10 April 2017

Full Year 2016 Audited Results

Highland Gold Mining Limited (“the “Company”), the AIM-quoted gold producer, presents its final audited results for the year ended 31 December 2016.

FINANCIAL HIGHLIGHTS

US$000 (unless stated) 2016 2015
Production (gold and gold eq. oz) 261,159 262,485
Group all-in sustaining costs (US$/oz) 652 640
Total Group cash costs (US$/oz) 454 480
Revenue 305,901 276,175
Operating profit 69,361 22,413
EBITDA1 162,491 133,317
Net profit /(loss) 47,909 (10,019)
Earnings /(loss) per share (US$) 0.145 (0.032)
Net profit before impairment losses 70,741 25,963
Net cash inflow from operations 136,164 105,603
Capital expenditure 59,349 42,195
Net debt2 (205,465) (231,442)
 

KEY EVENTS

  • Total 2016 production of 261,159 oz of gold and gold equivalent, in the upper half of the guidance range for the year of 255-265k oz. (2015 production: 262,485 oz).
  • Average realised price for gold and gold equivalent in 2016 was US$1,136 per oz (2015: US$1,062 per oz).
  • Total Cash Costs lowered by 5.5% to US$454 per oz and All-In Sustaining Cash Costs up by 1.8% to US$652 per oz.
  • Cash inflow from operating activities rose 28.9% to US$136.2 million (2015: US$105.6 million)
  • Net debt to EBITDA ratio reduced to 1.26 as of 31 December 2016 from 1.74 in the previous year.

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

Net debt is defined as cash and cash equivalent, financial assets, decreased by interest-bearing loans and borrowings and by liability under finance lease

  • Interim dividend of £0.050 per share paid for H1 2016 (2015: Interim dividend of £0.020 per share).
  • Mnogovershinnoye (MNV) – An adjusted internal Life-of-Mine model for MNV, based on ongoing near-mine exploration and reserve recalculations, now provides for production through at least 2022 (versus 2018 previously).
  • Novo – Project for expansion to 1.3 mtpa ore mining and processing capacity underway and on track for completion in late 2018.
  • Blagodatnoye – Extensive exploration drilling carried out to confirm resources.
  • Baley Hub – De-watering programme initiated for existing Taseevskoye open-pit with a view to de-risking the project and allowing for further reserve confirmation. Exploration work also carried out on Sredny Golgotay along with a pilot mining project at the Kaftan site on the Sredny Golgotay licence.

POST YEAR EVENTS

  • Final dividend of £0.054 per share recommended, making a total distribution of £0.104 per share for the year to 31 December 2016 (2015: £0.045 per share).

2017 TARGETS

  • Total production of gold and gold equivalent is expected to remain stable at 255,000-265,000 oz.
  • MNV – To continue extensive near-mine exploration programme throughout the year with a view towards further extending Life of Mine.
  • Novo – To proceed with design and construction work on mill expansion.
  • Belaya Gora – To complete a pre-feasibility study on processing plant upgrades and the inclusion of Blagodatnoye in Belaya Gora operations
  • Kekura – To complete a definitive feasibility study and move forward with procurement, infrastructure and construction preparations.
  • Baley Hub – To continue de-risking Taseevskoye and to examine development options for the Baley Hub projects.
  • To complete updated JORC-compliant reserve estimations on key operating and development projects.

CONFERENCE CALL DIAL-IN DETAILS

The Company will hold a simultaneous webcast and conference call to discuss the results, hosted by CEO Denis Alexandrov, on 10 April 2017 at 10:00 UK time (12:00 Moscow).

This event is being streamed. It is recommended that you listen via your computer speakers. The link for online registration is: http://engage.vevent.com/rt/webcasting/index.isp?seid=809

To register to participate by telephone and to receive local dial-in numbers, please follow this link: http://emea.directeventreg.com/registration/1943163

The Annual General meeting will be held on 17 May 2017.

FOR FURTHER INFORMATION PLEASE CONTACT:

John Mann, Head of Communications + 7 495 424 95 21

Duncan Baxter, Non-Executive Director + 44 (0) 1534 814 202

Numis Securities Limited                                    John Prior, James Black

(Nominated Adviser and Broker)                         Paul Gillam

+44 (0) 207 260 1000

Charlie Peat

+44 (0) 207 104 2334

***

CHAIRMAN’S STATEMENT

Dear Shareholder,

I am pleased to report that our key short-term objectives of stabilising production, furthering the unlocking of our extensive resource base and enhancing our cost competitiveness, as outlined a year ago, met with considerable success during 2016.

