(HGM) Highland Gold Mining

TRADING UPDATE FOR THE SECOND HALF OF 2011

30 January 2012 - Highland Gold Mining Limited ("Highland Gold", or the "Company") announces its trading update for the half year ended 31 December 2011. 

HIGHLIGHTS

·      Group wide production for the year to 31 December 2011 was 184,102 oz of gold and gold equivalents from Mnogovershinnoye (MNV), Novoshirokinskoye (Novo) (48.3%) and Belaya Gora 

·      Ownership in Novo increased to 96.6% following positive conclusion of transaction with Kazzinc

·      Construction of the second phase stand-alone processing facility at Belaya Gora commenced following approval by State authorities

·      JORC compliant audit increased stated MNV proven and probable reserves by 190% 

·      Total JORC compliant resource base (stated at 31 December 2010) increased by 1.84 Moz to 9.71 Moz after initial resource audit at Unkurtash project. An additional 1 Moz of resource is expected to be added in Q1 2012 following the conclusion of the ongoing audit at the 3^rd prospect (Sarytube)

·      Lyubov project prefeasibility study submitted to Russian regulatory authorities  

·      Positive exploration drilling results improve the resource potential at Blagodatnoye  

·      An interim dividend payment of 5.0 pence per share made at the end of Q3 2011

·      Group had a cash and cash equivalent position of US$ 127.5 million at 31 December 2011

·      Production for the year to 31 December 2012 (MNV, Novo and Belaya Gora) is forecast to be in the range of 200,000 - 215,000 oz of gold and gold equivalents 

OPERATIONAL REVIEW

Production

Mnogovershinnoye (MNV) - Khabarovsk region, Russia

In H2 2011 a total of 71,938 ounces of gold were produced from the combined open pit and underground operations at MNV. Process plant throughput improved substantially to 629,586 tonnes during the second half although the average ore grade delivered to plant was lower than targeted and resulted in metal production remaining much in-line with that of the first half of the year. As previously noted, open pit waste stripping volumes increased in the second half in an effort to access higher grades and to help offset earlier weather related production delays. Though mined volumes improved substantially, the estimated grades fell short of target. Going forward the focus will remain on open pit waste stripping to access reserve ore blocks with actions also taken to improve open pit mined grade reliability during 2012.

Process plant recoveries improved slightly over that of the first half of the year and can be attributed to process grinding and gravity circuit upgrades that were concluded during the year. New mobile equipment introduced during the year has provided an opportunity to retire several older units from the existing operations which is expected to help maintain productivity levels as well as reduce maintenance costs. Improvements to the previously stated resources and reserves were the result of an independent JORC compliant audit which was concluded mid-year. This saw a 190% improvement to MNV's proven and probable reserves (stated at 31 December 2010).

Novoshirokinskoye (Novo) - Zabaikalsky region, Russia

H2 2011 production resulted in 14,353 oz (48.3%) of gold and gold equivalents being produced at Novo where the operations saw minor improvements in both underground mining as well as ore tonnes processed achieving 220,390 tonnes ore throughput during the second half. Lower grades encountered from development ore and underground stope blocks had a negative impact on the average head grades processed. Underground development metres remained largely in line with that of the first half with full year 2011 development exceeding the previous year by 12%. On 29 December 2011, Highland Gold concluded the acquisition of Kazzinc's 48.3% share of Novo's holding company resulting in Highland consolidating its ownership to 96.6%.

        *calculated approximate Au equivalent

DEVELOPMENT AND EXPLORATION PROJECTS

Belaya Gora - Khabarovsk region, Russia

During the second half of the year select oxide ore continued to be trucked to MNV for toll processing. Efforts in grade control helped to improve delivered ore quality which resulted in 4,755 oz being produced from 30,926 tonnes of ore. The full year production resulted in 61,386 tonnes of ore from Belaya Gora yielding 6,945 oz of gold. In November, the Company received State authorisation for the commencement of the phase two construction of the stand-alone processing facility. The phase 2 project works are now underway with an anticipated commissioning date during Q4 2012. The accumulation of considerable stockpiled ore continues in advance of the stand-alone operations.

Taseevskoye - Zabaikalsky region, Russia

The Company continued to progress with its infill drilling programme introduced earlier in 2011 which is expected to provide the confirmation of ore block characteristics contained in the existing model as well as to provide fully representative samples from across all zones of the ore body that are required for process testwork. Difficult drilling conditions have been encountered which has slowed the drill programme considerably. This will require drilling shortfalls to be carried over into 2012. Only after the drill programme has been successfully concluded will the Company be in a position to finalise all planned test work and mine designs to the level of a definitive feasibility study.

EXPLORATION

Mnogovershinnoye (MNV) - Khabarovsk region, Russia

At MNV, positive results were achieved from a systematic near-mine surface diamond core drilling programme which continues to support the potential of increasing resources for future open-pit exploitation. In 2011 approximately 8,000 metres of drilling were completed at three specific targets including the two kilometre long Quiet (Tikhoye) - Pebble (Valunistoye) zone hosting an in-house estimated resource of 190,000 oz of gold with ore grading between 3.0 - 5.0 g/t. At the north-east flank of Pebble, drilling continued across a previously untested area and returned several near-surface high-grade intersects providing potential to increase the resource model at this prospect. At the Watershed (Vodorazdelnoye) target (immediately east of the Upper open pit) a trenching programme returned initial high-grade gold intersects warranting further drilling to delineate resource potential at depth and along strike. Underground resource conversion diamond core drilling completed 17,857 metres and surpassed the full-year budget by 10%.

