HGM.L Regulatory News (HGM)

21 Sep 2006 07:03

Highland Gold Mining Limited21 September 2006 HIGHLAND GOLD MINING LIMITED INTERIM RESULTS ANNOUNCEMENT FOR THE FIRST HALF OF 2006 London, 21 September 2006 - Highland Gold Mining Limited "Highland Gold" or the"Company" announces its interim results for the first half of the financial yearto 30 June 2006. Financial Summary H1 2006 H1 2005 2005 Restated Restated Financial (US$ millions; UK GAAP)Turnover $53.8 $28.3 $76.0 Cash flow from trading (before w/c) $10.9 $ 0.9 $ 4.8Group Operating Profit/(Loss) $ 4.2 $(1.7) $(4.3)Net loss $(0.2) $(7.2) $(8.4)Loss per share (cents) (0.1) (4.8) (5.5)Capital expenditure $15.4 $24.8 $56.1OperatingGold sold (ounces) 85,567 63,333 162,179MNV - Cash operating cost ($/ounce) $306 $318 $275MNV - Total cash cost ($/ounce) $344 $349 $306 First Half Highlights •Turnaround in operating profit to $4.2m from a loss of $1.7m in H1 2005 •Gold revenues increased by 90.1% over H1 2005 to $53.8 million on sales of 85,567 ounces •Total production of 91,205 ounces of gold - up 43% on H1 2005 (63,749 ounces) •MNV produced 79,444 ounces - 53% up on H1 2005 (51,979 ounces) •Unit costs at MNV were contained despite upward pressure on operating costs •Darasun back in production since the tragic fire - impact on H2 unknown at present time •Strengthening of operating management team continues by employing Russian and expatriate specialists •Development and Exploration Projects all progressed well - scoping study for Taseevskoye due by year-end and bankable feasibility study for Mayskoye in 2007. The Directors, commenting on today's announcement said "that the recent tragedyat our Darasun Mine has marred an otherwise positive period for our Company.Further to the Company's statement of last week the Directors again expresstheir condolences to all the families, friends and colleagues of the victims ofthe disaster. The Board is also grateful to management, employees, the rescueservices and government agencies for their huge effort during the rescueoperation. The Board is satisfied that many of the key strategic decisions made by the newmanagement team have now been instigated and are beginning to have a positiveeffect on the overall business of the group". Highland Gold will hold a conference call at 09.00 UK time on Thursday 21stSeptember Participant Dial In Numbers: International: +44 (0) 1452 587 356 UK National: 0871 871 0047 Conference ID Number: 6988365 The Interim Report to 30 June 2006 will be available on our website from 30September. Managing Director's Statement FINANCIAL REVIEW Gold revenue for the first half of 2006 increased by 90.1% over the same periodin 2005 to $53.8 million on sales of 85,567 ounces. The increase is attributableto stabilised production at MNV, improved recoveries, mill throughput volumesand an increase of $174 per oz in the average realised gold price. MNV accounted for $45.3 million of gold revenue from the sale of 75,594 ouncesat an average price of $599 per ounce while $6.7 million was contributed by theDarasun mine from the sale of 9,973 ounces at an average price of $671 perounce. Sales other than gold for the period were $1.8 million. The Company continued its policy of not hedging the gold price. Costs of sales increased by 61% or $15.6 million of which Darasun contributed$7.3 million and MNV contributed $7.7 million. Operating costs at MNV increased by 33% to $21.1 million in the first half of2006, following an increase in the mill throughput by 31%. Increased volumes andimproved grades helped sustain continuing pressure from inflation and the impactof the strengthening Rouble against the US dollar. Total cash costs were $344per ounce compared to $349 per ounce in the prior period. Darasun operating costs recognised in the income statement amounted to $8.5million whilst in the prior year most expenses were capitalised before Darasunwas put into full commercial production in September 2005. In 2006, Darasunremained unprofitable due to certain mining problems, high fixed costs and lowerthan expected head grades. With total cash costs of $983 per ounce, Darasun'simpact on the consolidated net loss for the 6 months to 30 June 2006 was $4.5million. The administrative costs increased by $4.2 million or by 93%. The increaseincludes the effect of the adoption of FRS20 "Share based payments" in theamount of $1.0 million, the write-off of input VAT considered not recoverable of$0.7 million, and management services costs of $2.0 million capitalised in thefirst half of 2005 