Cluster (Taseevskoye, Sredny Golgotay and ZIF-1)

Management continued to progress plans to design a heap leach facility with an annual processing capacity of 840,000 tonnes at its Baley ZIF-1 tailings licence. Public hearings, as part of an environmental impact study, were conducted in May 2018 and the project met with the unanimous approval of attendees. In the wake of this, a wide range of geological, environmental and archaeological studies have been conducted.

Design documentation was developed and subsequently approved by the Zabaikalsky region's supervisory authorities in September 2018. State environmental experts signed off on the project design in November and documentation has been prepared for submission to the State Expert Board for review.

At Taseevskoye, geophysical surveys were carried out in Q3 2018 for the purpose of delineating the outlines of the historic underground workings in order to achieve better-quality exploration planning. Analysis of the results carried out in Q4 2018 showed that additional study of polarisation parameters is necessary to complete the tomographic work. Amendments to stage-one of the mine development plan include the relocation of the processing water pond.

In October 2018, Wardell Armstrong (WAI-RU) was contracted to draft a trade-off study (Scoping Study level) to assist in the consideration of options for the development of the Sredny Golgotay deposit. A preliminary report was received at year-end and is currently under internal review.

Concurrently, contractor Vostokgeologia LLC developed a geological exploration programme for Sredny Golgotay which is currently being reviewed by state geological experts.

CAPITAL COSTS

A total of US$2.5 million was invested at the Bailey area licences in 2018.

CHUKOTKA AUTONOMOUS DISTRICT, RUSSIA

News that the Kekura and Klen licences have been included on the list of projects which can be granted 'residency' in the Chukotka Advanced Special Economic Zone (ASEZ) - received post the period under review - augurs well for the progression of both projects, qualifying them for certain tax benefits and other incentives.

The Company's applications for residency followed the approval by a commission of the Ministry for Development of the Russian Far East in December 2018 of a proposal to expand the Beringovsky ASEZ, which previously covered only the south-eastern part of Chukotka, to include other parts of the region within which the Kekura and Klen licences are located. The Chukotka ASEZ, as it is now known, was approved by the Russian prime minister on January 10, 2019.

Kekura

Preparations for ongoing construction and mining continued throughout 2018 ahead of the estimated start date of 2023. Developments included:

· Approval in December by Rosnedra, the federal agency for mineral resources, of the Kekura mine design developed by GeoSolutions LLC.

· Repair and maintenance activity in respect of the pilot processing plant.

· The drafting by General design contractor SPb-Giproshakht of key aspects of the construction design for the main processing plant based on the pilot plant.

· The development of specifications for construction materials and technical and processing equipment in respect of mining and processing facilities.

· The completion by research specialist EngGeo LLC of the first stage of field studies required for construction of mining and processing facilities. Desktop studies are currently in progress.

· The completion of equipment testing for the 110/6 kV substation which is designed to receive electricity from a new power line -- under construction by the government -- which will link Kekura to the regional electrical grid.

· Following an inspection of the explosives storage facility Rostekhnadzor, the industrial safety authority, issued appropriate certification.

· The assembly of a BS-1 communications tower was completed in November 2018.

Construction of a winter road from Kekura to the administrative town of Bilibino was completed in December 2018. This will facilitated delivery of materials and equipment stored at the ports of Zeleny Mys and Pevek.

On the exploration front, 19 holes totalling 2,255 metres were drilled at the Zapadny prospect in the broader Kekura licence area during Q4 2018. Further drilling on this prospect is scheduled during 2019.

CAPITAL COSTS

A total of US$17.7 million was invested at Kekura in 2018. This included capitalised expenditures and construction (US$3.6 million), purchase of equipment (US$13.0 million) and exploration (US$1.1 million).

Klen

Regulators signed and registered amendments to the Klen licence agreement in Q4 2018, thereby extending the period for development of the deposit.

The Company held a tender during the quarter to select a contractor to study X-ray transmission (XRT) ore pre-concentration as an option for ore processing and a contract was signed for the first stage of laboratory studies.

The development of design documentation for Klen was delayed until Q2 2019 ahead of the decision on residency within the Chukotka ASEZ and completion of the ore pre-concentration tests.

