24 Sep 2007 07:01
Highland Gold Mining Limited24 September 2007 HIGHLAND GOLD MINING LIMITED ANNOUNCESINTERIM RESULTS FOR THE FIRST HALF OF 2007 24 September 2007 - Highland Gold Mining Limited ("Highland Gold", or the "Company") announces its production and financial unaudited results for the halfyear ended 30 June 2007. FINANCIAL SUMMARY For all periods up to and including the year ended 31 December 2006, HighlandGold Mining Limited prepared its financial statements in accordance with UKGAAP. From 1 January 2007, the Group is required to prepare its consolidatedfinancial statements in accordance with IFRS as adopted by the EU. This changeapplies to all financial reporting for accounting periods beginning on or after1 January 2007. Consequently, the Group's first IFRS results are its unauditedinterim results for the first half of 2007 and the Group's first Annual Reportand Accounts under IFRS will be for the year ending 31 December 2007. As theGroup publishes comparative information in its Annual Report and Accounts, thedate for transition to IFRS is 1 January 2006, this being the start of theearliest period of comparative information. H1 2007 H1 2006Financial (US$ millions)Turnover 43.4 47.1Cash outflow from operating activities (26.0) (1.3)Group Operating profit 4.2 7.8Net profit from Continuing operations 5.7 8.4Profit/(loss) for the period (2.8) 0.8Diluted earnings per share from continuing operations (dollars/share) 0.029 0.051Capital expenditure 19.3 15.4OperatingMNV - Gold sold (ounces) 62,643 75,594MNV - Cash operating cost ($/ounce sold) 417 274MNV - Total cash cost ($/ounce sold) 458 313 FIRST HALF HIGHLIGHTS • US$5.7 million net profit from continuing operations • Integrated new management team from Barrick Gold • Completed MNV and Novo operations and engineering audits • Successful implementation of initiatives started • Debt restructuring established US$135 million of new low-cost financing facilities which extend the Group's debt portfolio maturity profile to 2011 • Darasun conditional agreement finalised • Good progress on all development and exploration projects • Ongoing improvements in safety performance Commenting on today's announcement Henry Horne, Managing Director said: "In thepast 6 months Highland Gold made several important steps in its development. Wehave started transforming production at our major producing mine MNV and arealready seeing the benefits from this process. We have made remarkable progresson our development and exploration projects. The conditional agreement to sellthe Darasun mine, which is subject to ongoing price negotiations, oncecompleted, will optimise considerably the operating structure of the Company.Just as important as these operational issues has been the restructuring of ourfinances to provide a more stable and well funded business going forward. It is with regret that Highland Gold announces that after almost 12 years withBarrick Gold, Rene Marion has resigned from Barrick to pursue other careeropportunities in the industry. As a result, Rene will be stepping down from theHighland Gold Board of Directors and as Chief Operating Officer effectiveOctober 24. Barrick management has confirmed that they will provide a seasonedsuccessor to Rene in the position of Chief Operating Officer prior to Rene'sdeparture to ensure a smooth transition. Barrick has nominated Scott Perry, Highland Gold's Chief Financial Officer, toreplace Rene on the Highland Gold Board of Directors and a further announcementwill be made in that regard. We wish Rene the very best for the future and thank him for the valuablecontribution he has made towards the development of Highland Gold." Conference call Highland Gold will hold a conference call hosted by Deputy Chairman IvanKulakov, COO Rene Marion and CFO Scott Perry at 10.00am GMT on 24 September2007. To participate , please dial one of the following toll-free numbers: 01296 317500 United Kingdom +44 1296 317500 International Dial In Passcode 835707 The Interim Report to 30 June 2007 will be available on our website from 30September. FINANCIAL REVIEW Highland Gold posted a profit from continuing operations of $5.7 million in thefirst half of 2007 versus $8.4 million for the corresponding period in 2006. Gold revenue for the first half of 2007 decreased by 8% over the same period in2006 to $43.4 million on sales of 62,643 ounces. Reduced revenues were due tothe mine resequencing initiatives being implemented at MNV and the completecessation of mining activity at the Darasun property, the effects of which werepartially offset by an increase of $56 in the average realised gold pricereflecting the company's policy of not hedging their exposure to the gold price. Following February's intensive operational and optimisation review audit at MNV,a large number of short and long term value adding initiatives were identifiedand implemented throughout the first half of this year. Many of the mininginitiatives are focused on the optimal mining sequencing of the mines which, asexpected, have resulted in notably lower production in the first half of 2007,but will result in increasing production contributions in the future. The Darasun property has been accounted for as an asset held for sale reflectinga strategic decision by management to divest this asset from the Group'sportfolio. On 8 August 2007, Highland announced that a conditional agreement forthe sale of the Darasun mine had been signed between Uzhuralzoloto Group ofCompanies. The total consideration under the deal amounts to $25 million whichis subject to some ongoing negotiation. The Group's costs of sales increased by 6%, or $1.9 million, over the prior yearcorresponding period. Operating costs at the MNV operation increased by 18% to$4.0 million in the first half of 2007 while the total cash cost per ounce was$458 compared to $313 per ounce in the prior period. The cost increase wasattributable to increased unit cost pressures higher repair and maintenanceexpense and operational fixed costs being spread over lower gold production inthe first half of 2007 with the lower gold production being a direct result ofthe in-process audit and optimisation review, and mine resequencing initiatives.Increased unit costs were predominantly associated with higher energy, materialand manpower costs together while higher repair & maintenance costs werenecessary for commissioning the items of mining equipment transferred to MNVfrom the Group's Darasun operation. The Group's cost of sales included reducednon-cash charges at the MNV operation in the form of depreciation andamortisation, which were lower due to the lower gold production result. Totalcash costs in the second half of 2007 are expected to significantly outperformthe first half result as the operations' production profile increases followingthe implementation of the various optimisation initiatives. The income tax release in the amount of $0.7 million consists of $1.6 million ofincome tax charge at MNV and $2.3 million of deferred tax release. All entitieswithin the Group, with the exception of MNV, are either development projects orhave suffered a tax loss during the period. These tax losses are not able to berecognised until such time as there is sufficient evidence of future taxableprofits in those entities, against which the losses can be utilized. In total,$5.9 million of tax losses arose during the period, which were not recognised.The application of this policy may lead to previously unrecognised deferred taxassets being recognised in the future, as projects are determined to beeconomically viable, resulting in a credit to income taxes. Following Highland Gold's decision to divest itself from the Darasun property,Darasun has been presented and recognized as a discontinued operation held forsale in the Group's Financial Statements. Costs at Darasun significantlydecreased in the first half of 2007 following the cessation of mining activitiesafter which the asset has been placed on care & maintenance. As a result of the MNV mine's resequencing activities which resulted in reducedlevels of gold production, the Group's cash outflow from operating activitieswas $26.0 million compared to a cash outflow of $1.3 million in the first halfof the prior year. The effects of the mine resequencing were partially offset bystronger realised gold prices. In addition to cash outflow from operatingactivities, the Group's net interest and loan arrangement outflow was $37.7million versus $15.5 million in the prior year period while $0.2 million inRussian income tax was refunded in the first half of 2007 versus $5.3 million ofpaid tax in the first half of the prior year. These operating and interest outflows, together with the Group's investmentoutflows, were financed by existing cash reserves of $31.6 million, netfinancing cash in-flows of $28.7 million. Highland Gold continued the steady advance of its development project pipelineinvesting $18.5 million in the first six months to 30 June 2007 compared to$15.4 million in the first six months to 30 June 2006. First half capitalexpenditures comprise development project advancement expenditures forNovoshirokinskoye's construction and commissioning, Mayskoye's Feasibilityprogramme and Taseevskoye's Pre-Feasibility programme together with operationalinvestment expenditures at MNV to augment both the open pit and undergroundmining equipment fleets and to upgrade the capacity and efficiency of theprocessing facility. The first of two significant debt restructurings was finalised in early Aprilwhereby $90 million in new financing facilities was raised through two largeRussian banks comprising a $60 million facility with MDM Bank and a $30 millionfacility with GazpromBank following which, the Group immediately utilised aportion of the proceeds to complete the early repayment of the existingSyndicated Loan Facility. As a result, at 30 June 2007, the Group's netfinancing cash inflows was $33.9 million comprising the full drawdown of the MDM$60 million facility partially offset by the early repayment of the $30.7million existing Syndicated Loan Facility, a $1.0 million partial drawdown onthe Gazprombank $30 million facility, $1.7 million in equipment lease payments. Cash and short term deposits at 30 June 2007 were $15.5 million versus $31.6million at 31 December 2006 while the net debt position of the Group totaled$99.5 million versus $48.5 million at 31 December 2006. The net debt of theGroup includes Cash at Bank, Bank Borrowings, Outstanding Corporate Bonds andLong-term finance lease payables. The increase of $51.0 million in net debt wascaused by a decrease in cash balances of $16.1 million, a net increase in loanprincipals of $30.2 million, a $1.7 million decrease in the capital element ofthe finance leases and general increases in other net debt items of $1.1 milliondue to adverse exchange rate movements. Recently, in August 2007, Highland completed a second debt restructuring withGazprombank by establishing an additional new five year term $45 millioncorporate debt facility which is available to fund the future development of theHighland Gold Group. Of this facility, $15 million will be used to refinance anexisting $15 million loan that is outstanding with GazpromBank and is due tomature in June 2008. The early refinancing of this existing facility will seethe effective maturity profile of all of Highland Gold's Corporate BankFacilities pushed out to late 2010 and 2011. This year's debt restructurings demonstrate the Group's ongoing capitalmanagement plan and continue to further align the company's debt maturities withits business plan. These facilities further reduce Highland Gold's weightedaverage cost of capital and are well suited to Highland Gold's focus on growth;further confirming our financiers' ongoing confidence in Highland Gold'sBusiness Plan. IFRS ADOPTION For all periods up to and including the year ended 31 December 2006, HighlandGold Mining Limited prepared its financial statements in accordance with UKGAAP. From 1 January 2007, the Group is required to prepare its consolidatedfinancial statements in accordance with IFRS as adopted by the EU. This changeapplies to all financial reporting for accounting periods beginning on or after1 January 2007. Consequently, the Group's first IFRS results are its unauditedinterim results for the first half of 2007 and the Group's first Annual Reportand Accounts under IFRS will be for the year ending 31 December 2007. As theGroup publishes comparative information in its Annual Report and Accounts, thedate for transition to IFRS is 1 January 2006, this being the start of theearliest period of comparative information. Overview