as Darasun pre-production expenses. The foreign exchange gain includes the $1.6 million recognised in the incomestatement to reflect the effect of a 6.0% weakening of the Dollar against theRouble and 5.3% weakening of the Dollar against Sterling. These FX effects ariseprincipally on our non-dollar denominated net monetary assets largely relatingto VAT recoverable and Sterling cash balances. Also as a result of hedging ourRouble bond liability through forward contracts, hedge gains were recorded of$1.4 million. The profit tax charge in the amount of $4.4 million consists solely of currenttax accrued at MNV. All Company entities apart from MNV are either developmentprojects or suffered a tax loss during the period. In line with currentaccounting practice, deferred tax assets can only be recognised to the extent ofa deferred tax liability recorded. All entities other than MNV generated netdeferred tax assets totaling $5.6 million, which are not recognised during theperiod. The application of the policy may lead to deferred tax assets previouslywritten off being recognised in the future, especially in the case ofdevelopment and exploration projects. Cash generated from operating activity (before changes in working capital)improved to $10.9 million compared to $0.9 million in the first half of theprior year. Net of changes in working capital, the Company's operatingactivities also improved by $7.1 million to $3.5 million against $3.6 million ofcash used in the first half of 2005. Such improvements relate to the strongperformance of MNV and the favourable gold price. Capital expenditure and investments for the 6 months to 30 June 2006 were $15.4million representing mainly the renewal of equipment and tails dam constructionat MNV, equipment and mining works at Darasun, and at Mayskoye, the continuedconstruction of the camp and the road to Pevek, the port, 100 miles fromMayskoye. CAPITAL EXPENDITURE AND INVESTMENTS(In US$ millions) 6 months ended 6 months ended 12 months ended(UK GAAP) 30 June 2006 30 Jun 2005 31 Dec 2005MNV 1.7 4.9 8.0Darasun 2.3 10.1 17.7Novoshirokinskoye 1.8 5.7 15.0Taseevskoye 2.7* - 0.2Mayskoye 6.3 3.9 15.0Other 0.6 0.2 0.24 Total 15.4 24.8 56.1*Capital expenditure for Taseevskoye is financed on a 50:50 basis with BarrickGold Corporation. In the first half of 2006 the Company received $4.4 million through the issue ofshares following the exercise of share options. At 30 June 2006, the balance outstanding on the Commerzbank facility was $41.0million. Whilst a breach of one of the loan covenants occurred as at 30 June2006, the Company expects to receive a waiver from the Bank. In order to complywith UK GAAP, the US$20.5 million long term portion of the outstanding balancewas reclassified as a short term liability. The net debt of the Group has increased during the period from $47.0 million to$60.3 million. In June 2006 the Company drew down $10 million of $15 million ofnew two year debt from Gazprombank. It repaid $10.2 million of debt in theperiod. Lease liabilities were reduced by $1.5 million together with a decreasein cash balances and short term deposits of $14.8m. OPERATING REVIEW Mnogovershinnoye Mine (MNV) - Khabarovsk Region, Russia The MNV Mine produced a total of 79,444 ounces of gold during the first half of2006 (53% up from 51,979 ounces in the same period of 2005) and above theCompany's 2006 forecast. Underground and open pit development rates, year to date continue to be in linewith expectations. A second new electro-hydraulic drill rig is now operationalin the underground Reindeer zone, and will significantly increase theunderground production drilling capacity. The mill continues to process inexcess of 80,000 tonnes per month of ore. Construction of the centralised workshop and stores has progressed well duringthe year, and is scheduled to be completed by the Q4, 2006. The Company believes that the MNV production range for 2006 of 150,000 to160,000 ounces will be achieved. MNV Operating Statistics: For the first half year ended June 30, Unit 2006 2005Mine developmentWaste stripping Cubic Meters 751,845 640,609Underground development Linear Meters 4,609 4,363MiningOpen pit Tonnes 205,896 156,615 g/tonne 5.90 4.70Underground Tonnes 209,255 180,619 g/tonne 5.90 5.37Total ore mined Tonnes 415,151 337,234 g/tonne 5.90 5.06Ore processed Tonnes 485,561 371, 403 g/tonne 5.60 4.81Including from stockpile Tonnes 70,410 34,169 g/tonne 3.83 2.33Recovery rate % 90.9 90.5Gold recovered Ounces 79,444 51,979Gold sold Ounces 75,594 55,426Gold price