Construction of a winter road to Klen commenced in Q4 2018 in order to transport a drilling rig and miscellaneous equipment to the site prior to exploration drilling on the flanks of the Klen deposit and within the boundaries of the surrounding Verkhne-Krichalskaya licence area in 2019.

Valunisty

Highland Gold completed the acquisition of the Valunisty mine and related assets at the end of Q4 2018, adding over 30 koz of gold and gold equivalent to Highland Gold's expected production for 2019. The assets purchased include:

· Valunisty, an operating gold mine and a processing plant with an annual capacity of 250k tonnes of ore;

· The Kanchalano-Amguemskaya Square ("KAS") licence, which covers territory surrounding Valunisty and hosts several satellite deposits including the operating Gorny open pit and the Zhilny deposit; and

· Kayenmivaam ("Kayen"), an exploration licence with several promising target deposits, located 130 km to the southeast of Kinross Gold's Kupol mine.

The Valunisty/KAS assets added 1.67 Moz at 3.0 g/t of gold and gold equivalent to the Company's Mineral Resource base and 503,000 oz at 5.2 g/t of gold and gold equivalent to Ore Reserves.

Beginning in 2018 and continuing through 2019, engineering surveys and design work are being carried out for the proposed reconstruction of the processing plant to upgrade annual throughput from 250k to 350k tonnes and for the beginning of underground mining operations.

KYRGYZSTAN

Unkurtash

The scoping study for the Unkurtash project that was completed and published in 2017 envisaged:

· Two open-pits and an 18-year LoM;

· Processing plant utilisation of gravity concentration and gravity tailings CIL with an annual throughput of 4 million tonnes and recoveries of more than 80%;

· Annual production of 133,000 oz Au at an average operating cost of US$616 per oz; and

· Estimated Capex of US$322 million to commence production.

This will now be progressed to a pre-feasibility study and talks will continue to be held with prospective development partners.

HEALTH, SAFETY AND ENVIRONMENT

Health and Safety

Two fatalities experienced at MNV on 29 December 2018 bear sad witness to the importance of mine rescue teams and the dangers inherent in their work.

In the wake of an investigation, it is apparent that two members of an auxiliary rescue team, having responded to an avalanche outside one of the entrances to MNV's underground mine, were killed by a second avalanche that fell in the same location. An employee of Highland Gold incurred non-life threatening injuries as a result of the first avalanche.

A series of measures are underway to mitigate future risk including the identification of a contractor to design an action plan to protect MNV's facilities and personnel from any recurrence of avalanche activity.

Meanwhile, auxiliary rescue teams remain on standby at each of the Company's mines and focus is being brought to bear on professional training with regard to avalanche search and rescue and avalanche mine rescue.

Against the background of this deeply regrettable event, management will seek to heighten its endeavours to ensure safe labour conditions, manage operational risks, provide ongoing employee training programmes and, at the same time, encourage employees to develop a sense of accountability for their safety and the safety of others.

One of the features of the Company's health & safety team's work in 2018 involved the development and introduction of new corporate standards covering the quality and use of personal protective equipment, contractors' safety management; audits and rating of labour safety; emergency medical response, leader inspections, and labour safety risk assessment. Tools for ensuring compliance with these standards were rolled out at MNV, Belaya Gora, Novo and Kekura. A new employee health management programme was also introduced across the Company's operations.

The management HSE Committee met in October 2018 to review the Company's updated labour safety strategy. This was followed by a review at the Board of Directors' HSE Committee meeting in November 2018.

The Lost Time Incident Frequency Rate (LTIFR), calculated as the number of incidents for every 1,000,000 man-hours, amounted to 4.02 in 2018 compared with 4.88 for the previous year. A total of 22 incidents were registered during the 12 months - 12 at Novo, eight at MNV, one at Belaya Gora and one in the Moscow office - compared to 26 incidents in 2017 (14 at Novo, five at Belaya Gora and seven at MNV).

Training sessions conducted in Q4 2018 included a "Conscious Safety Management: Behavioural Safety Audit" course for 10 people in the Moscow office, 13 at Novo and six at MNV. This brought the total number of attendees during the year to more than 200 from the Moscow office, Novo, MNV, Belaya Gora and Kekura with a further 40 enrolled in the same course at Valunisty. In addition, a course on "Conscious Safety Attitude" was attended by 85 people from MNV and 47 people from Novo in December 2018.