of impact At 1 January 2006 UK GAAP IFRS US$'000 US$'000Net assets 248,154 242,149 Period ended 30 June 2006 UK GAAP IFRS US$'000 US$'000Profit before income tax 4,224 4,263Profit /(Loss) after taxation (201) 805Earnings per share (basic) (0.001) 0.006Earnings per share (diluted) (0.001) 0.005Net assets 258,932 248,261 Year ended 31 December 2006 UK GAAP IFRS US$'000 US$'000Loss before income tax (83,202) (84,600)Loss after taxation (96,445) (95,661)Earnings per share (basic and diluted) (0.597) (0.592)Net assets 253,588 246,412 The most significant elements contributing to the change in financialinformation for 2006 are: • the write-off of the negative goodwill on transition to IFRS to the retained earnings; • recognition of deferred tax liabilities on the fair value adjustments arising in the prior business combination and recognition of deferred tax liabilities arising on the retranslation of fixed assets arising in group's Russian subsidiaries whose functional currency is different from their tax currency; • recognition of additional gain arising on the disposal of the group's 50% share in Novoshirokinskoye ("Novo") as a result of the decrease in the net assets of Novoshirokinskoye on conversion to IFRS; • change in the treatment of derivative financial instruments; and • change in the treatment of the joint venture. OPERATIONAL REVIEW MNOGOVERSHINNOYE MINE (MNV) - Khabarovsk Region MNV Operating Statistics: MNV 6 months ended 30 June Unit 2007 2006Mine development Waste stripping 000 M3 867 751 Underground Metres 4,740 4,609Mining Open pit Tonnes 141,086 205,896 g/tonne 5.74 5.90 Underground Tonnes 261,189 209,255 g/tonne 4.79 5.90Total ore mined Tonnes 402,275 415,151 g/tonne 5.12 5.90Ore processed Tonnes 381,201 485,561 g/tonne 5.20 5.60Incl. from stockpile Tonnes (21,074) 70,410 g/tonne 3.69 3.83Recovery rate % 91.26 90.90Gold recovered Ounces 58,196 79,444Gold sold Ounces 62,643 75,594Gold price received US$/oz 655 599 Full details of the progress made in the first half are contained in the TradingStatement issued on 13 August 2007. At MNV short and long term value adding initiatives which were identified duringthe first quarter 2007 operational review and optimisation audit are beingsuccessfully implemented. Many of the mining initiatives focus on the short term recapitalisation(1) andoptimal mining sequencing of the mines which as expected has resulted in notablylower production in first quarter 2007 but will result in increasing productioncontributions in the future. The processing facility at MNV has been upgraded ahead of schedule during thesecond half of August, to increase the grinding circuit capacity by splitting itinto two trains and increasing the mine's processing capacity by 25% to anominal 110,000 tonnes per month by year-end compared to the historicaltechnical limit of 88,000 tonnes per month. The mill expansion will significantly augment the mine's annual gold productionprofile and is necessary for the operation in order to treat the increased oreproduction being realised from both the open pit and underground mines. Theautomation of the grinding circuit, to reduce electricity, reagent and waterconsumption will be completed in Q4. In addition, the modifications to the RIL(2) regeneration facility, which will reduce the time for resin regenerationfrom 200 hours to less than 50 hours (in effect increasing resin activity andreducing soluble gold losses resulting in increasing recovery) will also becompletion by Q4. A gravity circuit (Knelson concentrator) has been installed and commissionedthat will allow the coarse gold to be recovered prior to the RIL circuit. Inaddition to increased coarse gold recovery, this will allow the fine gold toeffectively have increased residence time in the RIL circuit and therebyincreasing recovering. Other components of the mill upgrade initiatives include an increase in theleach residence time to improve mill recovery and reduce cyanide andhypochlorite consumption by mid-2008. Due to the previously announced underground mining accident of August 8 at MNVand subsequent loss of the underground loader (which can not be replaced untilthe new year) and the delays in delivery of new open pit equipment to Septemberand October (resulting in a shortfall in open pit stripping activities)Management believe that there may be up to a 10% gold production shortfall riskin 2007. In efforts to partially mitigate and minimize the negative impact of these twouncontrollable events, Management have made the decision to transfer theremaining Hitachi excavator and Atlas Copco drill from Darasun to the MNV openpit operation. DARASUN MINE - Chita Region, Russia On 8 August 2007, Highland announced that its wholly owned subsidiary, StanmixHolding Limited, had entered into a conditional agreement for the sale of theDarasun, Teremky and Talatui Mines ("the Mines") in the Chita region of Russia.The agreement was entered into with Open Joint Stock Company "UzhuralzolotoGroup of Companies" a company incorporated under the laws of Russia ("thePurchaser") whereby the Purchaser will acquire the whole of the share capital ofOOO "Darasunsky Rudnik", the owner of the Mines, for a total consideration ofUS$25 million. This agreement remains subject to the satisfaction of certain conditionsprecedent which includes, among others, the Purchaser obtaining Russiananti-monopoly approval. In addition, the previously announced sale price of US$25 million is subject toongoing negotiation over areas including the impact on the price of receivingall the consideration up front, as opposed to via installments, and which itemsof mining equipment should be included in the sale. The outcome of both theseareas of negotiation could have a material impact on the purchase price. Subject to the satisfactory outcome of the price negotiations, it is acceptedthat the conditions precedent will be satisfied by the end of 2007. NOVOSHIROKINSKOYE DEVELOPMENT PROJECT - Chita Region, Russia The Company continues to work in partnership with Kazzinc to optimise productionand sales opportunities at the site. Detailed engineering for the plant andfacility construction is in progress. The main construction contractor has beenselected, has mobilised and has begun work on facilities. Initial construction is focusing on infrastructure, accommodation and utilities.Mining equipment has been ordered and processing equipment is in the tenderphase. The contract for the construction of the tailings dam and water storagedam has been awarded. By year end the Company will have the Novoshirokinskoye resources/reservesclassified under the JORC code. The site began underground development work in July. Stoping will begin in early2008 in anticipation of building a surface stockpile suitable in size for asecond half 2008 startup of the mill. MAYSKOYE DEVELOPMENT PROJECT - Chukotka Region, Russia The Mayskoye Feasibility Study is progressing well and is scheduled forcompletion in Q4 2007. The study is focusing on a 850,000 tonnes per yearflotation and Biox leach plant, and is being jointly undertaken by SRK (SouthAfrica) and Aker Kvaerner (Canada). In addition, during the month of September,a contract has been awarded for the commencement in fourth quarter of therehabilitation of the underground workings It is anticipated that by year end, JORC resources and reserves for the Mayskoyeproject will be updated. The Mayskoye license extension process is ongoing and we are hopeful that theprocess will be concluded positively within the next two months. All requireddocumentation and support letters from the Chukotka Deputy Governor weresubmitted. Another environmental inspection, the second one within eighteenmonths, was concluded by the Environmental Agency and no violations were found.This report was also submitted to Rosnedra, the agency dealing with licenseextensions. TASEEVSKOYE DEVELOPMENT PROJECT - Chita Region, Russia The 2006-2007 exploration drilling programme at the Taseevskoye deposit was35,500 metres, with 44,809 samples being assayed. The 2007 9,053 metre drillingprogramme, including 1,568 metres being drilled from the frozen pit lake, hasbeen completed. The resource block model, as well as a revised estimation of reserves takinginto account the drilling programme results, are expected in fourth quarter2007. A Pre-Feasibility Study is scheduled to be completed by year end along with anupdate of the JORC resources. Further details on progress at Novoshirokinskoye, as well as at Mayskoye andTaseevskoye, were made available in the Trading Statement issued on 13 August. EXPLORATION Belaya Gora - Khabarovsk Region, Russia Belaya Gora is our most advanced exploration project which is well on track tobecome the next development project in the near vicinity of our Mnogovershinnoyemine. Due to the mine's close proximity Belaya Gora is already utilisinglogistical synergies with the mine but the main benefits are envisaged inprocessing and production synergies in future operations. A large volume of exploration work has been accomplished at Belaya Gora andcurrently the second phase of the 2007 drilling programme is in progress withnearly 8,000 metres out of a planned 12,000 metres being completed. Drilling isnow focused at the more complex Stockwork target whereas at the Pologaya target250 metres of additional trenching has been started. More than 7,500 sampleshave been assayed in the course of the programme which continues to deliverpositive results. Drilling at the southwestern Stockwork area recently intersected a steeplydipping pipe-like breccia body with an anomalously high content of visible goldof 0.2-0.5 mm grain size. Measuring 50 to 80 metres in diameter the pipe appearsto continue to a depth of at least 200 metres from surface. Preliminary assays from drill hole DH 4506 in the vicinity of the pipe indicatea cumulative gold-mineralised interval of 92 metres grading 3.0 g/t Au with anore to waste ratio of 0.56. Metallurgical testwork on two 300 kilogramme bulk samples from both Pologaya andStockwork has been initiated at the TsNIGRI lab in Moscow and a cut-off studyfor resource delineation has been awarded to NBL Gold (Moscow). Lyubov - Chita Region, Russia 2,700 metres out of a 3,500 metres drilling programme in 2007 have beencompleted on schedule at the three exploration targets which coincide withpronounced geophysical and geological anomalies which we identified in 2006along the Lyubov gold trend. More than 2,200 drill core samples have beenprocessed to date at our own sample preparation facility at Tassevskoe and arebeing forwarded to Alex Stewart Labs (Moscow) for assaying. At the northernlicense 1,923 soil samples have been collected as part of a geochemical surveyacross a geophysical anomaly. All assays are still pending, but drillingreturned several promising intersects of rich sulphide mineralisation. Sovinoye - Chukotka Region, Russia With 2,600 metres drilled out of a planned 2,700 metres the drilling programmetesting the Central Sovinoe gold zone is nearing completion. Final assays fromAlex Stewart and TsNIGRI labs in Moscow are still pending, but assays receivedto date indicate a wide low-grade gold-mineralized system. The drillingprogramme with interpretation of results is on track for completion by thebeginning of fourth quarter 2007. Unkurtash - Kyrgyzstan 28 drill holes totalling 3,500 metres of large-diameter reverse-circulationdrilling have been completed at three prospects (Sarytube, Karytube andUnkurtash) concluding the 2007 drilling programme. A total of 3500 samples havebeen collected and sent for assaying to Alex Stewart labs in Bishkek(Kyrgyzstan). Partial assays received to date confirm a low-grade goldmineralised stockwork system for Sarytube and Unkurtash, and skarn-typemineralisation of higher grade for the Karatube prospect. A large portion ofassays for the main target Unkurtash is still pending. Final assays followed byan evaluation of results are expected by the beginning of Q4 2007. Maya Inikan - Khabarovsk Region, Russia A detailed exploration programme has been drafted to investigate the promisingnew gold anomaly discovered during the 2006 work. The detailed programme plannedfor 2008 will include a geochemical soil sampling survey covering an 80 sq kmarea, selected geophysical surveys (IP, resistivity and magnetic), as well asdetailed geological mapping and sampling. Sarasa - Altai Region, Russia The low prospectivity of the Sarasa property does not warrant further work onthe property and the exploration license has been returned to the statecomplemented by a report summarising our findings. The return of the Sarasalicense has been accepted without