received US$/ounce 599 425 Darasun Mine - Chita Region, Russia The tragic fire which started on 7th September 2006 in the Central Shaft atDarasun in which 25 of our workforce lost their lives and another 22 wereinjured has been the major focus of the Board and Management's attention for thelast two weeks. As the Board confirmed in an announcement on 15th September thefamilies of the victims and the injured have been provided with interim paymentsand will continue to be supported by the Company going forwards. The purpose ofthis report however is to focus on the trading period prior to the occurrence ofthe fire. As we reported in our Trading Update in August Gold production for the firsthalf of 2006 was below the Company's plan due to the production shortfalls fromboth the underground and open pit operations. This shortfall was partly made upby processing over 46,193 tonnes of low grade, historical stockpiled material.Mill throughput during the second quarter 2006 improved averaging over 30,700tonnes per month, an improvement of over 53% on the first quarter 2006production results. The anticipated production for the year is now likely to belimited to 18,000 ozs. The South West and Teremky shafts were placed on a care and maintenance basis inAugust. Quotations have been sourced from International and local drillingcontractors for an exploration drilling programme, and are currently underreview. Darasun Operating Statistics: For the first half year ended June 30,Unit 2006 2005Mine development Waste stripping Cubic Meters 541,754 730,072 Underground Linear 2,242 2,125 development MetersMining Open pit Tonnes 47,369 17,425 g/tonne 3.11 6.43 Underground Tonnes 64,523 55,084 g/tonne 6.73 12.37Total ore mined Tonnes 111,892 72,509 g/tonne 5.17 10.94Ore processed Tonnes 158,085 86,700 g/tonne 3.40 5.84Including fromstockpile Tonnes 46,193 14,191 g/tonne 0.90 1.10Recovery rate % 68.1 72.3Gold recovered Ounces 11,761 11,770Gold sold Ounces 9,973 7,907Gold price received US$/ounce 671 437 Since the fire in the Central Shaft had been brought under control andeventually extinguished on 14th September we have had to reassess the mining andproduction processes of the whole mine. The Talatui open pit resumed work on13th September and the mill restarted operations the next day. The Board hasagreed that the management will ensure that appropriate manning levels atDarasun should be maintained in order that the necessary refurbishment work canbe undertaken. At this early stage we are unable to report on the impact of thefire on the second half of the year. Production for the remainder of 2006 and2007 will focus on the optimisation of production from the Talatui open pit andthe processing of historical stockpiles. Taseevskoye Development Project - Chita Region, Russia The initial exploration drilling programme has proceeded well over the pastthree months. In excess of 23,000 metres of the planned 28,500 metres have beencompleted. This initial programme is scheduled for completion by the end ofSeptember. Assay results from the first 24 of the planned 92 holes have beenreceived and are in the process of being interpreted. First indications of theaverage gold grade from the 24 holes are encouraging. Once all the results from this drilling programme have been obtained, thegeological resource model will be updated and a detailed scoping study will beconducted by year end before embarking on the planned second explorationprogramme with our joint venture partner, Barrick Gold. An International firm of Consultants has been commissioned to commence therequired Environmental Impact Assessment and Re-settlement Action Plan. Mayskoye Development Project - Chukotka Region, Russia A total of 28 diamond drill holes, intended to upgrade Inferred Resources toIndicated Resources, have been completed. To date assay results from 9 of theseholes have been received. The gold values in these 9 holes range from 3.2 g/tto 33.7 g/t. In general, these initial values fall well within the gradevariability range expected from the Mayskoye Orebodies. The Metallurgical test work being carried out by Lakefield Laboratories (SouthAfrica) has progressed well. The bulk flotation tests on a composite samplegave gold recoveries to flotation concentrates some 2% to 3% higher thanexpected. Variability tests carried out on a number of sulphide ore samples,taken from different positions from different orebodies, consistently producedthe same positive gold recoveries. The gold grade in samples tested range fromless than 5g/t to