Labour safety management system audits were performed in November/December 2018 at Novo and MNV. The audits provided data which were used to develop a full assessment of labour safety practices across the Company during the year.

Environment

Highland Gold continues to adhere to its stated policy of protecting the environment and operating in accordance with all relevant regulatory requirements. An environmental monitoring system is in place at each of the Company's operations. All aspects of operational activity that impact or could impact the environment are identified and analysed in order to outline the most significant associated risks and to develop programmes to minimise such hazards.

The standards of the Company's corporate environmental management systems were updated during the year in order to adhere to the latest revision of ISO 14001:2015.

Quality assurance and risk management company DNV GL carried out independent audits of environmental management systems at the Moscow office, Belaya Gora and Novo over the course of 2018 to ensure compliance with ISO 14001-2015. A new certificate valid until 1 March 2022 was issued as a result of the audit results, thereby confirming that the systems are functioning properly.

During the course of the year, 2,068 employees underwent environmental safety training and 436 employees received training and tests with regard to handling class I-IV hazard waste via the OlympOKS system. The Company sent 52 managers and specialists for skills improvement training in dedicated centres where they attended professional environmental courses.

FINANCIAL REVIEW

Trends on global metals markets during 2018 remained similar to the year before and, by and large, were positive. Despite price fluctuations between US$1,178 per oz and US$1,358 per oz over the course of the year, the average London Bullion Market Association (LBMA) gold price was US$1,268, an increase of 1% versus 2017. The prices for lead and zinc traded around their highest levels for three years. The weakening of the rouble favourably influenced the Company's financial indicators and drove costs down despite higher prices in respect of fuel and consumables.

In 2018, Highland Gold retained its status as one of the world's lowest-cost gold producers and maintained a strong cash position. This enabled the Company to deliver a competitive dividend distribution for the sixth consecutive year.

On 27 December 2018, the Company acquired from Aristus Holdings Limited a 100% interest in three companies with assets in the Russian region of Chukotka: Rudnik Valunisty LLC, Kanchalano-Amguemskaya Square LLC and Severo-Vostochnaya Gorno-Geologicheskaya Company LLC. The assets include the Valunisty gold mine and processing plant, with annual production of 31 koz (2017), as well as the Kanchalano-Amguemskaya Square ("KAS") licence, which covers territory surrounding Valunisty and hosts several satellite deposits, and the Kayenmivaam ("Kayen") exploration licence. The Company determined that this transaction was a business combination and treated it under IFRS 3 applying a provisional accounting approach. The Company issued 38,621,343 ordinary shares to Aristus, valued at US$68.1 million at the time of closing in exchange for the acquired assets and liabilities, which were recognised in the consolidated balance sheet as at 31 December 2018 at fair value. No gain or loss was recognised on the acquisition.

Total revenue amounted to US$311.2 million with US$196.6 million from sales of gold and silver generated at MNV and BG, and US$113.8 million from sales of lead and zinc concentrates at Novo (2017: total revenue US$316.7 million consisting of US$185.8 million and US$130.5 million respectively). During the reporting period, the Company sold 263,795 oz of gold and gold equivalent, representing a 2.4% volume decrease versus 2017. MNV increased its sales volume by 9.7% to 111,866 oz representing a 42.4% share of the total. Novo's contribution (108,738 oz of Au eq.), accounting for 41.2% of the total, decreased by 12.6% mainly due to lower Au eq. grade and lower recovery rates. Belaya Gora sold 43,191 oz showing a minor decline and accounted for a 16.4% share.

Gold and Gold Equivalent Sold by Mine

During 2018, the Company continued to pursue a "no hedge" policy. The Company's average realised price of gold and gold equivalent increased by 0.7% to US$1,171 per oz (2017: US$1,162 per oz). The average realised price of gold in respect of MNV and Belaya Gora (net of commission) was US$1,258 per oz (2017: US$1,259 per oz), which corresponded with the average market price. The price of gold equivalent realised by Novo was US$1,047* per eq. oz against US$1,048 per eq. oz in 2017 (-0.2% y-o-y).