A solid operating performance resulted in the overall production of 261,159 oz of gold and gold equivalent. This nudges the record output of 262,485 oz achieved in 2015 and sits comfortably within our official estimate of between 255,000 and 265,000 oz. We are repeating this guidance range in respect of 2017 when, once again, our intention is to balance stable production with the progression of our principal development and exploration projects.

Such projects are integral to your Company’s ongoing growth and, in line with this, activity at Kekura, our flagship development undertaking situated in the remote, mineral rich region of Chukotka, in the Far East of Russia, will gather further momentum during 2017 and beyond as we prepare for commercial production in 2020.

The importance of this premier project to our medium-term production targets, the respective performances of our three operating mines – MNV, Belaya Gora and Novo – and the scale of additional development and exploration activities, are covered in detail in the Chief Executive’s Report and the subsequent Operational Review.

In view of this I will merely draw attention to the following:

  • The life of MNV, our oldest mine, has been extended by four years to 2022 following a detailed reappraisal of each of the mine’s 12 ore bodies and receipt of the regulatory approval of reserves under Russian (GKZ) classification;
  • Plans to significantly increase the mining and milling capacity of Novo, our largest producer, from 700,000 tonnes per annum to 1.3 million tonnes per annum by 2018 are progressing well; and
  • Mining and processing challenges at Belaya Gora, our youngest mine, are being addressed in conjunction with outside consultants.

I am pleased to record a 5.5% reduction in our Total Cash Costs to US$454 per oz in 2016, while our All-In-Sustaining Cash Costs remained basically flat at US$652 per ounce. Strict expenditure controls, a higher gold price, efficiency improvements and the weakness of the Russian Rouble versus the US$ all served to drive these key performance indicators which illustrate the competitive advantage we enjoy as a low-cost gold producer.

The average gold and gold equivalent price realised during 2016 amounted to US$1,136 (2015: US$1,062 per oz) and should be viewed alongside our All-In-Sustaining Cash Costs measurement.

These factors were duly reflected in a 21.9% increase in 2016’s EBITDA to US$162.5 million and a consequential advance in our EBITDA margin to 53.1% (2015: 48.3%): a positive indication of operating profitability.

Strong cash flow has been utilised, in part, to further reduce gearing and our net debt to EBITDA ratio at the year-end stood at a conservative 1.26 compared with 1.74 as at 31 December 2015.

Your Directors have constantly voiced the Company’s commitment to the return of profits to shareholders through dividend payments. Against the aforementioned background, the Board is pleased to recommend the payment of a final dividend of £0.054 per share (2015: £0.025 per share) which, subject to approval at the Annual General Meeting on 17 May 2017, will make a total distribution of £0.104 per share (2015: £0.045 per share) for the financial year to 31 December 2016.

Management has, during the year under review, communicated more actively with the investment community, largely in response to the revival of interest in natural resource stocks: a trend that has been accompanied by a marked improvement in the stock liquidity of your Company and a strong share price performance.

Shareholders may be interested to note that, on 23 May 2017, Highland Gold Mining will celebrate the 15th anniversary of its founding, having originally been incorporated in Jersey in 2002 ‘for the purpose of acquiring, consolidating and developing a portfolio of quality gold mining projects in the Russian Federation with good growth potential.’

The sound achievements of 2016 bear witness to management’s ongoing pursuit of ‘good growth potential’ and, irrespective of the inevitable challenges, your Board has every confidence that the unlocking of Highland’s valuable resource base over the ensuing years will yield further significant rewards for shareholders.

At the time of incorporation Highland also demonstrated ‘a firm commitment towards safety, health and the environment and social responsibility towards employees and communities.’ As the Chief Executive’s Report and the Operational Review show, such perspectives are as much a part of Highland’s corporate culture today as they were in 2002.

It is with deep regret that I have to record the occurrence of a fatality at our MNV mine on 10 September 2016. Additional safety measures have been implemented, details of which are to be found in the following sections.

Finally, it gives me great pleasure to thank all our employees, on behalf of the Board, for the hard work and commitment that underwrote our achievements during 2016.

Eugene Shvidler Executive Chairman

CHIEF EXECUTIVE OFFICER’S REPORT

Highland Gold is in the midst of its 15th year as a publicly-quoted enterprise. While there have been many achievements over the years, our objective remains to constantly look for ways to realise the substantial potential of the Company’s asset base. With that in mind, we undertook several initiatives during the year under review.

Among these is the ‘cluster’ initiative, designed to drive the Company’s progress on multiple fronts by focusing our development around existing operations and milling capacity and maximising corporate synergies. As part of this effort, the Company appointed a Business Development Head for each of our key geographic regions:

  • Khabarovsk Cluster (MNV, Belaya Gora and Blagodatnoye);
  • Baikal Cluster (Novo, Lyubov and Baley Hub encompassing Taseevskoye, Sredny Golgotay and Baley ZIF-1 Tailings); and
  • Chukotka Cluster (Kekura and Klen).