further claims. Iska - Khabarovsk Region, Russia The 920 sq km Iska license, acquired in an open auction on 24 August , is thelatest addition to our growing exploration portfolio in vicinity to ourMnogovershinnoye mine. A staged multidisciplinary exploration programme is nowbeing designed for 2008 which will include a review of geological data fromprevious explorers and prioritisation of several exploration targets of knowngold mineralisation on the large property. Apart from mapping and sampling thesetargets will be investigated by geophysical and geochemical surveys followed bytrenching and drilling in selected areas. HEALTH AND SAFETY There has been a 47% reduction in lost time incidents compared to the sameperiod in 2006. Three sites (Taseevskoye, Novoshirokinskoye and Mayskoye) aswell as the exploration group have achieved zero lost time incidents year todate. A fatal underground incident occurred at the MNV mine involving an LHD operatoron 8 August. Based on the results of the investigation, preventive measureshave been put in place to prevent the risk of reoccurrence in the future. In August, the Company's substance abuse policy was approved and implemented.The policy includes education of the hazards of drug and alcohol abuse as wellas reinforcing our zero tolerance of prohibited substance use in the workplace. A Company wide safety award programme was introduced to recognise sitesshowing excellence in safety performance. Awards will be presented to the minesite with the best safety record, the site showing the most improvement, and toindividuals demonstrating outstanding safety leadership. Training remains a key strategy for raising safety awareness at our mine sites.In addition to standard Russian requirements, the Company continues to providesupplemental training. Field Level Risk Assessment, fire fighting andevacuation, Drive First Initiative, and first aid training are among theprogrammes designed to improve employees' safety awareness and accountabilityfor safety and health. UNAUDITED INTERIM CONSOLIDATED INCOME STATEMENTfor the six months ended 30 June 2007 For the six months ended 30 June 2007 2006 Notes US$000 US$000 (unaudited) (unaudited) Continuing operations Revenue 43,387 47,115Cost of sales (32,155) (30,266)Gross profit 11,232 16,849 Administrative expenses (6,900) (8,629)Other operating income - -Other operating expenses (167) (34)Loss on asset disposal - (329) Operating profit 4,165 7,857 Foreign exchange gain 1,450 6,484Finance income 535 379Finance costs (1,154) (2,870) Profit before income tax 4,996 11,850 Income tax (expense)/credit 3 705 (3,457) Profit for the period from continuing operations 5,701 8,393Discontinued operationLoss after tax for the period from a discontinued operation 5 (8,485) (7,588) PROFIT /(LOSS) FOR THE PERIOD (2,784) 805 Attributable to:Equity holders of the parent (2,784) 890Minority interests - (85) Earnings/(loss) per share • Basic, for the loss for the periodattributable to ordinary equity holders ofthe parent (0.014) 0.005 • Diluted, for the loss for the periodattributable to ordinary equity holders ofthe parent (0.014) 0.005 Earnings per share from continuing operations • Basic, for the profit from continuingoperations attributable to ordinary equity holders of the parent 0.029 0.052 • Diluted, for the profit from continuingoperations attributable to ordinary equity holders of the parent 0.029 0.051 INTERIM CONSOLIDATED BALANCE SHEETat 30 June 2007 Notes 30 June 2007 31 December US$000 2006 (unaudited) US$000Assets Non-current assetsProperty, plant and equipment 4 254,466 232,041Goodwill 65,231 65,231Other non-current assets 3,902 3,903 Total non-current assets 323,599 301,175 Current assetsInventories 39,280 29,953Trade and other receivables 19,746 15,805Prepayments 11,199 3,781Cash and cash equivalents 2 14,840 30,780 Total current assets 85,065 80,319 Assets of disposal group classified as held for sale 5 12,017 15,611 Total assets 420,681 397,105 EQUITY AND LIABILITIES Equity attributable to equity holders of theparentIssued capital 325 325Share premium 334,800 334,800Shares to be issued 510 510Assets revaluation reserve 790 790Accumulated losses (92,301) (90,013) Total equity 244,124 246,412 Non-current liabilitiesInterest-bearing loans and borrowings 6 68,787 43,324Provisions 7,258 7,083Other liabilities 1,358 1,325Deferred income tax liability 18,934 21,250 96,337 72,982 Current liabilitiesTrade and other payables 5,444 10,368Interest-bearing loans and borrowings 6 41,351 30,501Other payables 8,034 8,897Income tax payable 2,233 2,293Provisions 9,088 9,406 66,150 61,465 Liabilities included in disposal groups 5 14,070 16,246classified as held for sale Total liabilities 176,557 150,693 Total equity and liabilities 420,681 397,105 INTERIM CONSOLIDATED STATEMENT OF CHANGES IN EQUITYfor the six months ended 30 June 2007 Attributable to equity holders of the parent Issued Share Shares to Asset Accumulated Total Minority Total capital premium be issued revaluation losses interests equity reserve US$000 US$000 US$000 US$000 US$000 US$000 US$000 US$000 At 1 January 2007 325 334,800 510 790 (90,013) 246,412 - 246,412 Loss for the period - - - - (2,784) (2,784) - (2,784)Share-based payment - - - - 496 496 - 496 At 30 June 2007 (unaudited) 325 334,800 510 790 (92,301) 244,124 - 244,124 Attributable to equity holders of the parent Issued Share Shares to Asset Retained Total Minority Total capital premium be issued revaluation earnings interests equity reserve US$000 US$000 US$000 US$000 US$000 US$000 US$000 US$000 At 1 January 2006 255 236,483 - - 5,190 241,928 221 242,149Loss for the period - - - - 805 805 (85) 720Issue of share 3 4,412 - - - 4,415 - 4,415capitalShare-based payment - - - - 977 977 - 977 At 30 June 2006 (unaudited) 258 240,895 - - 6,972 248,125 136 248,261 INTERIM CONSOLIDATED CASH FLOW STATEMENTfor the six months ended 30 June 2007 For the six months ended 30 June Notes 2007 2006 US$000 US$000 (unaudited) (unaudited) Operating activities 4,996 11,850 Profit before tax from continuing operationsLoss before tax from discontinued operations 5 (8,485) (7,588) (3,489) 4,262 Adjustments to reconcile profit/(loss) before taxto net cash flows from operating activities:Depreciation and impairment of property, plant and equipment 4,039 5,797Loss on disposal of property, plant and equipment 19 329Share-based payments expense 496 977Interest income (535) (383)Interest expense 1,337 3,010Net foreign exchange gains (465) (1,610)Derivative financial instruments - (1,790)Movement in provisions (1,064) (139)Increase in trade and other receivables (11,307) (6,981)Decrease/(increase) in inventories (7,807) 459Increase/(decrease) in trade and other payables (6,148) 682Increase in deferred costs (1,265) (562)Income tax refund ed/(paid) 226 (5,343) Net cash flows from operating activities (25,963) (1,292) Of which discontinued operations (6,235) (8,839) Cash flows from investing activitiesPurchase of property, plant and equipment 4 (19,328) (15,382)Interest received 535 383 Net cash flows from investing activities (18,793) (14,999) Of which discontinued operations (106) (2,327) Cash flows from financing activitiesIssue of ordinary shares - 4,415Proceeds from borrowings 61,039 10,000Repayment of borrowings (30,772) (10,241)Interest paid (5,251) (3,767)Receipts from Barrick Gold to finance the Taseevskoye joint venture - 2,640Receipt from Kazzinc to finance the Novoshirokinskoye joint venture 5,326 -Lease payments (1,687) (1,540) Net cash flows from financing activities 28,655 1,507Of which discontinued operations (886) (489) Net (decrease)/increase in cash and cash (16,101) (14,784)equivalentsCash and cash equivalents at 1 January 31,576 33,570 Cash and cash equivalents at 30 June 2 15,475 18,786 The Highland Gold Mining Limited and its Operations 1. Summary of Significant Accounting Policies Authorisation of financial statements The consolidated financial statements were authorised for issue in accordancewith a Directors' resolution on 23 September 2007. The ultimate parent entity ofthe Group, Highland Gold Mining Limited, is a public company incorporated inJersey. Its ordinary shares are traded on the AIM. The principal activity is building of a portfolio of gold mining operationswithin the Russian Federation. Statement of compliance These financial statements have been prepared in accordance with InternationalFinancial Reporting Standards (IFRSs) for the period ended 30 June 2007 forHighland Gold Mining Limited (the "Company") and its subsidiaries (togetherreferred to as the "Group"). The interim financial statements are prepared incompliance with IAS 34 "Interim financial reporting" and contain a condensed setof financial statements. Basis of preparation The policies applied in the Group's interim financial statements are consistentwith those that the Directors intend to use in the next annual financialstatements. There is however a possibility that the directors may determine thatsome changes to these policies are necessary when preparing the full annualfinancial statements for the first time in accordance with those IFRSs adoptedfor use by the European Union. The principal accounting policies applied in thepreparation of these consolidated financial statements have been consistentlyapplied to all the periods presented, unless otherwise stated and are set outbelow. These financial statements are the Group's first financial statements thatcomply with IFRS. The Group's IFRS transition date is 1 January 2006. The Grouppreviously reported under UK GAAP and the Group financial statements have nowbeen restated from UK GAAP to comply with IFRS. The reconciliation anddescription of the adjustments from UK GAAP to IFRS financial statements areprovided in Note 9. United States dollar ("US dollar") is the functional and presentation currencyof all companies within the Group. Monetary assets and liabilities are translated into the functional currency atthe official exchange rate at the respective balance sheet dates. Foreignexchange gains and losses resulting from the settlement of the transactions andfrom the translation of monetary assets and liabilities into the functionalcurrency at year-end official exchange rates are recognised in the incomestatement. The principal exchange rates against US dollars that were applied are: 30 June 2007 31 December 2006 30 June 2006 31 December 2005 AverageRUR 26.07 27.13 27.62 28.34GBP 0.508 0.544 0.559 0.550 ClosingRUR 25.82 26.33 27.08 28.78GBP 0.499 0.511 0.551 0.581 Consolidated financial statements The Group financial statements consolidate the financial statements of HighlandGold Mining Limited and the entities it controls (its subsidiaries). Subsidiaries are consolidated from the date of their acquisition, being the dateon which the Group obtains control, and continue to be consolidated until thedate that such control ceases. Control comprises the power to govern thefinancial and operating policies of the investee so as to obtain benefit fromits activities and is achieved through direct or indirect ownership of votingrights; currently exercisable or convertible potential voting rights; or by wayof contractual agreement. The financial statements of subsidiaries used in thepreparation of the consolidated financial statements are prepared for the samereporting year as the parent company and are based on consistent accountingpolicies. All inter-company balances and transactions, including unrealisedprofits arising from them, are eliminated. Minority interests represent the portion of profit or loss and net assets insubsidiaries that is not held by the Group and is presented separately withinequity in the consolidated balance sheet, separately from parent shareholders'equity. Interests in jointly controlled entities The Group has a contractual agreement with Kazzinc which represents a jointventure entity. The Group recognises its interest in joint ventures using the proportionatemethod of consolidation whereby the Group's share of each of the assets,liabilities, income and expenses of the joint venture are combined with similaritems, line by line, in its consolidated financial statements. Joint ventures are accounted for in the manner outlined above until the date onwhich the Group ceases to have joint control over the joint venture. Property, plant and equipment Land and buildings, plant and equipment On initial acquisition, land and buildings, plant and equipment are valued atcost, being the purchase price and the directly attributable costs ofacquisition or construction required to bring the asset to the location andcondition necessary for the asset to be capable of operating