The Company's cost of sales net of depreciation decreased by 2.7% to US$135.9 million (2017: US$139.6 million). During 2018 the rouble weakened by 8.0%, resulting in an average rate of 62.93 roubles per dollar. The positive effect on costs was diminished by overall inflation (4.3%), wage revision more expensive diesel and higher prices for imported consumables, reagents, and grinding balls.

Depreciation amounted to US$42.3 million, down 14.5% y-o-y, largely reflecting the life-of-mine extensions at all operational assets.

*Novo's average price is based on the spot price for metals contained in the concentrates (gold, lead, zinc and silver), net of fixed processing and refining costs at third-party plants.

Cash Operating Costs - Breakdown

Total cash costs* (TCC) were practically unchanged at US$506 per oz, (2017: US$507 per oz) comfortably below the industry average. A breakdown by operating unit shows an increase of 11.1% in total cash costs at our lowest-cost producer Novo to US$323 per eq. oz (2017: US$291 per oz), reflecting the lower grade and, as a consequence, a decreased recovery rate. MNV, our oldest mine, succeeded in improving total cash costs to US$600 per oz (2017: US$617 per oz). Belaya Gora's total cash costs reduced from US$861 per oz in 2017 to US$724 per oz in 2018, a reflection of processing higher-grade ore with a higher recovery rate which in turn led to a decrease in processing ore from low-grade stockpile (from 78% to 23% in 2018).

All-in sustaining costs** (AISC) registered an increase of just 2.8% from US$664 per oz in 2017 to US$682 per oz in 2018.

TCC and AISC Calculation

* Total cash costs include mine site operating costs such as mining, processing, administration, royalties and production taxes but are exclusive of depreciation, depletion and amortisation, 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 the all-in sustaining cash costs measurement 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

Administrative expenses increased by 6.9% to US$17.2 million (2017: US$16.1 million), reflecting the increased costs for sustainable improvement projects and additional legal services related to the acquisition of Rudnik Valunisty.

Strong metal prices and largely maintained AISC delivered strong headroom of US$489 per oz, effectively underwriting the Company's development projects and dividend distribution.

In 2018, the Company's EBITDA amounted to US$153.1 million (2017: US$155.3 million). In line with this, the EBITDA margin* remained flat: 49.2% in 2018 (2017: 49.0%) - a ratio which underlines Highland's status as one of the most efficient gold producers.

*EBITDA margin is defined as EBITDA divided by total revenue

EBITDA Reconciliation to Operating Profit

EBITDA bridge (US$ M)

The Company's management analysed internal and external indicators of impairment as of 31 December 2018. No impairment loss relating to CGUs* was recognised in 2018. Two development projects located in Chukotka (Kekura and Klen) have both been included on the list of companies which can be granted 'residency' status within the Chukotka Advanced Special Economic Zone (ASEZ). Such status will lead to certain tax benefits and other incentives that will beneficially influence the projects' NPV.

In 2018, the Company recognised a net finance cost of US$1.8 million compared with US$2.5 million in 2017. The principal components were the accretion expense on site restoration provision for US$1.5 million in 2018 (2017: US$1.6 million) and the bank interest expense of US$0.4 million (2017: US$0.8 million).

A foreign exchange gain of US$0.8 million (2017: gain of US$0.7 million) resulted from the settlement of foreign currency transactions and the retranslation of monetary assets and liabilities denominated in Russian roubles into US Dollars.

The income tax charge in 2018 was 50% higher than in 2017: US$52.2 million versus US$34.5 million. The principal reason was a substantial increase in deferred tax expense US$18.3 million (2017: gain of US$6.6 million) driven by future tax revaluation of the rouble's depreciation at the end of the year and an increase in dividend withholding tax expense US$13.7 million (2017: US$7.7 million), reflecting the higher dividends.

Current tax expenses totalled US$20.2 million (2017: 33.3 million). This comprised income tax expense of US$10.3 million (2017: US$19.4 million) at Novo, US$9.8 million (2017: US$13.1 million) at MNV, US$0.1 million (2017: US$0.4 million) at BG and US$0.05 million (2017: US$0.4 million) at RDM.