A key feature of 2016 was our extensive exploration activity designed to (i) provide additional resource for existing operations and (ii) advance identified development projects. The scale of such activity is reflected in more than 74,000 metres of exploration drilling across the Company’s portfolio during 2016 and a commensurate exploration spend of US$8.2 million.

As detailed below, exploration activity encompassed MNV, Belaya Gora, the Blagodatnoye and Sredny Golgotay deposits and Kekura, our premier development project. This work has already helped us to extend MNV’s life of mine and will help advance a Definitive Feasibility Study (DFS) for Kekura.

Alongside this with the aid of our 2016 drilling results, we have initiated new, updated JORC reserve audits for our key operating and development assets, namely MNV, Novo, Belaya Gora, Blagodatnoye and Kekura. We aim to publish the results of these audits over the next 6 months.

In 2016, we met our production guidance at a level of output that we are looking to maintain in 2017.

Novo proved the top performer with a 10% year-on-year increase in the production of gold and gold equivalent to a record 117,577 oz. This represented 45% of total production and 55% of EBITDA.

The average Au equivalent head grade was more than maintained at 5.61 g/t but the task ahead is to enhance throughput in order to offset the expected decline in average grade. To this end, plans to expand Novo’s ore processing capacity from 700,000 tonnes per annum to an annual 1.3 million tonnes are well advanced and we expect to reach targeted capacity in late 2018.

MNV maintained stable output in 2016 and the four-year extension of the mine’s life to 2022 is a valuable achievement. Management’s aim, however, is to extend the life of the mine beyond this and the near mine exploratory activity of 2016 will continue in 2017 and subsequent years utilising a US$3-5 million annualised budget.

At Belaya Gora, outside consultants were engaged to assist in improving mine planning in order to address issues with dilution and irregular grade distribution. Work also continues on a project to expand cyanide leach (CIL) capacity to improve processing plant recovery rates.

The Kekura licence, which enjoys an average reserve Au grade of 10.73 g/t, represents a world class gold deposit. A combination of open-pit and underground mining is envisaged, with a processing plant capacity of 800,000 tonnes per annum and a life of mine tentatively put at eight years.

Engineering and construction specialists Fluor Canada are developing a DFS in this regard which will consolidate various specifics including SRK’s new JORC resource estimation and mining schedule. Delivery of the DFS is anticipated in Q3 2017 and commercial production is set to begin in 2020.

The Kekura deposit sits on a very small part of our licence area, which encompasses approximately 1,500 sq km. We have identified several promising targets within this territory, providing significant upside potential for the Kekura operation.

Considerable activity was seen at our other development projects during the year. At Klen we initiated an updated PFS, which is scheduled for completion in the first half of 2017. At the Baley Hub deposits, we worked to de-risk these brownfield projects in order to facilitate further analysis of available development options.

In Kyrgyzstan, our fourth region, a scoping study was completed for our Unkurtash project and delivered in Q1 2017. We are now reviewing various development options, including the possibility of entering into a partnership arrangement with an appropriate investor.

Our primary objectives during 2017 will essentially mirror those for the year under review as we:

  • Target stable levels of overall production from our three operating mines: MNV, Belaya Gora and Novo;
  • Continue to implement rigorous cost disciplines and efficiencies in order to leverage our advantage as a low-cost producer;
  • Progress Kekura, the expansion of Novo and the Belaya Gora upgrade; and
  • Maintain our focus on exploration adjacent to MNV in order to further extend the life-of-mine.

Our Kekura investment, together with the Novo expansion, inevitably signals a significantly higher capex spend during the current financial year. With the comfort of a sound balance sheet, we would expect to fund the majority of 2017’s capex through operating cash flow.

With the successful implementation of our key objectives – extending MNV’s life of mine, expanding capacity at Novo, improving Belaya Gora’s operations, and bringing Kekura online – we aim to achieve annualised production of 500,000 ounces.

I have every confidence that the growth potential inherent in our operating assets and our high grade development projects, together with our competitive cost disciplines, augur well for the future.

All of these objectives are, of course, dependent upon the skills and expertise of our employees. We are totally committed to the welfare of our personnel and our activities in this regard and in relation to our environmental responsibilities appear in the Operational Review.