in the mannerintended by management. In subsequent periods, buildings, plant and equipment are stated at cost lessaccumulated depreciation and any impairment in value, whilst land is stated atcost less any impairment in value and is not depreciated. Depreciation is provided so as to write off the cost, less estimated residualvalues of buildings, plant and equipment (based on prices prevailing at thebalance date) on the following bases: • Mineral properties are depreciated using a unit of production method based on estimated economically recoverable reserves, which results in a depreciation charge proportional to the depletion of reserves. • Buildings, plant and equipment unrelated to production are depreciated using the straight-line method based on estimated useful lives. Where parts of an asset have different useful lives, depreciation is calculatedon each separate part. Each item or part's estimated useful life has due regardto both its own physical life limitations and the present assessment ofeconomically recoverable reserves of the mine property at which the item islocated, and to possible future variations in those assessments. Estimates ofremaining useful lives and residual values are reviewed annually. Changes inestimates which affect unit of production calculations are accounted forprospectively. The expected useful lives are as follows: Buildings 17 yearsPlant and Equipment 7 - 14 years The net carrying amounts of land, buildings, plant and equipment are reviewedfor impairment either individually or at the cash-generating unit level whenevents and changes in circumstances indicate that the carrying amount may not berecoverable. To the extent that these values exceed their recoverable amounts,that excess is fully provided against in the financial year in which this isdetermined. Expenditure on major maintenance or repairs includes the cost of replacement ofparts of assets and overhaul costs. Where an asset or part of an asset isreplaced and it is probable that future economic benefits associated with theitem will be available to the Group, the expenditure is capitalised and thecarrying amount of the item replaced is derecognised. Similarly, overhaul costsassociated with major maintenance are capitalised and depreciated over theiruseful lives where it is probable that future economic benefits will beavailable and any remaining carrying amounts of the cost of previous overhaulsare derecognised. All other costs, including repair and maintenance expenditure,are expensed as incurred. Where an item of property, plant and equipment is disposed of, it isderecognised and the difference between its carrying value and net salesproceeds is disclosed as a profit or loss on disposal in the income statement. Any items of property, plant or equipment that cease to have future economicbenefits expected to arise from their continued use or disposal are derecognisedwith any gain or loss included in the income statement in the financial year inwhich the item is derecognised. Exploration and evaluation expenditure Exploration and evaluation expenditure relates to costs incurred on theexploration and evaluation of potential mineral reserves and includes costs suchas exploratory drilling and sample testing and the costs of pre-feasibilitystudies. Exploration and evaluation expenditure for each area of interest, otherthan that acquired from the purchase of another mining company, is carriedforward as an asset provided that one of the following conditions is met: - such costs are expected to be recouped in full through successful development and exploration of the area of interest or alternatively, by its sale; or - exploration and evaluation activities in the area of interest have not yet reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves, and active and significant operations in relation to the area are continuing, or planned for the future. Purchased exploration and evaluation assets are recognised as assets at theircost of acquisition or at fair value if purchased as part of a businesscombination. An impairment review is performed, either individually or at the cash-generatingunit level, when there are indicators that the carrying amount of the assets mayexceed their recoverable amounts. To the extent that this occurs, the excess isfully provided against, in the financial period in which this is determined.Exploration assets are reassessed on a regular basis and these costs are carriedforward provided that at least one of the conditions outlined above is met. Expenditure is transferred to mine development assets once the work completed todate supports the future development of the property and such developmentreceives appropriate approvals. Mine development expenditure Capitalised mine development costs include expenditure incurred to develop newore bodies, to define future mineralisation in existing ore bodies, to expandthe capacity of a mine and to maintain production, and also interest andfinancing costs relating to the construction of mineral property. Mine development costs are, upon commencement of production, depreciated using aunit of production method based on the estimated proven and probable mineralreserves to which they relate or are written off if the property is abandoned.The net carrying amounts of mine development costs at each mine property arereviewed for impairment either individually or at the cash-generating unit levelwhen events and changes in circumstances indicate that the carrying amount maynot be recoverable. To the extent that these values exceed their recoverableamounts, that excess is fully provided against the income statement in thefinancial year in which this is determined. Mineral properties The development costs are transferred to the mineral properties category whenthe asset is available for use; this is when commercial levels of production areachieved. The restoration provision cost is capitalised within mine assets. Thecost of acquiring mine assets after start of the production is capitalised onthe balance sheet as incurred. Mine assets are amortised using theunits-of-production method based on estimated proven and probable mineralreserves. The net carrying amounts of mine assets are reviewed for impairmenteither individually or at the cash-generating unit level when events and changesin circumstances indicate that the carrying amount may not be recoverable. Tothe extent that these values exceed their recoverable amounts, that excess isfully provided against the income statement in the financial year in which thisis determined. Mineral rights The cost of acquiring rights on mineral reserves and mineral resources includingdirectly attributable expenses is capitalised on the balance sheet as incurredand included in the mineral rights category. Mineral rights are amortised usingthe units-of-production method based on estimated proven and probable mineralreserves. The net carrying amounts of mineral rights are reviewed for impairmenteither individually or at the cash-generating unit level when events and changesin circumstances indicate that the carrying amount may not be recoverable. Tothe extent that these values exceed their recoverable amounts, that excess isfully provided against the income statement in the financial year in which thisis determined. Impairment At each reporting date, management assess whether there is any indication ofimpairment within the categories of property, plant and equipment. If any suchindication exists, management estimates the recoverable amount, which isdetermined as the higher of an asset's fair value less costs to sell or itsvalue in use. The carrying amount is reduced to the recoverable amount and animpairment loss is recognised in the income statement to the extent it exceedsthe previous revaluation surplus in equity. An impairment loss recognised for anasset in prior years is reversed if there has been a change in the estimatesused to determine the asset's value in use or fair value less costs to sell. Gains and losses on disposals determined by comparing proceeds with carryingamount are recognised in the income statement. Construction work in progress Assets in the course of construction are capitalised in the construction work inprogress account. On completion, the cost of construction is transferred to theappropriate category of property, plant and equipment. No depreciation is charged on assets in the construction work in progressaccount. These assets are depreciated upon their transfer to the appropriatecategory of property, plant and equipment. Operating leases Where the Group is a lessee in a lease which does not transfer substantially allthe risks and rewards of ownership from the lessor to the Group, the total leasepayments are charged to the income statement on a straight-line basis over theperiod of the lease. Finance lease liabilities Where the Group is a lessee in a lease which transfers substantially all therisks and rewards of ownership to the Group, the assets leased are capitalisedin property, plant and equipment at the lower of the fair value of the leasedasset and the present value of the minimum lease payments, on commencement ofthe lease. Each lease payment is allocated between the liability and financecharges so as to achieve a constant rate on the finance balance outstanding. Thecorresponding rental obligations, net of future finance charges, are statedseparately as finance lease liabilities. The interest cost is charged to theincome statement over the lease period using the effective interest method. Theassets acquired under finance leases are depreciated over the shorter of theiruseful life or the lease term if the Group is not reasonably certain that itwill obtain ownership by the end of the lease term. Stripping costs Stripping costs incurred in open-pit operations during the production phase toremove waste ore are charged to operating costs on the basis of the average lifeof mine stripping ratio and the average life of mine costs per cubic meters. Theaverage stripping ratio is calculated as the number of cubic meters of wastematerial expected to be removed during the life of mine per ounces of goldmined. The average life of mine cost per cubic meters is calculated as the totalexpected costs to be incurred to mine the ore body, divided by the number ofcubic meters expected to be mined. The average life of mine stripping ratio andthe average life of mine cost per cube meters are recalculated annually in thelight of additional knowledge and changes in estimates. The cost of the "excess stripping" is capitalised on the balance sheet when theactual mining costs exceed the sum of the adjusted tonnes mined, being theactual ore tonnes plus the product of the actual ore tonnes multiplied by theaverage life of mine stripping ratio, multiplied by the life of mine cost percubic meters. When the actual mining costs are below the sum of the adjustedtonnes mined, being the actual ore tonnes plus the product of the actual oretonne multiplied by the average life of mine stripping ratio, multiplied by thelife of mine cost per cubic meters, previously capitalised costs are expensed toincrease the cost up to the average. The cost of stripping in any period will be reflective of the average strippingrates for the ore body as a whole. Changes in the life of mine stripping ratioare accounted for prospectively as a change in estimate. Sale and leaseback transactions A sale and leaseback transaction involves the sale of an asset and the leasingback of the same asset. The lease payment and the sale price are usuallyinterdependent because they are negotiated as a package. The sale and leaseback transaction results in a finance lease for the Group. Theexcess of sales proceeds over the carrying amount is not immediately recognisedas income by the Group. Instead, it is deferred and amortised over the leaseterm. Goodwill Business combinations on or after 1 January 2006 are accounted for under IFRS 3using the purchase method. Any excess of the cost of the business combinationover the Group's interest in the net fair value of the identifiable assets,liabilities and contingent liabilities is recognised in the balance sheet asgoodwill and is not amortised. To the extent that the net fair value of theacquired entity's identifiable assets, liabilities and contingent liabilities isgreater than the cost of the investment, a gain is recognised immediately in theincome statement. Goodwill recognised as an asset is recorded at its carryingamount and is not amortised. After initial recognition, goodwill is stated at cost less any accumulatedimpairment losses, with the carrying value being reviewed for