Net profit, benefiting from strong operating results but adversely impacted by high deferred tax, decreased by 15% to US$56.1 million (2017: US$65.9 million). Consequently, earnings per share fell to US$0.154 for the year to 31 December 2018 (2017: US$0.201)

The Company's cash inflow from operating activities registered a 4.0% increase to US$136.2 million reflecting lower payments of income taxes (minus US$10.7 million). Capital expenditure for the reporting period amounted to US$62.3 million versus US$58.3 million in respect of 2017. This primarily related to near-mine exploration at MNV, designed to further extend the LOM, the expansion of Novo's processing capacity, the progression of the Kekura project and the replacement of obsolete equipment.

Specific capital expenditures included US$20.7 million at MNV, US$13.7 million at Novo, US$4.8 million at Belaya Gora, US$17.7 million at Kekura and US$5.4 million in relation to other exploration and development projects. Capital expenditures were entirely funded by operating cash flow.

The Company's total debt is denominated in USD. The debt in relation to facility agreements with banks amounted to US$230.1 million as of 31 December 2018 (2017: US$207.4 million). This amount was inclusive of the IFRS 9 modification impact. In addition to this, the Company acquired the loans of Valunisty amounting to US$17.7 million. The effective annual interest rate was 4.24%, inclusive of Valunisty debt (2017: 3.43%). To mitigate the rising cost of debt, management continued to refinance debt with floating interest rates to fixed-rate debt, thereby increasing the overall proportion of fixed-rate liabilities to 75% compared with 65% as of end December 2017.

* Cash Generating Unit

Debt Dynamics

At the end of the reporting period, cash and cash equivalents amounted to US$38.7 million compared with US$12.4 million as of 31 December 2017. The Company's net debt position, including lease liabilities, was US$194.3 million (free of Valunisty debt, cash and lease) as of 31 December 2018, compared with US$198.3 million as of 31 December 2017.

The ratio of net debt to EBITDA (free of Valunisty) was 1.27 as at the end of 2018 (2017: 1.28) which is well within the Board of Directors' debt policy.

Cash Position Bridge (US$ M)

Taking into account the Company's solid financial performance, the Board is pleased to recommend a third interim dividend of GBP 0.024 per share.

PAYMENT OF DIVIDENDS

The second interim dividend for the year ending 31 December 2017 in the amount of US$24.2 million was paid in May 2018.

The Company paid a first interim dividend of GBP 0.06 per share in respect of H1 2018 (2017: interim dividend of GBP 0.0498 per share) which resulted in an aggregate interim dividend payment of US$25.5 million (2017: US$21.3 million). The first interim dividend was paid on 24 September 2018.

In December, the Board approved a second interim dividend of GBP 0.05 per share (2017: GBP 0.0542 per share) which, taking into account the first interim dividend paid in September 2018, brings total dividends paid to GBP 0.11 per share for the year 2018 (2017: GBP 0.104 per share). The second interim dividend was paid to shareholders in January 2019 for US$20.9 million. The total payout for 2018 exceeds the minimum amount prescribed in the Company's dividend policy, reflecting the availability of additional funds for disbursement to shareholders.

The Board has approved a third interim dividend of GBP 0.024 per share (2017: nil) to be paid to shareholders on 7 June 2019, thereby bringing the total payout based on the 2018 financial year to GBP 0.134. The ex-dividend date is 25 April 2019 and the record date is 26 April 2019. A Scrip Dividend alternative is offered in respect of the interim dividend.

The Company has introduced an option for shareholders to elect to receive their dividends in pounds sterling, US dollars, or in respect of such dividends as the directors offer a Scrip Dividend alternative, via a sterling value Scrip Dividend alternative in accordance with the Company's Scrip Dividend Scheme approved by shareholders at the Annual General Meeting on 24 May 2018 which is available on the Company's website at www.highlandgold.com.