more than 30 g/t. It is also pleasing to note that these goldrecoveries were obtained at slightly coarser grinds than was previouslyexpected. A detailed scoping study has been completed on supplying grid electric power toMayskoye. This study is being evaluated and being compared to the alternativeoption of installing diesel generating plant. Important progress has been madein the construction of surface facilities and the all-weather road. Negotiations are well advanced with an International firm of Mining Consultantsto audit and complete a Bankable Feasibility Study for Mayskoye. The programmesuggested by the Consultants is to complete the audit and Bankable FeasibilityStudy next year. Novoshirokinskoye Development Project - Chita Region, Russia As previously announced in the August Trading Update we reviewed several optionsfor the future development of the Novoshirokinskoye polymetallic deposit andconcluded that a joint venture with a strategic partner would be the wayforward. We are continuing to develop this idea, which would bring synergies tothe Project. Exploration joint ventures with Barrick Gold Sovinoye - Chukotka Region, Russia Metal Resources (HGML & BG geologists' estimate) P1 P2 P3Gold (oz) 1 000 000 800 000 3 000 000 - 5 000 000 During the first half of 2006, a camp has been established at Sovinoye.Trenching and drilling are underway with the trenching due to be finished thismonth and the first phase of drilling (3,000 metres) due to be completed by theend 1Q, 2007. Lubov - Chita Region, Russia Metal Resources (HGML & BG geologists' estimate) C1+C2 P1Gold (oz) 450,000 2,000,000 Accommodation and site facilities have been established at Lubov during thefirst half of 2006 and magnetic surveys have been completed. Over 2,000 metresof trenches have been completed with over 1,000 samples taken. A further 10,000mof additional drilling and trenching are scheduled for 2007. Belaya Gora - Khabarovsk Region, Russia Metal Resources (HGML & BG geologists' estimate) C2 P1Gold (oz) 466,000 2,000,000 Construction of the accommodation and site facilities was started in June 2006.Topographical mapping has been completed and drilling pads established. Drillingand trenching has started and is on going. Two stages of drilling are plannedfrom now through to 2007, the first stage involving 5,000 metres of drilling andif the results are positive further 10,000 metres. Management Changes As noted in our August Trading Update, the Company has continued to strengthenits management team. Mr. Sergei Lysakov was appointed the new Managing Director of MNV. He graduatedfrom the Technical Institute of Irkutsk as a surveyor. Prior to joining ZAOMnogovershinnoye in 1998 he worked for a number of Russian mining companies anduntil March 2006 was the Chief Surveyor at MNV. Mr. Paul Clarke joined us as a Group Technical Director. He has a bachelordegree in mining engineering from Cardiff University, Wales, with 32-yearsworldwide mining experience. He held the position of mine manager at Kumtor minein Kyrgyzstan and was also instrumental in the design and construction of themine. Mr. Alexander Arisanov joined us as Group Ore Reserve Manager. He has a master'sdegree in geology and has been the Chief Geologist at Chelopech Mining EAD - acopper-gold operation situated in central Bulgaria. Mr. Vladimir Milekhin joined us as Chief Geologist at Darasun. Prior to joiningDarasun he worked for more then 10 years as geologist and then as ChiefGeologist with Omolon Gold Mining Company at its Kubaka operation in the Magadanregion of Russia. Dominic Palmer-Tomkinson joined the London office as Head of Investor Relationson secondment from Smith's Corporate Advisory where he has spent the last threeyears. Prior to Smith's, he spent 3 years in the Equity Sales Department atCazenove. We have also managed to attract Russian specialists who will contribute to theoverall increase in the skills level within the Group in Russia. Dividend As the Company has extended its operations to include a number of explorationprojects and continued to invest in the development of existing assets, theBoard have decided not to pay an interim dividend for the period to 30 June 2006. HIGHLAND GOLD MINING LIMITED Consolidated Profit and Loss Account Notes Six months Six months 12 months ended ended 30 ended 30 June 31 December 2005 June 2006 2005 Restated Restated US$000 US$000 US$000 ------------------------- ------ ----------- ---------- ----------Turnover 2 53,815 28,251 75,955Cost of sales (40,952) (25,395) (66,605)------------------------- ------ ----------- ---------- ----------GROSS PROFIT 12,863 2,856 9,350Administrativecosts (8,670) (4,502) (13,670)------------------------- ------ ----------- ---------- ----------GROUPOPERATINGPROFIT/ (LOSS) 4,193 (1,646) (4,320)Bank interestreceivable 383 634 1,849Interestpayable andsimilarcharges (3,010) (4,052) (6,804)Loss on assetdisposals (329) - -Foreignexchangegains/(losses) 2,987 (671) (1,355)------------------------- ------ ----------- ---------- ----------PROFIT ONORDINARYACTIVITIESBEFORETAXATION 4,224 (5,735) (10,630)Tax on profiton ordinaryactivities (4,425) (1,439) 2,233------------------------- ------ ----------- ---------- ----------LOSS FOR THEFINANCIALPERIOD (201) (7,174) (8,397)------------------------- ------ ----------- ---------- ---------- Basic earningsper share(US$) (0.001) (0.048) (0.055)Dilutedearnings pershare (US$) (0.001) (0.048) (0.055)------------------------- ------ ----------- ---------- ---------- Diluted loss per ordinary share has not been disclosed as inclusion ofunexercised warrants would be anti-dilutive. Consolidated Statement of Total Recognised Gains and Losses ----------------------- ---------- --------- --------- 6 months ended 6 months ended 12 months ended 30 June 2006 30 June 2005 31 December 2005 US$000 Restated Restated US$000 US$000----------------------- ---------- --------- ---------Loss for the periodattributable to members ofthe parent company andtotal recognized gains andlosses relating to theperiod (201) (7,174) (8,397)----------------------- ---------- --------- ---------Prior year adjustment (asexplained in Note 1) (495)----------------------- ----------TOTAL GAINS AND LOSSESRECOGNISED SINCE LASTANNUAL REPORT (696)----------------------- ---------- Consolidated Balance Sheet ------------------------------ ------ --------- ---------- At At 30 June 2006 US$000 31 December 2005 Restated US$000------------------------------ ------ --------- ----------FIXED ASSETSIntangible assets - negativegoodwill (8,796) (8,796)Tangible assets 287,948 277,174------------------------------ ------ --------- ---------- 279,152 268,378CURRENT ASSETSStocks 42,612 41,930Debtors 37,706 28,198Deferred costs 2,705 2,143Cash at bank and in hand 5 18,786 33,570------------------------------ ------ --------- ---------- 101,809 105,841 CREDITORS: amounts falling duewithin one year (94,179) (102,211)------------------------------ ------ --------- ----------NET CURRENT ASSETS / 7,630 3,630(LIABILITIES) TOTAL ASSETS LESS CURRENTLIABILITIES 286,782 272,008 CREDITORS: amounts falling dueafter more than one year (10,217) (610)PROVISIONS FOR LIABILITIES ANDCHARGES (17,633) (17,572)MINORITY INTERESTS - EQUITY (197) (282)------------------------------ ------ --------- ---------- 258,735 253,544------------------------------ ------ --------- ----------CAPITAL AND RESERVESCalled up share capital 258 255Share premium 240,895 236,483Profit and loss account 17,582 16,806------------------------------ ------ --------- ---------- 258,735 253,544------------------------------ ------ --------- ---------- Approved by the Board on 20 September 2006 James Cross Henry HorneNon-Executive Chairman Managing Director Consolidated Cash Flow Statement Notes Six months Six months 12 months ended 30 June ended 30 June ended 31 2006 US$000 2005 US$000 December 2005 US$000---------------------------- ----- ---------- --------- ----------CASH GENERATEDFROM OPERATINGACTIVITIES 10,873 896 4,787---------------------------- ----- ---------- --------- ----------Changes inworkingcapital 4 (7,376) (4,457) 2,964---------------------------- ----- ---------- --------- ----------NET CASHINFLOW/(OUTFLOW) FROMOPERATINGACTIVITIES 4 3,497 (3,561) 7,751---------------------------- ----- ---------- --------- ----------RETURNS ON INVESTMENT ANDSERVICING OF FINANCEInterestreceived 383 634 1,849Interest paidon bank loans (3,649) (2,032) (4,792)Loanarrangementfees - - (1,960)Interest paidon financeleases (118) (243) (452)---------------------------- ----- ---------- --------- ----------NET CASHOUTFLOW FROMRETURNS ONINVESTMENT ANDSERVICING OFFINANCE (3,384) (1,641) (5,355)---------------------------- ----- ---------- --------- ---------- TAXATIONRussianprofits taxpaid (5,343) (1,484) (2,521)---------------------------- ----- ---------- --------- ----------CAPITAL EXPENDITURE ANDFINANCIAL INVESTMENTPayments toacquiretangible fixedassets (15,382) (24,800) (56,143)Taseevskoyefinancing 2,640---------------------------- ----- ---------- --------- ----------NET CASHOUTFLOW