impairment, atleast annually and whenever events or changes in circumstances indicate that thecarrying value may be impaired. For the purpose of impairment testing, goodwill is allocated to the Group's cashgenerating units that are expected to benefit from the synergies of thecombination. Where the recoverable amount of the cash generating unit is lessthan its carrying amount, including goodwill, an impairment loss is recognisedin the income statement. Financial instruments Financial instruments classification and recognition Financial assets are classified as either financial assets at fair value throughprofit or loss, loans and receivables, held-to-maturity investments oravailable-for-sale financial assets, as appropriate. The Group determines theclassification of its financial assets at initial recognition (which in the caseof financial assets existing at the transition date, includes designation atthat date). Where as a result of a change in intention or ability, it is nolonger appropriate to classify an investment as held to maturity, the investmentis reclassified into the available-for-sale category. When financial assets arerecognised initially, they are measured at fair value on the trade date, plus,in the case of investments not at fair value through profit or loss, directlyattributable transaction costs. Currently the Group does not have financialassets at fair value through profit or loss, held-to-maturity investments andavailable-for-sale financial assets. Loans and receivables Loans and receivables are non-derivative financial assets with fixed ordeterminable payments that are not quoted in an active market, do not qualify astrading assets and have not been designated as either fair value through incomestatement or available for sale. Such assets are carried at amortised cost usingthe effective interest method. Gains and losses are recognised in the incomestatement when the loans and receivables are derecognised or impaired, as wellas through the amortisation process. Derecognition of financial assets and liabilities A financial asset is derecognised where: - the rights to receive cash flows from the asset have expired; - the Group retains the right to receive cash flows from the asset, but hasassumed an obligation to pay them in full without material delay to a thirdparty under a 'pass-through' arrangement; or - the Group has transferred its rights to receive cash flows from the asset andeither has transferred substantially all the risks and rewards of the asset, orhas neither transferred nor retained substantially all the risks and rewards ofthe asset, but has transferred control of the asset. Where the Group has transferred its right to receive cash flows from an assetand has neither transferred nor retained substantially all the risks and rewardsof the asset nor transferred control of the asset, it continues to recognise thefinancial asset to the extent of its continuing involvement in the asset. A financial liability is derecognised when the obligation under the liability isdischarged or is cancelled or expires. Gains on derecognition are recognisedwithin finance income and losses within finance costs. Where an existing financial liability is replaced by another from the samelender on substantially different terms, or the terms of an existing liabilityare substantially modified, such an exchange or modification is treated as aderecognition of the original liability and the recognition of a new liability,and the difference in the respective carrying amounts is recognised in profit orloss. Derivative financial instruments The Group uses derivative financial instruments such as forward currencycontracts to hedge its risks associated with foreign currency fluctuations. Suchderivative financial instruments are initially recognised at fair value on thedate on which a derivative contract is entered into and are subsequentlyremeasured at fair value. Derivatives are carried as assets when the fair valueis positive and as liabilities when the fair value is negative. The fair value of forward currency contracts is calculated by reference tocurrent forward exchange rates for contracts with similar maturity profiles. Inventories Inventories are recorded at the lower of cost and net realisable value. Cost isdetermined on a weighted average basis. The cost of finished goods and work inprogress comprises raw material, direct labour, other direct costs and relatedproduction overheads (based on normal operating capacity) but excludes borrowingcosts. Net realisable value is the estimated selling price in the ordinarycourse of business, less the cost of completion and selling expenses. The inventories are segregated by the following: - Gold in process which is valued at the average total production cost at therelevant stage of production; - Gold on hand which is valued on an average total production cost method; - Ore stockpiles which are valued at the average cost of mining and stockpilingthe ore; - Raw materials and consumables: materials, goods or supplies to be eitherdirectly or indirectly consumed in the production process which are valued atweighted average costs; - Fuel which is valued at weighted average costs; - Spare parts which are valued at weighted average costs. Trade and other receivables Trade and other receivables are carried at amortised cost using the effectiveinterest method. A provision for impairment of receivables is established whenthere is objective evidence that the Group will not be able to collect allamounts due according to the original terms of receivables. The amount of theprovision is the difference between the asset's carrying amount and the presentvalue of estimated future cash flows, discounted at the original effectiveinterest rate. The amount of the provision is recognised in the incomestatement. Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call withbanks, and other short-term highly liquid investments with original maturitiesof three months or less. Discontinued operations A discontinued operation is a component of the Group that either has beendisposed of, or that is classified as held for sale, and: (a) represents aseparate major line of business or geographical area of operations; (b) is partof a single co-ordinated plan to dispose of a separate major line of business orgeographical area of operations; or (c) is a subsidiary acquired exclusivelywith a view to resale. Earnings and cash flows of discontinued operations, ifany, are disclosed separately from continuing operations with comparatives beingre-presented. Share capital Ordinary shares are classified as equity. Incremental costs directlyattributable to the issue of new shares are shown in equity as a deduction, netof tax, from the proceeds. Any excess of the fair value of considerationreceived over the par value of shares issued is presented in the notes as sharepremium. Dividends Dividends are recognised as a liability and deducted from equity when approvedat AGM. Dividends are disclosed when they are proposed before the balance sheetdate or proposed or declared after the balance sheet date but before thefinancial statements are authorised for issue. Value added tax Gold production and subsequent sales are not subject to output value added tax.Input VAT is recoverable against income tax. Where input VAT is not recoverablethe VAT provision is created on the balance sheet corresponding with the incomestatement in a relevant period. Borrowings Borrowings are carried at amortised cost using the effective interest method.Interest costs on borrowings to finance the construction of property, plant andequipment are capitalised, during the period of time that is required tocomplete and prepare the asset for its intended use. All other borrowing costsare expensed. Trade and other payables Trade payables are accrued when the counterparty has performed its obligationsunder the contract; they are carried at amortised cost using the effectiveinterest method. Provisions for liabilities and charges A provision is recognised when the Group has a present legal or constructiveobligation as a result of a past event, when it is probable that an outflow ofresources will be required to settle the obligation, and when a reliableestimate of the amount can be made. Environmental protection, rehabilitation and closure costs Provision is made for close down, restoration and environmental clean up costs(including the dismantling and demolition of infrastructure, removal of residualmaterials and remediation of disturbed areas), where there is a legal orconstructive obligation to do so in the accounting period in which theenvironmental disturbance occurs, based on the estimated future costs. Wherematerial, the provision is discounted and the unwinding of the discount is shownas a finance cost in the income statement. At the time of establishing theprovision, a corresponding asset, is capitalised and depreciated on a unit ofproduction basis. The provision is reviewed on an annual basis for changes in cost estimates orlives of operations. Revenue recognition Revenue is recognised at the fair value of the consideration received orreceivable to the extent that it is probable that the economic benefits willflow to the group and the revenue can be reliably measured. Gold sale revenue isrecognized when the product has been dispatched to the purchaser and is nolonger under the physical control of the producer. Employee benefits Wages, salaries, contributions to the Russian Federation state pension andsocial insurance funds, paid annual leave and sick leave, bonuses, andnon-monetary benefits (such as health services) are accrued in the year in whichthe associated services are rendered by the employees of the Group. Pension plan The Group pays contributions to personal pension schemes of employees, which areadministered independently of the Group. The Group has no other obligations oncethe contributions have been paid. The contributions are recognised as anemployee benefit expense when they are due. Share Based Payments Equity-settled transactions The cost of equity-settled transactions with employees is measured by referenceto the fair value at the date at which they are granted and is recognised as anexpense over the vesting period, which ends on the date on which the relevantemployees become fully entitled to the award. Fair value is determined using anappropriate pricing model. In valuing equity-settled transactions, no account istaken of any vesting conditions, other than conditions linked to the price ofthe shares of the Company (market conditions). No expense is recognised for awards that do not ultimately vest, except forawards where vesting is conditional upon a market condition, which are treatedas vesting irrespective of whether or not the market condition is satisfied,provided that all other performance conditions are satisfied. At each balance sheet date before vesting, the cumulative expense is calculated,representing the extent to which the vesting period has expired and management'sbest estimate of the achievement or otherwise of non-market conditions and ofthe number of equity instruments that will ultimately vest or, in the case of aninstrument subject to a market condition, be treated as vesting as describedabove. The movement in cumulative expense since the previous balance sheet dateis recognised in the income statement, with a corresponding entry in equity. Where an equity-settled award is cancelled, it is treated as if it had vested onthe date of cancellation, and any cost not yet recognised in the incomestatement for the award is expensed immediately. Any compensation paid up to thefair value of the award at the cancellation or settlement date is deducted fromequity, with any excess over fair value being treated as an expense in theincome statement. Cash-settled transactions The cost of cash-settled transactions is measured at fair value using anappropriate option pricing model. Fair value is established initially at thegrant date and at each balance sheet date thereafter until the awards aresettled. During the vesting period a liability is recognised representing theproduct of the fair value of the award and the portion of the vesting periodexpired as at the balance sheet date. From the end of the vesting period untilsettlement, the liability represents the full fair value of the award as at thebalance sheet date. Changes in the carrying amount of the liability arerecognised in profit or loss for the period. Earnings per share Earnings per share is determined by dividing the profit or loss attributable toequity holders of the Company by the weighted average number of participatingshares