For 2012 the near-mine exploration efforts at MNV will include substantial drilling programmes focussing on the Quiet and Watershed targets whose resource potential the Company is committed to fully unlock.

Unkurtash - Kyrgyzstan

At Unkurtash, the Company successfully completed a large exploration programme at three adjoining prospects, - Unkurtash, Sarytube and Karatube, including a total of more than 53,000 metres of reverse circulation drilling, 3,000 metres of diamond core drilling and 1,800 metres of exploration underground development. Following an independent resource audit in H2 at the Unkurtash and Karatube prospects and in support of the previously GKZ-registered C1+C2 reserve at the project, a JORC compliant mineral resource of a total of 1.8 Moz (Measured & Indicated: 1.73 Moz) has been added to the Company's portfolio. This increases the Company's total resource base by 23% to 9.71Moz, as stated in the Company's Annual Report and Accounts 2010. At the Sarytube prospect, a resource audit scheduled for completion in Q1 2012 is expected to yield an additional JORC compliant mineral resource of approximately 1 Moz.

The Company plans to proceed with engineering studies for the development of a conventional open-pit mine and processing plant while continuing significant exploration drilling and underground development throughout 2012 with the objective of substantially enlarging the current mineral resource base both at depth and along strike.

Lyubov - Zabaikalsky region, Russia

At Lyubov, following the completion of a resource conversion drilling programme and other relevant technical requirements earlier in the year, in H2 2011 the Company compiled and submitted to regulatory authorities a prefeasibility study (TEO) for the Evgraf target. Accordingly, at the Evgraf target alone, a C1+C2 category reserve of approximately 0.5 Moz contained in 8.35 million tonnes of ore at an average grade of 1.88 g/t is to be considered for reserve registration by the State Committee on Reserves of the Russian Federation (GKZ). Approval is expected in Q3 2012. A JORC compliant resource audit is anticipated to be completed in H2 2012.

Blagodatnoye - Khabarovsk region, Russia

At Blagodatnoye, the Company completed 8,037 metres of diamond core drilling and 2,000 metres of exploration trenching in 2011. Assay results received to date outline a steeply dipping gold-mineralised zone of 350 metres strike length and 170 metres in width intersected to a depth of 200 metres and support the potential for Blagodatnoye to host a significant near surface resource grading from 1.5 - 2.0 g/t. Preliminary results from metallurgical test work initiated in 2011 have indicated favourable metallurgy and gold recovery levels via conventional processing methods. A soil geochemical survey completed by the Company over an area of 1 km sq surrounding the currently drilled area revealed strong and distinct gold anomalies which warrant further testing.

In 2012 the Company has allocated 5,000 m of drilling and additional geochemical and geophysical surveys which aims to further increase the resource potential at Blagodatnoye.

Belaya Gora Flanks - Khabarovsk region, Russia

The Belaya Gora Flanks license encapsulates the Belaya Gora deposit and represents near-mine exploration potential to increase the open-pit resource base for the Belaya Gora Project. During H2 2011 the Company continued with its trenching and diamond drilling programme at several gold prospects historically known to be located within the license area. For the year a total of 3,055 metres of diamond core drilling and 2,230 metres of exploration trenching were completed. Preliminary assay results from initial drill testing and trenching at the Kolchanka prospect yielded several decametre long intersects grading between 1.2 - 1.9 g/t indicating the potential for an open-pit mineable gold resource which could be used as a satellite feed source for the Belaya Gora project.

Qualified Persons Statement: Mr. Werner Klemens, Head of Exploration at Highland Gold has reviewed and verified the information contained in this release with respect to drilling and resource / reserves matters. Mr. Klemens holds a Ph.D. in Geology from the University of Toronto. He has 14 years experience in mineral exploration and is a fellow of the Geological Association of Canada. A rigorous quality assurance programme complying with international standards is in effect at all exploration projects and includes duplicate sampling, insertion of standards and check assaying with external laboratories. 

HEALTH, SAFETY & ENVIRONMENT

The provision of a safe working environment, management of production risks, training of personnel and improvement of personal responsibility for site safety, remains of paramount importance to the Company. The resultant lost time incident ("LTI") rate (the LTI rate is the number of lost time incidents for every 200,000 man hours worked) was 0.57 in 2011 (0.37 in 2010). During July and November there were no lost time injuries reported Group wide. 1470 employees went through introductory (1 day) safety training, 509 employees attended a safety work performance / production safety course (3-5 days) and 372 employees completed industrial safety certification training courses (7-30 days). To ensure that specific skills in equipment operation were maintained another 50 MNV employees were trained on mobile heavy equipment with 70 MNV employees completing light vehicle driving skills testing.   

Environmental compliance continued to be in good standing with regulatory authorities. In particular, environmental audit procedures for all sites of the Company were implemented during the year. Environmental safety requirement training was provided to 68 employees at MNV, Belaya Gora and Taseevskoye. The Company continued its efforts towards implementation of an accredited environmental management system (ISO 14001 compliant) Group wide with final compliance auditing targeted by YE 2012. To this end 52 employees received internal audit training at MNV and RDM, while an additional 32 MNV employees were provided with environmental risks and assessments training developed by an external environmental consultant.

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