ONCAPITALEXPENDITUREAND FINANCIALINVESTMENT (12,742) (24,800) (56,143)---------------------------- ----- ---------- --------- ----------ACQUISITIONS AND DISPOSALSCash receivedfor partialdisposal ofTaseevskoye - 13,340 13,340Purchase ofsubsidiaryundertakings - (466) (11,500)Acquisition ofLicensesrights (2,015)---------------------------- ----- ---------- --------- ----------NET CASHOUTFLOW ONACQUISITIONSAND DISPOSALS - 12,874 (175)---------------------------- ----- ---------- --------- ---------- Equitydividends paid - (1,473) (1,473)---------------------------- ----- ---------- --------- ----------NET CASHOUTFLOW BEFOREMANAGEMENT OFLIQUIDRESOURCES ANDFINANCING (17,972) (20,085) (57,916)---------------------------- ----- ---------- --------- ----------Decrease/(increase) inshort-termdeposits 9,455 - (1,464)---------------------------- ----- ---------- --------- ----------FINANCINGIssue ofordinary sharecapital 4,415 50,094 50,562Share issuecosts - (1,687) (1,687)Receipt oflong termloans 10,000 65,153 65,849Loanarrangementfee - (1,912) -Repayment ofborrowings (10,241) (50,662) (58,624)Repayment ofcapitalelement offinance leases (1,540) (2,789) (4,195)---------------------------- ----- ---------- --------- ----------CASH INFLOWFROM FINANCING 2,634 58,197 51,905---------------------------- ----- ---------- --------- ----------INCREASE/(DECREASE) IN CASH (5,883) 38,112 (7,475)---------------------------- ----- ---------- --------- ---------- RECONCILIATION OF NET CASHFLOW TO MOVEMENT IN NETDEBTIncrease/(decrease) in cash (5,883) 38,112 (7,475)Repayment ofcapitalelement offinance leasesand lease backtransactions 1,540 2,789 4,195Cash flow fromshort-termdeposits (9,455) - 1,464Movements inloans 241 (12,579) (7,225)---------------------------- ----- ---------- --------- ----------MOVEMENTS INNET DEBTARISING FROMCASH FLOWS (13,557) 28,322 (9,041)---------------------------- ----- ---------- --------- ---------- Other movementin long termpayables - (864) 199New financeleases andother (100) (414) (618)Exchangedifferences 292 - 188---------------------------- ----- ---------- --------- ----------MOVEMENT INNET DEBT (13,365) 27,044 (9,272)---------------------------- ----- ---------- --------- ----------NET DEBT ATBEGINNING OFPERIOD 5 (46,966) (37,694) (37,694)---------------------------- ----- ---------- --------- ----------NET DEBT ATEND OF PERIOD 5 (60,331) (10,650) (46,966)---------------------------- ----- ---------- --------- ---------- Notes to the Group Financial Statements 1. Accounting policies Basis of preparationThe Interim Financial Statements have been prepared in accordance with theaccounting policies set out in Highland Gold Mining Limited's FinancialStatements for the year to 31 December 2005 with the exception of the newstandard adopted which is set out below. Going ConcernThe continued operational issues at Darasun have resulted in higher thananticipated operating losses and capital expenditure. As a result, the Group'sability to fund its current development plans and remain as a going concernduring the next 12 months is dependent upon obtaining sufficient additionalfunding. As at the date of this report the Group is in negotiations, which hadbeen delayed as a result of the Darasun fire, with several parties to obtain thenecessary funding, and the Directors are confident of their success in securingthis funding. Adoption of a new accounting standardStarting from 1 of January 2006 the Group has adopted FRS 20 "Share basedpayments". According to the adopted standard all equity instruments are valuedat their fair value. Previously equity based instruments were valued at historicprices at the reporting date. The fair value of the equity instruments have beendetermined using the Black-Scholes-Merton option pricing model. The standard hasbeen adopted retrospectively leading to the following changes in thecomparatives: • Current liabilities at 31 December 2005 increased by US$495 • Administrative costs for the 6 months ended 30 June 2005 and for 12 months ended 31 December 2005 increased by US$222 and by US$1,223 respectively Russian political and economic risks Whilst there have been improvements in the Russian economic situation, such asan increase in gross domestic product and a reduced rate of inflation, Russiacontinues economic reforms and development of its legal, tax and regulatoryframeworks as required by a market economy. The future stability of the Russianeconomy is largely dependent upon these reforms and developments and theeffectiveness of economic, financial