outstanding during the reporting year. Income taxes Current tax for each taxable entity in the Group is based on the local taxableincome at the local statutory tax rate enacted at the balance sheet date andincludes adjustments to tax payable or recoverable in respect of previousperiods. The income tax charge/(credit) comprises current tax and deferred taxand is recognised in the consolidated income statement, except to the extentthat it relates to items charged or credited directly to equity, in which caseit is recognised in equity. Deferred income tax is recognised using the balance sheet liability method inrespect of tax losses carried forward and temporary differences between the taxbases of assets and liabilities, and their carrying amounts for financialreporting purposes, except as indicated below. Deferred income tax liabilities are recognised for all taxable temporarydifferences, except: - where the deferred income tax liability arises from the initial recognition ofgoodwill, or the initial recognition of an asset or liability in a transactionthat is not a business combination and, at the time of the transaction, affectsneither the accounting profit nor taxable profit or loss; and - in respect of taxable temporary differences associated with investments insubsidiaries and interests in joint ventures, where the timing of the reversalof the temporary differences can be controlled and it is probable that thetemporary differences will not reverse in the foreseeable future. Deferred income tax assets are recognised for all deductible temporarydifferences, carry-forward of unused tax assets and unused tax losses, to theextent that it is probable that taxable profit will be available against whichthe deductible temporary differences, and the carry-forward of unused tax assetsand unused tax losses can be utilised, except: - where the deferred income tax asset relating to the deductible temporarydifference arises from the initial recognition of an asset or liability in atransaction that is not a business combination and, at the time of thetransaction, affects neither the accounting profit nor taxable profit or loss;and - in respect of deductible temporary differences associated with investments insubsidiaries and interests in joint ventures, deferred tax assets arerecognised only to the extent that it is probable that the temporary differenceswill reverse in the foreseeable future and taxable profit will be availableagainst which the temporary differences can be utilised. The carrying amount of deferred income tax assets is reviewed at each balancesheet date and reduced to the extent that it is no longer probable thatsufficient taxable profit will be available to allow all or part of the deferredincome tax asset to be utilised. To the extent that an asset not previouslyrecognised fulfils the criteria for recognition, a deferred income tax asset isrecorded. Deferred tax is measured on an undiscounted basis at the tax rates that areexpected to apply in the periods in which the asset is realised or the liabilityis settled, based on tax rates and tax laws enacted or substantively enacted atthe balance sheet date. New standards The group has adopted the following new accounting standards in the preparationof its interim financial statements. IFRS 7, Financial Instruments: Disclosures, and a complementary Amendment to IAS1, Presentation of Financial Statements - Capital Disclosures. IFRS 7 introducesnew disclosures relating to financial instruments. IFRS 7 will be adopted forits financial statements for the year-ended 31 December 2007. IFRIC 9, Reassessment of Embedded Derivatives (effective from annual periodsbeginning on or after 1 June 2006). IFRIC 9 requires an entity to assess whetheran embedded derivative is required to be separated from the host contract andaccounted for as a derivative when the entity first becomes a party to thecontract. Subsequent reassessment is prohibited unless there is a change in theterms of the contract that significantly modifies the cash flows that otherwisewould be required under the contract, in which case reassessment is required.IFRIC 9 is not expected to be relevant to the Group's operations because none ofthe terms of the Group's contracts has been changed. However the Group willcontinue to monitor changes to contracts in order to assess the application onIFRIC9. IFRIC 10 - Interim Financial Reporting and Impairment (effective for annualperiods beginning on or after 1 November 2006). IFRIC 10 prohibits theimpairment losses recognised in an interim period on goodwill and investments inequity instruments and in financial assets carried at cost to be reversed at asubsequent balance sheet date. The Group has applied IFRIC 10 from 1 January2007 but it has not had any impact on the Group's financial statements. 2. Cash and cash equivalents For the purpose of the interim consolidated cash flow statement, cash and cashequivalents are comprised of the following: 30 June 2007 2006 US$000 US$000 Cash in hand and in bank 9,882 10,949Deposits 4,958 7,009 14,840 17,958 Cash at bank and in hand attributable to a discontinued operation 635 828 15,475 18,786 3. Income tax The major components of income tax expense in the interim consolidated incomestatement are: For the six months ended 30 June 2007 2006 US$000 US$000 Current income taxCurrent income tax charge 1,862 4,633Reversal of income tax provision (250) -Deferred income taxRelating to origination and reversal of temporary differences (2,317) (1,176) Income tax expense/(benefit) (705) 3,457 4. Property, plant and equipment Acquisitions and disposals During the six months ended 30 June 2007, the Group acquired assets with a costof US$26.1 million (2006: US$17 million). The main items acquired were: • Plant & equipment with a cost of US$12.1 million (2006: US$4.4 million); and • Capitalised mine development costs totalling US$14 million (2006: US$12.6 million). Assets with a net book value of US$1.5 million were disposed of by the Groupduring the six months ended 30 June 2007 (2006: US$0.4 million). 5. Discontinued operation On 8 August 2007, Highland Gold Mining Limited publicly announced that itentered into a conditional agreement for the sale of the Darasun, Teremky andTalatui Mines ("the Mines") in the Chita region of Russia for a totalconsideration of US$25 million. The results of the Mines are as follows: For the six months ended 30 June 2007 2006 US$000 US$000 Revenue 511 6,700Cost of sales (1,300) (11,060)Care and maintenance expenses (6,707) -Gross loss (7,496) (4,360) Administrative expenses (15) 21Other operating income 194 -Other operating expenses - (28)Foreign exchange expenses (985) (3,085)Finance costs (183) (140)Finance revenue - 4 Loss before tax from discontinued operation (8,485) (7,588) Tax income / (expense) - - Loss after tax for the period from a discontinued operation (8,485) (7,588) The assets and liabilities are classified as part of a disposal group held forsale. 6. Interest-bearing loans and borrowings On 2 April 2007, the Group announced that they had arranged US$90 million of newdebt facilities. The new facilities comprise of the following: • US$60 million facility with MDM Bank. The facility bears interest at 8.6% and is repayable until 30 December 2011. • US$30 million line of credit with Gazprombank. The facility bears interest of 8.7% and is available until 25 May 2011. 7. Related party transactions The following table provides the total amount of transactions which have beenentered into with related parties during the six months ended 30 June 2007 and2006: Services Services Sales to Amounts Amounts provided to provided by related owed by owed to related related parties related related parties parties parties parties US$000 US$000 US$000 US$000 US$000Entity with significantinfluence over the Group:Barrick Resources 2007 - 225 - - - 2006 - - - - -Barrick Gold Services 2007 - 152 - - - 2006 - 326 - - 72Fleming Family & Partners 2007 - 60 - - 47 2006 - 59 - - 48 Joint venture in which theparent is the venturer:OAO Novoshirokinskoye 2007 3,510 - 1,257 2,401 - 2006 - - - - - Loans given Loans Interest Interest Amounts Amounts to related received on the on the owed by owed to parties from loan loan related related related given to received parties parties parties the from the related related party party US$000 USD$000 USD$000 US$000 USD$000 USD$000Joint venture in which theparent is the venturer:OAO Novoshirokinskoye 2007 500 - 63 - 65 - 2006 - - - - - -Partner in the joint venture:Kazzinc 2007 - 5,326 - 66 - 66 2007 - - - - - - 8. Events after the balance sheet event Conditional sale of Darasun On 8 August, 2007, Highland announced that its wholly owned subsidiary, StanmixHolding Limited, had entered into a conditional agreement for the sale of theDarasun, Teremky and Talatui Mines ("the Mines") in the Chita region of Russia.The agreement was entered into with Open Joint Stock Company "UzhuralzolotoGroup of Companies" a company incorporated under the laws of Russia ("thePurchaser") whereby the Purchaser will acquire the whole of the share capital ofOOO "Darasunsky Rudnik", the owner of the Mines, for a total consideration ofUS$25 million. The consideration was to be satisfied by the payment of US$3million in cash, which shall be paid on completion of the transaction, and therepayment by OOO "Darasunsky Rudnik" of US$22 million of its indebtedness due toStanmix Investments Limited, a wholly owned subsidiary of Highland, of whichUS$12 million planned to be repaid by the end of 2007 and US$10 million plannedto be repaid on 1 March 2008. This agreement remains subject to the satisfaction of certain conditionsprecedent which include, among others, the Purchaser successfully raisingfinance for the required purchase consideration, and the Purchaser obtaining ofRussian anti-monopoly approval. In addition, the previously announced sale price of US$25 million is subject toongoing negotiation over areas including the impact on the price of receivingall the consideration up front, as opposed to via installments, and which itemsof mining equipment should be included in the sale. The outcome of both theseareas of negotiation could have a material impact on the purchase price. The conditions precedents remain unsatisfied, and the negotiations are ongoingregarding the ultimate sales price. Given these uncertainties, management hasresolved not to effect any upward adjustment to the carrying value of the Minesin the Group's Interim Financial Statements. It is anticipated that theseuncertainties will be resolved by the end of 2007, at which point any requiredrevaluation of the assets will be effected. Financing On 7 August, 2007, the Group officially received credit and risk committeeapproval from GazpromBank to establish a new five year term US$45 millioncorporate debt facility which is available to fund the future development of theHighland Group. Of this US$45 million debt facility, US$15 million has been usedto refinance an existing US$15 million loan that is outstanding with GazpromBankand is due to mature in June 2008. The early refinancing of this existingfacility will see the maturity profile pushed out to December 2011. Acquisition of exploration licences On 24 August the Company acquired a license for exploration and mining rightsfor the Iska ore field in the Khabarovsk Region. The acquisition was made in anopen auction in Khabarovsk for a bid price of 1.87 million roubles (US$ 72.300). 