Payments for the interim cash dividend in US dollars will be fixed at an exchange rate of 0.765 GBP/US$, or US$ 0.031 per share. To receive payment in US dollars, shareholders should complete and file the Currency Election Form no later than the 13 May 2019. The Currency Election Form and instructions for filing them are available on the Company's website at address: https://www.highlandgold.com/home/investors/dividends

The Scrip Dividend alternative offered in respect of the interim dividend requires a Scrip Dividend Mandate to be completed and received by Link Asset Services by the Return Date of 13 May 2019. The value for the issue of new Shares under the Scrip Dividend alternative will be calculated in accordance with the Scrip Dividend Scheme and announced on 2 May 2019. The value of the New Shares offered by way of a Scrip Dividend alternative shall be calculated by reference to the average of the middle-market quotations for a fully paid Ordinary Share, for the day on which such Ordinary Shares are first quoted "ex" the relevant dividend and the 4 subsequent dealing days. The Scrip Dividend Mandate can be completed via www.signalshares.com for Shareholders holdings their Shares in Certificated form and via the CREST system if Shares are uncertificated. 

A notice has been sent to all shareholders who are entitled to join the Company's Scrip Dividend Scheme notifying them of (amongst other matters) their right to elect to receive a Scrip Dividend.

EVENTS AFTER THE REPORTING PERIOD

In early 2019, the Company's Kekura and Klen licences were included on the list of companies which can be granted 'residency' status within the Chukotka Advanced Special Economic Zone (ASEZ), a programme designed to encourage investment in the region. Such status will lead to certain tax benefits and other incentives and augurs well for the progression of both projects.

In March 2019, the company repaid $17.7 million of borrowings assumed as part of the Valunisty acquisition.

Rounding of figures may result in computational discrepancies

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the year ended 31 December

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

* Certain line items have been reclassified in the consolidated statement of comprehensive income for 2017.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

as at

The financial statements were approved by the Board of Directors on 11 April 2019 and signed on its behalf by:John Mann and Olga Pokrovskaya.

CONSOLIDATED STATEMENT OF CASH FLOWS

for the year ended 31 December

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Corporate information

The consolidated financial statements of Highland Gold Mining Limited for the year ended 31 December 2018 were authorised for issue in accordance with a resolution of the Directors on 11 April 2019.

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 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.

Going concern

The Directors consider that the Group will continue as a going concern.

In assessing the going concern status, the Directors have taken account of the Group's financial position, expected future trading performance, its borrowings, available credit facilities and capital expenditure commitments, considerations of the gold price, currency exchange rates, and other risks facing the Group. After making appropriate enquiries, the Directors consider that the Group has adequate resources to continue in operational existence for at least the next 12 months from the date of signing these consolidated financial statements and that it is appropriate to adopt the going concern basis in preparing these consolidated financial statements. Having examined all reasonably possible scenarios, the Group also concluded that no covenants are breached in such scenarios.

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.

Acquisition of Rudnik Valunisty

On 27 December 2018, the Group acquired from Aristus Holdings Limited a 100% interest in three companies with assets in the Russian region of Chukotka: Rudnik Valunisty LLC, Kanchalano-Amguemskaya Square LLC and Severo-Vostochnaya Gorno-Geologicheskaya Company LLC. The assets include the Valunisty gold mine and processing plant, with annual production of 31 koz of gold (2017), as well as the Kanchalano-Amguemskaya Square ("KAS") licence, which covers territory surrounding Valunisty and hosts several satellite deposits, and the Kayenmivaam ("Kayen") exploration licence. It was a non-cash transaction during which the Group issued 38,621,343 ordinary shares of £0.001 each to Aristus.

Rudnik Valunisty and KAS hold total audited Proven and Probable Ore Reserves (JORC 2012) of 3.4 Mt at 5.1 g/t Au equivalent (4.6 g/t Au and 49.3 g/t Ag) (554 koz Au equivalent); and Indicated and Inferred Mineral Resources of 17.6 Mt at 3.0 g/t Au equivalent (2.4 g/t Au and 58.5 g/t Ag) (1.72 Moz Au equivalent), as at 1 January 2018.

This acquisition added a fourth operating mine to the Group's portfolio as well as positive upside potential in the surrounding area, all in a familiar region with existing mining infrastructure.

Costs incurred in relation to the acquisition amounted to US$0.8 million during 2018.

The Group determined that this transaction represents a business combination.

Fair value of issued shares was determined by multiplying the number of shares by market share price as at 27 December 2018.

Assets acquired and liabilities assumed

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

The goodwill balance of US$5.8 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 Chukotka region CGU. None of the goodwill recognised is expected to be deductible for income tax purposes.