and monetary measures undertaken by thegovernment. The principal exchange rates against US dollars were:-------------------------- ---------- ----------- ----------- 6 months ended 6 months ended 12 months ended 30 June 2006 30 June 2005 31 December 2005-------------------------- ---------- ----------- -----------AverageRUR 27.62 27.98 28.34GBP 0.559 0.534 0.550-------------------------- ---------- ----------- -----------ClosingRUR 27.08 28.67 28.78GBP 0.550 0.554 0.581-------------------------- ---------- ----------- ----------- 2. Turnover and segmental analysis The Group operates in one principal area of activity, that of exploration andproduction of gold. Starting from April 2005 the Group made export sales toWestern Europe countries using agent agreements with Russian banks. There wereno discontinued operations during the period.------------------------------- --------- --------- --------- 6 months 6 months 12 months ended ended ended 30 June 2006 30 June 2005 31 December 2005------------------------------- --------- --------- ---------Turnover:Domestic sales 31,345 19,853 48,928Export sales 22,470 8,398 27,027------------------------------- --------- --------- --------- 53,815 28,251 75,955------------------------------- --------- --------- --------- 3. Ordinary dividends on equity shares The Board has made a decision not to declare any interim dividends for 6 months2006 (30 June 2005: Nil). 4. Reconciliation of operating profit to net cash inflow from operatingactivities--------------------------- ----------- ---------- ---------- 6 months 6 months ended 30 June 12 months ended 2005 Restated ended 30 June US$000 31 December 2005 2006 Restated US$000 US$000--------------------------- ----------- ---------- ----------Operatingprofit 4,193 (1,646) (4,320)Depreciation,depletion andamortisation 5,797 3,075 8,639Other non-cash 883 (533) 468--------------------------- ----------- ---------- ----------Cash generatedfrom trading 10,873 896 4,787--------------------------- ----------- ---------- ----------Changes in working capital: (Increase)/decrease indebtors (6,112) (3,401) 7,098(Increase)/decrease in stock 459 717 (1,862)(Increase)/decrease indeferred costs (562) 247 (617)Increase/(decrease) increditors 682 (1,520) 1,469(Increase)/decrease in VAT (701) (1,357) (4,101)Increase/(decrease) inprovisions (1,142) 857 977--------------------------- ----------- ---------- ----------Total changesin workingcapital (7,376) (4,457) 2,964--------------------------- ----------- ---------- ----------Net cashinflow/(outflow) fromoperatingactivities 3,497 (3,561) 7,751--------------------------- ----------- ---------- ---------- 5. Reconciliation of net debt As at 31 Cash Exchange Other non As at December flow difference cash 30 June 2005 2006 US$000 US$000 US$000 US$0000 US$000 Cash in bankand in hand 17,106 (5,883) 554 - 11,776Short-termdeposits 16,464 (9,455) - - 7,009Capitalelement offinance leases (3,010) 1,540 - (100) (1,570)Loans andother longterm creditors (77,526) 241 (262) - (77,547)-------------------------- -------- ------- ------- ------- -------- (46,966) (13,557) 292 (100) (60,331)-------------------------- -------- ------- ------- ------- -------- 6. Reconciliation of shareholders' funds ---------------------------- ------------ ------------ 6 months ended 12 months ended 30 June 2006 31 December 2005 Restated US$000 US$000---------------------------- ------------ ------------Shareholders' funds at thebeginning of the period, asoriginally reported 254,039 211,409Prior year adjustment (495) (47)---------------------------- ------------ ------------Shareholders' funds at thebeginning of the period, asrestated 253,544 211,362Share issues during the period 4,415 50,562Share issue costs - (761)Profit/(loss) retained for theperiod 776 (7,619)---------------------------- ------------ ------------Shareholders' funds at end ofperiod 258,735 253,544---------------------------- ------------ ------------As a result of exercise of share options the Company has issued new ordinaryshares in amounts of 1,200,000 at a price of 211p per share and 500,000 at aprice of 0.1p per share on 21st of February 2006 and 3rd of May 2006respectively. 