9. First time adoption of IFRS Introduction For all periods up to and including the year ended 31 December 2006, HighlandGold Mining Limited prepared its financial statements in accordance with UKGAAP. From 1 January 2007, the Group is required to prepare its consolidatedfinancial statements in accordance with IFRS as adopted by EU. This changeapplies to all financial reporting for accounting periods beginning on or after1 January 2007. Consequently, the Group's first IFRS results are its interimresults for the first half of 2007 and the Group's first Annual Report andAccounts under IFRS will be for the year ending 31 December 2007. As the Grouppublishes comparative information in its Annual Report and Accounts, the datefor transition to IFRS is 1 January 2006, this being the start of the earliestperiod of comparative information. The transition to IFRS represents a significant change in the Group's accountingpolicies. The purpose of this note is to provide details of the impact of thischange. Overview of impact At 1 January 2006 UK GAAP IFRS US$'000 US$'000 Net assets 248,154 242,149 Period ended 30 June 2006 UK GAAP IFRS US$'000 US$'000 Profit before income tax 4,224 4,263Profit /(Loss) after taxation (201) 805Earnings per share (basic) (0.001) 0.006Earnings per share (diluted) (0.001) 0.005Net assets 258,932 248,261 Year ended 31 December 2006 UK GAAP IFRS US$'000 US$'000 Loss before income tax (83,202) (84,600)Loss after taxation (96,445) (95,661)Earnings per share (basic and diluted) (0.597) (0.592)Net assets 253,588 246,412 The most significant elements contributing to the change in financialinformation for 2006 are: • the write-off of the negative goodwill on transition to IFRS to the retainedearnings; • recognition of deferred tax liabilities on the fair value adjustments arisingin the prior business combination and recognition of deferred tax liabilitiesarising on the retranslation of fixed assets arising in group's Russiansubsidiaries whose functional currency is different from their tax currency; •recognition of additional gain arising on the disposal of group's 50% share inNovoshirokinskoye ("Novo") as a result of the decrease in the net assets of Novoon conversion to IFRS; • change in the treatment of derivative financial instruments; and • change in the treatment of the joint venture. The financial information for the full year ended 31 December 2006 is based onthe statutory accounts for the year ended 31 December 2006, restated for theeffects of adoption of IFRS as outlined in the following note. Those statutoryaccounts, upon which the auditors issued an unqualified opinion, have beendelivered to the Registrar of Companies. Details of Changes Transitional arrangements The requirements for first time adoption of IFRS are set out in IFRS 1. Ingeneral, a company is required to determine its IFRS accounting policies and toapply these retrospectively in order to determine its opening balance sheetunder IFRS. The standard allows a number of exemptions to this general principleto assist companies as they move to reporting under IFRS. Where the Company hastaken advantage of these exemptions, they are noted below. Changes in accounting policies Adoption of IFRS involves changes to the Group's accounting policies.Significant changes in policy, together with associated transitionalarrangements, are explained in more detail below. A summary of the relevant and significant IFRS accounting policies is providedon pages 6 to 14. The resultant changes from each standard are quantified onpages 20 to 29 for 2006. The Group has taken the opportunity to modify theformat of its financial statements. The starting point for reconciliations ofthe financial statements in this document is UK GAAP but the formats used arethose that will be shown for 2007 reporting under IFRS. IAS 12 Income Taxes IAS 12 requires recognizing deferred tax provision related to the fair value ofthe acquired assets, and the foreign exchange differences to be treated astemporary differences. Consequently, the opening IFRS balance sheet at 1 January2006 includes a US$14.4 million increase in deferred tax provision. IFRS 3 Business combinations IFRS 3 requires negative goodwill arose on previous business combinations to bewritten-off to retained earnings. As a result, the opening IFRS balance sheet at1 January 2006 includes a US$8.8 million increase in retained earnings. IAS 32 Financial instruments: Presentation, IAS 39 Financial instruments:Recognition and Measurement IAS 39 requires to recognise derivative financial instruments such as forwardcurrency contracts at fair value. IAS 31 Interests in Joint Ventures IAS 31 requires using the proportional consolidation method to recognise itsinterests in joint ventures. The Group's financial statements have been prepared in accordance withInternational Financial Reporting Standards (IFRSs) as adopted by the EuropeanUnion as they are expected to apply to the financial statements of the Group forthe year ended 31 December 2007. This is the first year in which the Group willprepare its financial statements under IFRSs and the comparatives have beenrestated from UK GAAP to comply with IFRSs. As part of the transition to IFRSs,the Group has restated the Group Balance Sheets as at 31 December 2005 (the "transition date"), 31 December 2006 and 30 June 2006 and the Group IncomeStatements for the year ended 31 December 2006 and six months ended 30 June 2006to comply with IFRS. Under IFRS 1 'First time adoption of International Financial ReportingStandards', IFRS are applied retrospectively at the transition balance sheetdate with all adjustments to assets and liabilities as stated under UK GAAPtaken to retained earnings unless certain exemptions are applied. The primaryexemption that has been applied by the Group is not to restate financialinformation for business combination that occurred prior to 31 December 2005. The reconciliations to IFRS from the previously published UK GAAP financialstatements are summarised in this note. Balance sheet reconciliations A reconciliation between the UK GAAP and IFRS Consolidated Balance Sheet at 1January 2006 (date of transition to IFRS) is provided below: UK GAAP Reclassifications Subtotal Adjustments Notes IFRS US$'000 US$'000 US$'000 US$'000 US$'000 ASSETS Non-current assets Property, plant and equipment 277,174 2,143 279,317 - 279,317Negative goodwill (8,796) - (8,796) 8,796 (a) -Other non-current assets - 6,809 6,809 - 6,809 Total non-current assets 268,378 8,952 277,330 8,796 286,126 Current assets Inventories 36,258 - 36,258 - 36,258Trade and other receivables 28,198 (8,876) 19,322 - 19,322Prepayments - 2,067 2,067 - 2,067Deferred costs 2,143 (2,143) - - -Cash and cash equivalents 33,570 - 33,570 - 33,570 Total current assets 100,169 (8,952) 91,217 - 91,217 TOTAL ASSETS 368,547 - 368,547 8,796 377,343 EQUITY Share capital 255 - 255 - 255 Share premium 236,483 - 236,483 - 236,483 Retained earnings 11,134 - 11,134 (5,944) 5,190 Equity attributable to the Company's equity holders 247,872 - 247,872 (5,944) 241,928 Minority interest 282 - 282 (61) (c) 221 TOTAL EQUITY 248,154 - 248,154 (6,005) (f) 242,149 LIABILITIES Non-current liabilities Borrowings 610 - 610 - 610 Provisions 17,572 (6,888) 10,684 - 10,684 Deferred income tax liability - 6,888 6,888 14,413 (b) 21,301 Derivative financial instruments - - - - - Total non-current liabilities 18,182 - 18,182 14,413 32,595 Current liabilities Current trade and other payables 102,211 (102,211) - - - Trade and other payables - 21,720 21,720 - 21,720 Income tax payable - 565 565 - 565Derivative financial instruments - - - 642 (d) 642Borrowings - 79,926 79,926 (254) (d) 79,672 Total current liabilities 102,211 - 102,211 388 102,599 TOTAL LIABILITIES 120,393 - 120,393 14,801 135,194 TOTAL LIABILITIES & EQUITY 368,547 - 368,547 8,796 377,343 A reconciliation between the UK GAAP and IFRS Consolidated Balance Sheet at 30June 2006 is provided below: UK GAAP Adjusted UK GAAP Adjustments UK GAAP Reclass Subtotal Adjustments Notes IFRS US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 ASSETS Non-current assets Property, plant and equipment 287,948 - 287,948 2,705 290,653 - 290,653 Goodwill (8,796) - (8,796) - (8,796) 8,796 (a) - Other non-current assets - - - 7,450 7,450 - 7,450 Total non-current assets 279,152 - 279,152 10,155 289,307 8,796 298,103 Current assets Inventories 42,612 (6,046) 36,566 - 36,566 - 36,566 Trade and other receivables 37,706 - 37,706 (13,850) 23,856 - 23,856 Prepayments - - - 6,400 6,400 - 6,400 Derivative financial instruments - - - - - 1,148 (d) 1,148 Deferred costs 2,705 - 2,705 (2,705) - - - Cash and cash equivalents 18,786 - 18,786 - 18,786 - 18,786 Total current assets 101,809 (6,046) 95,763 (10,155) 85,608 1,148 86,756 TOTAL ASSETS 380,961 (6,046) 374,915 - 374,915 9,944 384,859 EQUITY Share capital 258 - 258 - 258 - 258 Share premium 240,895 - 240,895 - 240,895 - 240,895 Retained earnings 17,582 (6,046) 11,536 - 11,536 (4,564) 6,972 Equity attributable to the Company's equity holders 258,735 (6,046) 252,689 - 252,689 (4,564) 248,125 Minority interest 197 - 197 - 197 (61) (c) 136 TOTAL EQUITY 258,932 (6,046) 252,886 - 252,886 (4,625) (f) 248,261 LIABILITIES Non-currentliabilities Borrowings 10,217 - 10,217 - 10,217 - 10,217 Provisions 17,633 - 17,633 (6,683) 10,950 - 10,950 Deferred income tax liability - - - 6,683 6,683 13,446 (b) 20,129 Total non-current liabilities 27,850 - 27,850 - 27,850 13,446 41,296 Current liabilities Current trade and other payables 94,179 - 94,179 (94,179) - - - Trade and other payables - - - 26,223 26,223 - 26,223 Income tax payable - - - 48 48 - 48 Derivative financial instruments - - - - - - - Borrowings - - - 67,908 67,908 1,123 (d) 69,031 Total current -liabilities 94,179 - 94,179 94,179 1,123 95,302 TOTAL LIABILITIES 122,029 - 122,029 - 122,029 14,569 136,598 TOTAL LIABILITIES & EQUITY 380,961 (6,046) 374,915 - 374,915 9,944 384,859 A reconciliation between the UK GAAP and IFRS Consolidated Balance Sheet at 31December 2006 is presented below: UK GAAP Reclass Novo Subtotal Adjustments Notes IFRS proportional consolidation US$'000 US$000 US$000 US$000 US$000 US$000 ASSETS Non-current assets Property, plant and 220,883 1,862 18,777 241,522 - 241,522equipment Goodwill 61,442 - (4,397) 57,045 8,186 (a) 65,231 Investments accounted for 16,216 - (16,216) - - -using the equity method Other non-current assets - 3,903 - 3,903 - 3,903 Total non-current assets 298,541 5,765 (1,836) 302,470 8,186 310,656 Current assets Inventories 33,885 - 237 34,122 - 34,122 Trade and other 23,125 (8,262) 1,873 16,736 - 16,738receivables Prepayments - 3,922 93 4,015 - 4,015 Deferred costs 1,862 (1,862) - - - - Cash and cash equivalents 31,493 - 83 31,576 - 31,576 Total current assets 90,365 (6,202) 2,286 86,449 - 86,449 TOTAL ASSETS 388,906 (437) 450 388,919 8,186 397,105 EQUITY Share capital 325 - - 325 - 325 Share premium 334,800 - - 334,800 - 334,800 Shares to be issued 510 - - 510 - 510 Other reserves 1,039 - - 1,039 (249) (e) 790 Accumulated loss (83,086) - - (83,086) (6,927) (90,013) Equity attributable to the 253,588 - - 253,588 (7,176) 246,412Company's equity holders Minority interest - - - - - TOTAL EQUITY 253,588 - - 253,588 (7,176) (f) 246,412 LIABILITIES Non-current liabilities Borrowings 46,754 - - 46,754 - 46,754 Provisions 30,347 (16,506) - 13,841 - 13,841 Deferred income tax - 5,886 - 5,886 15,362 (b),(e) 21,248liability Total non-current 77,101 (10,620) - 66,481 15,362 81,843liabilities Current liabilities Current trade and other 58,217 (58,217) - - - -payables Trade and other payables - 20,761 208 20,969 - 20,969 Income tax payable - 216 - 216 - 216 Derivative financial - - - - - -instruments Provisions - 14,347 - 14,347 - 14,347 Borrowings - 33,076 242 33,318 - 33,318 Total current liabilities 58,217 10,183 450 68,850 - 68,850 TOTAL LIABILITIES 135,318 (437) 450 135,331 15,362 150,693 TOTAL LIABILITIES & EQUITY 388,906 - 450 388,919 8,186 397,105 Notes to the Balance Sheet and Equity Reconciliation at 31 December 2005, 30June 2006 and 31 December 2006 UK GAAP The UK GAAP balance sheets are derived from the UK GAAP balance sheets asreported in the prior year financial statements. They have however been amendedto an IFRS presentation and the main adjustments are as follows: • Minority interests have been reclassified to a separate component of equity. Under UK GAAP they were reported in a liability section. • Current trade and other payables represents amounts disclosed as ' Creditors: amounts due within one year' in the UK GAAP balance sheets. • Various other categories have been renamed in accordance with IFRS. UK GAAP adjustments: 30 June 2006: During the second half of 2006 the Group implemented inventory turnover analysisto more accurately estimate the level of inventory obsolescence at itsoperations. The reason for the adoption of this inventory analysis technique wasto increase the overall effectiveness of the Group's inventory management. As a result of this analysis, it was determined that the 30 June 2006 inventoryprovision balance previously reported was understated by US$6.046 million, ofwhich US$5.672 million related to previous periods. The UK GAAP figurespreviously reported have been adjusted for this error by reducing the balance ofinventory, and retained earnings by US$6.046 million, of which US$0.374 millionhas been recorded in the six month period ended 30 June 2006 as an increase tocost of sales. The 31 December 2005 figures were restated in the 31 December 2006 UK GAAPfinancial statements, and as a result no adjustment to these figures ispresented in the above reconciliations. Reclassifications: The adoption of IFRS has resulted in the requirement to reclassify several itemsfrom their existing UK GAAP classifications. The main reclassifications are asfollows: • At transition date