The Group did not assess the amount of revenue and profit in case if the combination had taken place at the beginning 2018 because of the absence of corresponding figures under IFRS.

The Group is applying the provisional accounting approach due to the complexity of the acquisition. The finalisation of the valuation work required to determine the fair values of the assets and liabilities acquired will be completed within 12 months of the acquisition date, at the latest.

Segment information

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

· Gold production of Khabarovsk region;

· Gold production of Chukotka region;

· Polymetallic concentrate production;

· Development and exploration; and

· Other.

The gold production of Khabarovsk region 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. MNV and BG have been aggregated into one reportable segment as they exhibit similar long-term financial performance and have similar economic characteristics: nature of products (gold and silver), nature of production processes, type of customer for their products (banks), methods used to distribute their products and the nature of the environment (both are located in the Khabarovsk region). 

Following the acquisition of subsidiaries in late December 2018, we identified a new reportable segment - the gold production of Chukotka region. This new segment consists of three companies, namely Rudnik Valunisty (RV), Kanchalano-Amguemskaya Square (KAS) and Severo-Vostochnaya Gorno-Geologicheskaya Company (Kayen),   All three companies operate in the same region and have similar economic characteristics. They produce gold and silver and perform exploration work with the aim of extending their reserves base.

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 entities which hold licenses in the development and exploration stage: Kekura, Klen, Taseevskoye, Unkurtash, Lubov, and related service entities: Zabaykalzolotoproyekt (ZZP) and BSC.

The 'other' segment includes head office, management company and other non-operating companies which have been aggregated to form the reportable segment.

Segment performance is evaluated based on EBITDA (defined as operating profit) excluding depreciation and amortisation, impairment losses, movement in ore stockpiles obsolescence provision, movement in raw materials and consumables obsolescence provision, result of disposal of a non-core entity and gain on settlement of contingent consideration). 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 assets information for the Group's reportable segments. The segment information is reconciled to the Group's profit after tax for the year.

Finance costs, finance income, income taxes, and foreign exchange losses are managed on a group basis and are not allocated to operating segments.

Transfer prices between operating segments are on an arm's length basis in a manner similar to transactions with third parties.

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

In 2018 the gold and silver revenue reported in the gold production segment was received from sales to Gazprombank (US$196.6 million) in the territory of the Russian Federation.

In 2017 the gold and silver revenue reported in the gold production segment was received from sales to Gazprombank (US$185.8 million) in the territory of the Russian Federation.

In 2018 the concentrate revenue reported in the polymetallic concentrate production segment in the amount of US$40.0 million was received from sales to Kazzinc (2017: US$69.4 million) in the territory of the Republic of Kazakhstan, to Hyosung and Trafigura corporation in the territory of the People's Republic of China in the amount of US$72.8 million (2017: 61.1 million) and to Hyosung TNC in the territory of South Korea in the amount of US$1.0 million (2017: nil).

Other third-party revenues in both 2018 and 2017 were received in the territory of the Russian Federation.

Inter-segment revenues mostly represent management services.

*Concentrate revenue contains US$118.8 million of IFRS 15 revenue, a negative provisional price adjustment of US$4.5 million which represents changes in the fair value of embedded derivatives in respect of 2018, and a negative price adjustment of US$0.5 million related to 2017.

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

*** Current assets include corporate cash and cash equivalents of US$38.7 million, inventories of US$70.5 million, trade and other receivables of US$33.1 million and other assets of US$4.5 million. Eliminations relate to intercompany accounts receivable.

**** Capital expenditure - additions in 2018 - includes additions to property, plant and equipment of US$63.6 million, capitalised interest of US$5.6 million (including US$7.2 million of 2018 interest expense, increased by US$1.7 million of the modification effect of 2018 according to IFRS 9, decreased by US$3.4 million of the retained earnings effect following the adoption of new IFRS 9 as at 1 January 2018, and capitalised upfront commission US$0.1 million), acquisition of subsidiaries of US$73.4 million and prepayments made for property, plant and equipment of US$0.9 million.

Non-current assets for 2018 are located in the Russian Federation (US$1,094.3 million) and in the Kyrgyz Republic (US$46.0 million). Current assets for 2018 are located in the Russian Federation.