7. Employee share option plan The Group runs an Employee share option scheme approved by the Board in July2005. The scheme is managed by the Remuneration Committee. Currently there are 26 participants of the scheme representing board members,directors and executive management of the Group. During the 6 months to 30 June2006 the Group issued new share options for 1 million of ordinary shares at aprice of 302p per share and options for 1.7 million shares have been exercised.The options have been valued at fair value using Black-Scholes-Merton optionpricing Model. For the years 2006-2010 the fair values of the share options varyfrom 47.5p per option exercisable in 2006 to 142.2p per option exercisable in2010. 8. Post Balance Sheet events Breach of loan covenants As at the 30 June 2006, the Group was in breach of one of the loan covenantsattached to its long-term loan facility, and accordingly the US$ 20.5 millionlong-term portion of the facility was reclassified to "creditors: amountsfalling due within one year". On 18 September 2006, a 6 months waiver in respectof the breach was obtained for the relevant period ended 30 June 2006. Gazprombank loan On 7 July 2006 the Group drew down the remaining US$5 million under the 2 yearUS$15 million 8% loan agreement with Gazprombank. Darasun mine fire On 7 September 2006 a fire occurred in the underground part of the Central shaftat the Darasun mining complex. The exact cause of the fire is yet to bedetermined. Management of the Group is currently uncertain on the amount ofdamage caused by the fire as necessary valuations have not been completed at thedate of issuance of these financial statements. Unaudited Historic Summary----------------------- -------- -------- -------- -------- -------- -------- -------- 6 months 6 months 6 months 6 months 6 months 6 months 6 months ended ended ended ended ended ended ended 30 June 31 December 30 June 31 December 30 June 31 December 30 June 2006 2005 2005 2004 2004 2003 2003 US$000 US$000 US$000 US$000 US$000 US$000 US$000 ----------------------- -------- -------- -------- -------- -------- -------- -------- Balance Sheet----------------------- -------- -------- -------- -------- -------- -------- -------- Non-currentassets 279,152 268,378 238,861 215,418 154,977 137,943 60,618Current assets 101,809 105,841 160,097 121,599 76,691 58,532 44,463----------------------- -------- -------- -------- -------- -------- -------- --------Total assets 380,961 374,219 398,958 337,017 231,668 196,475 105,081----------------------- -------- -------- -------- -------- -------- -------- -------- Non-currentliabilities 27,850 18,182 46,369 42,812 42,027 42,956 19,730Currentliabilities 94,179 102,211 100,156 82,505 68,572 74,719 15,587Minorityinterests 197 282 338 338 1,024 1,445 347Equity 258,735 253,544 252,095 211,362 120,045 77,355 69,417----------------------- -------- -------- -------- -------- -------- -------- --------Totalliabilitiesand equity 380,961 374,219 398,958 337,017 231,668 196,475 105,081----------------------- -------- -------- -------- -------- -------- -------- -------- Production(Oz) 91,205 101,737 63,749 102,910 96,986 103,866 90,133----------------------- -------- -------- -------- -------- -------- -------- -------- Profit and LossAccount ----------------------- -------- -------- -------- -------- -------- -------- -------- Sales 53,815 47,704 28,251 43,903 38,159 40,199 31,379Operatingprofit 4,193 (2,674) (1,646) 7,918 10,819 15,651 12,241Othergains/(losses)includinginterest net 31 (2,221) (4,089) (2,042) (2,513) (2,757) (503)Profit (loss)beforetaxation 4,224 (4,895) (5,735) 5,876 8,306 12,894 11,738Tax (4,425) 3,672 (1,439) (7,400) (1,818) (3,337) (3,246)Profit (loss)after taxation (201) (1,223) (7,174) (1,524) 6,488 9,557 8,492Dividends - - (1,473) (1,199) (1,798) (1,658) (1,105)----------------------- -------- -------- -------- -------- -------- -------- --------Retainedearnings (201) (1,223) (8,647) (2,723) 4,690 7,899 7,387 Statistical----------------------- -------- -------- -------- -------- -------- -------- -------- Shares issued,average 159,929,655 150,618,363 150,618,363 122,528,340 118,149,741 110,525,821 110,525821EPS (0.001) (0.008) (0.046) (0.012) 0.055 0.086 0.077Dividends pershare - - 0.01 0.01 0.02 0.02 0.01Dividend cover - - (4.9) (1.2) 3.6 5.8 7.7Interest cover 1.39 (0.97) (0.41) 2.70 5.60 6.93 10.94----------------------- -------- -------- -------- -------- -------- -------- -------- For further information please contact: Enquiries: London: +44 (0) 207 851 64 00 Moscow: + 7 (495) 777 55 29 E-mail: info@highlandgold.com Henry Horne, Managing Director Dmitry Yakushkin, Director of Communications Dominic Palmer-Tomkinson, Head of Investor Relations Or, WMC Communications, Alex Glover on +44 20 7930 9030 This information is provided by RNS The company news service from the London Stock Exchange