US$2.143 million, at 30 June 2006 US$2.705 millionand at 31 December 2006 US$1.862 million of deferred stripping costs have beenreclassified from Deferred costs to the Property, plant & equipment as this isan industry practice to include deferred stripping costs into PP&E. • At transition date US$6.809 million, at 30 June 2006 US$7.450 millionand at 31 December 2006 US$3.644 million of non-current debtors have beenreclassified from Current trade & other receivables to Other non-current assets.This amount relates to the input VAT associated with the capital construction,which will be reimbursed only at the production stage of the related projectswhich are not planned within a one year period. • At transition date US$2.067 million, at 30 June 2006 US$6.400 millionand at 31 December 2006 US$3.922 million of prepaid expenses have beenreclassified from Current trade & other receivables to Prepayments, due to thefact that IFRS requires Prepayments to be presented separately on the face ofthe balance sheet. • At transition date US$6.888 million, at 30 June 2006 US$6.683 millionand at 31 December 2006 US$5.886 million of deferred tax liabilities have beenreclassified from Provisions to Deferred tax liabilities due to the fact thatIFRS requires Deferred tax liabilities to be presented separately on the face ofthe balance sheet. • At transition date US$24.119 million, at 30 June 2006 US$26.584million and at 31 December 2006 US$27.576 million of current liabilities havebeen reclassified from Current liabilities to Trade & other payables. • At transition date US$0.565 million, at 30 June 2006 US$0.048 millionand at 31 December 2006 US$0.216 million of income tax have been reclassifiedfrom Current liabilities to Income tax payable, as IFRS requires income taxliabilities to be presented separately on the face of the balance sheet. • At transition date US$77.527 million, at 30 June 2006 US$66.555million and at 31 December 2006 US$30.740 million of loans have beenreclassified from Current liabilities to Borrowings, due to the fact that IFRSrequires borrowings to be presented separately on the face of the balance sheet. • At transition date US$2.399 million, at 30 June 2006 US$1.353 millionand at 31 December 2006 US$2.579 million of finance leases have beenreclassified from Trade & other payables to Financial liabilities. Finance leaseliabilities have been moved to a separate line on the balance sheet. • At 31 December 2006 US$10.620 million of provisions have beenreclassified from Non-current Provisions to Current Provisions. Legal and othertaxes provisions have been reclassified to current provisions. • At 31 December 2006 US$3.608 million of Royalty and US$0.119 millionof non-profit taxes provisions have been reclassified from current Trade & otherpayables to Current Provisions. Novoshirokinskoye ("Novo") proportional consolidation Under UK GAAP, the Group's investment in the Novoshirokinskoye Joint Venture ("the JV") was treated as a joint venture and was accounted for using the grossequity method, with the Group's share of the JV's assets and liabilities beingrecorded on the face of the balance sheet under "Share of gross assets" and "Share of gross liabilities". The remaining balance of the negative goodwill wasincluded as a part of the share of gross assets. Under IAS 31 "Interests injoint ventures", the investment is accounted for using the proportionalconsolidation method, with the Group's share of assets and liabilities of the JVshown in each individual category of asset and liability on the face of thebalance sheet. Adjustments a) Goodwill Under IFRS 3 "Business Combinations", negative goodwill can no longer berecognised on the Balance sheet. Therefore, negative goodwill which had arisenon the Novo acquisition in the amount of US$8.796 million was written-off toRetained earnings on transition. b) Deferred taxation Deferred tax liabilities arising from fair value adjustments made in priorbusiness combinations have been recognised on transition to IFRS. Suchliabilities were specifically excluded from recognition under UK GAAP. Thesedeferred tax liabilities will be realized as the carrying values of the assetsare reduced through depreciation, impairment or disposal. In addition,additional deferred tax liabilities have been recognised as a result of theimpact of the appreciation of the rouble against the US$, and the impact thishas on the deferred tax calculations, where the tax values of the assets andliabilities are maintained in roubles. c) Minority Interest This adjustment primarily represents the minority share of the increaseddeferred tax liability at Novo. d) Hedge transaction Under UK GAAP, hedge accounting was applied to the currency forward contracts onthe rouble-denominated bonds whereby the bonds were translated at the forwardcontract rates at the balance sheet date. Under IFRS, these forward exchange contracts do not quality for hedge accountingand they are accounted for as derivative financial instruments where they arecarried at fair value based on the spot exchange rate at each period end, withchanges in the fair value taken to the income statement. The rouble denominated bond is translated at the spot exchange rate at the endof each period. e) Additional goodwill arising on the Barrick transaction As at 31 December 2006, an additional deferred tax liability of US$4.038 millionhas been recognised on adoption of IFRS, relating to the fair value upliftsarising on the Barrick transaction. Of the adjustment, US$0.249 million wasrecognised directly in equity, as it related to a revaluation of the Group'sexisting 50% interest of the Taseevskoye mine. As this transaction was accounted for as a business combination in accordancewith IFRS 3, the impact of the recognition of the additional deferred taxliability on adoption of IFRS, is to increase goodwill by US$3.789 million. f) Equity reconciliation A reconciliation of total equity under UK GAAP to total equity under IFRS isoutlined in the below table, which illustrates the net impact on equity of eachof the major adjustments: US$000 Notes As at 31 As at 30 As at 31 December June 2006 December 2005 2006 UK GAAP equity 248,154 258,932 253,588 UK GAAP adjustment - (6,046) - Adjusted UK GAAP equity 248,154 252,886 253,588 IFRS adjustments: Negative goodwill (a) 8,796 8,796 8,796 Deferred taxation (b) (14,413) (13,446) (12,038) Hedge transaction (d) (388) 25 - Deferred tax on Barrick transaction recognised directly in (e) - - (249)equity Gain on Novoshirokinskoye shares disposal (iv) - - (3,685) IFRS equity 242,149 248,261 246,412 Income statement reconciliation A reconciliation between the UK GAAP and IFRS income statement for the periodended 30 June 2006 is provided below. UK UK GAAP Adjusted GAAP Adjustments UK GAAP Adjustments Notes IFRS US$000 US$000 US$000 US$000 US$000 Continuing operations: Revenue 53,815 - 53,815 - 53,815 Cost of sales (40,952) (374) (41,326) - (41,326) Gross profit 12,863 (374) 12,489 - 12,489 Administrative expenses (8,670) - (8,670) - (8,670) Other operating income - - - - - Other operating expenses - - - - - Loss on asset disposal (329) - (329) - (329) - Operating profit 3,864 (374) 3,490 - 3,490 Foreign exchange gain 2,987 - 2,987 413 (iii) 3,400 Finance income 383 - 383 - 383 Finance costs (3,010) - (3,010) - (3,010) Profit/(loss) before income 4,224 (374) 3,850 413 - 4,263tax Income tax charge (4,425) - (4,425) 967 (i) (3,458) Profit/(loss) for the year (201) (374) (575) 1,380 805 Profit/(loss) isattributable to: Equity holders of the (116) (374) (490) 1,380 890Company Minority interest (85) - (85) - (85) (201) (374) (575) 1,380 805 Income statement reconciliation A reconciliation between the UK GAAP and IFRS income statement for the yearended 31 December 2006 is provided below. UK GAAP UK GAAP Adjusted Novo Sub Adjustment Notes IFRS Adjust UK GAAP proportional ments consolidation total US$000 US$000 US$000 US$000 US$000 US$000 US$000 Continuing operations: Revenue 102,365 - 102,365 - 102,365 - 102,365 Cost of sales (97,155) - (97,155) (7) (97,162) - (97,162) Asset impairment following fire (79,274) - (79,274) - (79,274) - (79,274) Gross loss (74,064) - (74,064) (7) (74,071) - (74,071) Administrative expenses (21,903) - (21,903) (10) (21,913) 129 (21,784) Costs associated with the (2,373) - (2,373) - (2,373) - (2,373)fire Share of operating loss of (666) - (666) 666 - - -Joint Venture Other operating income - - - - - - - Other operating expenses - - - - - - - Loss on asset disposal (329) - (329) - (329) - (329) Operating loss (99,335) - (99,335) 649 (98,686) 129 (98,557) Gain on the disposal of 50% 17,988 1,767 19,755 - 19,755 (3,685) (iv) 16,070of Novoshirokinskoye Foreign exchange gain 4,199 - 4,199 (596) 3,603 391 (iii) 3,994 Finance income 736 - 736 - 736 - 736 Finance costs (6,790) - (6,790) (53) (6,843) - (6,843) Profit/(loss) before (83,202) 1,767 (81,435) - (81,435) (3,165) (84,600)income tax Income tax expense (13,243) - (13,243) - (13,243) 2,182 (i) (11,061) Profit/(loss) for the year (96,445) 1,767 (94,678) - (94,678) (983) (95,661) Profit/(loss) isattributable to: Equity holders of the (96,445) 1,767 (94,678) - (94,678) (983) (95,661)Company Minority interest - (1,767) (1,767) - (1,767) - (1,767) (96,445) - (96,445) - (96,445) (983) (97,428) - Notes to the Reconciliation of Income statement for half a year ended 30 June2006 and the full Year ended 31 December 2006 The UK GAAP amounts are based on the UK GAAP profit and loss account presentedin the format of an IFRS income statement. UK GAAP adjustments 30 June 2006: As discussed in relation to the balance sheet reconciliations, during the secondhalf of 2006 the Group revised their approach to inventory provisioning. Theimpact of this revision on the 30 June 2006 income statement was to increasecost of sales by US$0.374 million. 31 December 2006: The gain recognised on disposal of Novo under UK GAAP was incorrectlycalculated. This was due to the fact that no share of the US$39m financialassistance provided prior to the sale of Novo to Kazzinc by Stanmix InvestmentLimited, Highland's wholly owned Cyprus registered subsidiary, had beenattributed to the 3.4% minority shareholders of Novo. This error has beencorrected in the above reconciliation, by increasing Minority Interest, andincreasing the gain on the disposal of Novo by US$1.767 million. Novo proportionate consolidation Under UK GAAP, the Group's share of the results of the Novo joint venture isrecorded in a single line in the Profit & Loss Statement 'Share of operatingprofit of Joint Venture'. Under IAS 31 'Interest in Joint Ventures', the JV isaccounted for as a joint venture entity and proportionately consolidated, withthe Group's share of the JV's results included in each line in the IncomeStatement. Adjustments i) Deferred taxation As a result of the adoption of IAS 12, the deferred tax charge was decreased byUS$0.967 million for the period ended 30 June 2006, and by US$2.182 million forthe year ended 31 December 2006. ii) Minority interest The decrease in the minority interest represents the minority's share in theincreased deferred income tax charge in Novoshirokinskoye. iii) Hedge transaction The application of mark-to-market accounting to the rouble denominated bonds andforward contracts resulted in the recognition of US$0.413 million gain in thesix months to 30 June 2006 and US$0.391 million gain for the year ended 31December 2006. These amounts represent the net gain arising on the change inthe fair values of both the rouble-denominated bond, and the forward exchangecontracts, resulting from the appreciation of the rouble. iv) Gain on Novoshirokinskoye shares disposal As a result of the recognition of additional deferred tax liabilities and thewrite off of negative goodwill on adoption of IFRS, the net assets of Novo atthe date of disposal were increased by US$7.370 million. Accordingly, the gainon the disposal of 50% of the Group's interest in Novo has decreased by US$3.685million as at 31 December 2006 upon adoption of IFRSs. Cash Flow Statement The presentation of certain items in the cash flow statement prepared under IAS7 "Cash Flow Statements" differs to the previous presentation under UK GAAP. Under IFRS, cash flows are segregated into three categories: operating,investing and financing. This differs from UK GAAP which requires additional subcategories. -------------------------- (1) The purchase of new equipment, the refurbishment of older equipment and thetransfer of Darasun equipment to MNV. (2) Resin in Leach This information is provided by RNS The company news service from the London Stock Exchange
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