Denis Alexandrov Chief Executive Officer

OPERATIONAL REVIEW

KHABAROVSK REGION, RUSSIA Mnogovershinnoye (MNV)

MNV Units H12015 H2 2015 H12016 H2 2016 2015 2016
Waste stripping 3

m

1,780,663 1,573,547 305,900 1,462,897 3,354,210 1,768,797
Underground development m 4,287 6,163 5,863 5,518 10,450 11,381
Waste dumps ore mined t     276,312 2,801 279,113
Waste dumps ore grade g/t     1.06 1.21 1.06
Open-pit ore mined t 289,420 448,548 22,067 383,426 712,073 405,493
Open-pit ore grade g/t 2.08 1.85 3.02 1.89 2.01 1.95
Underground ore mined t 330,329 434,890 351,336 388,576 765,219 739,912
Underground ore grade g/t 2.21 2.52 3.20 2.92 2.38 3.05
Total ore mined t 619,749 883,438 649,715 774,803 1,477,292 1,424,518
Average grade g/t 2.15 2.18 2.28 2.41 2.20 2.35
Ore processed t 705,493 707,326 672,600 708,363 1,412,819 1,380,963
Average grade g/t 2.08 2.49 2.28 2.44 2.29 2.36
Recovery rate % 89.0 91.5 90.93 91.9 90.4 91.5
Gold produced oz 42,451 52,107 44,929 51,259 94,558 96,188
 

Production of gold and gold equivalent at MNV in 2016 edged ahead from 94,558 oz to 96,188 oz representing a near 37% share of total production. The average grade showed a 3% improvement year-on-year from 2.29 g/t to 2.36 g/t, while the recovery rate rose from 90.4% to 91.5%. Ore processed totalled 1,380,963 tonnes (2015: 1,412,819 tonnes).

A detailed reappraisal of each of the 12 ore bodies across the licence area continued into Q1 2017 and culminated in a four-year extension of the life of the mine to 2022 following the regulatory approval of reserves under Russian (GKZ) classification. The primary target, however, is to extend the life of the mine beyond this (see ‘Outlook’). In total, more than 18,000 metres of drilling was carried out during 2016.

The evaluation of MNV’s historic rock dumps saw a total of 758,200 tonnes of ore identified during the course of 2016. This programme will continue in 2017.

PRODUCTION COSTS

Total cash costs amounted to US$607 per oz (2015: US$691 per oz) while all-in sustaining costs were US$765 per oz (2015: US$881 per oz).

CAPITAL COSTS

A total of US$14.0 million was invested at MNV in 2016. This included capitalised expenditures and construction (US$4.1 million), purchase of equipment (US$8.7 million) and exploration (US$1.2 million).3

OUTLOOK

The extensive near-mine exploration activity seen during 2016 will continue in 2017 with a view to further extending the life of the mine beyond 2022. Such activity will encompass:

  • The lower horizons of the existing underground mine;
  • Areas in the vicinity of open-pit operations;
  • Near-mine Greenfield sites on adjacent licences; and
  • Historic rock dumps.

Specific targets, utilising an annual budget of US$3-5 million, will include the Southern, Flank, Upper, and Quiet ore zones and, additionally, the MNV North-Western Flank licence (Bear ore body).

An updated JORC-compliant reserve audit of MNV is currently in progress, with results expected during Q2 2017.

Belaya Gora

Belaya Gora Units H12015 H2 2015 H12016 H2 2016 2015 2016
Waste stripping 3

m

1,557,257 2,160,512 3,294,701 2,212,572 3,717,769 5,507,273
Ore mined t 885,314 1,337,790 955,385 605,349 2,223,104 1,560,734
Average grade g/t 1.63 1.32 1.22 1.24 1.45 1.23
Ore processed t 674,985 876,303 833,509 809,637 1,551,288 1,643,146
Average grade g/t 1.87 1.47 1.29 1.14 1.64 1.21
Recovery rate % 75.89 74.9 72.7 70.0 75.4 71.4
Gold produced oz 30,157 31,149 25,349 20,560 61,306 45,909
 

With effect from Q3 2016 operations at Belaya Gora focused on the treatment of low-grade ore stockpiles (~1 g/t) while an operational reassessment was undertaken in response to irregular grade distribution, inconsistent mill performance and low recovery rates.

In addition to focusing on prospective improvements to the processing flowsheet in order to increase recoveries, management is working with outside consultants on designs for the incorporation of additional cyanide leach (CIP) capacity at the mill. A programme designed to stabilise the mill input rate successfully lowered the tailings grade.

As a consequence, production of gold and gold equivalent recorded a 25% year-on-year reduction in respect of 2016 to 45,909 oz. This was accompanied by a fall in the recovery rate from 2015’s 75.4% to 71.4% and a decline in average grade from 2015’s 1.64 g/t to 1.21 g/t.

Some 3,000 metres of drilling was conducted for the purpose of reserve confirmation.

PRODUCTION COSTS

Total cash costs amounted to US$678 per oz (2015: US$465 per oz) while all-in sustaining costs were US$1,134 per oz (2015: US$551 per oz).

CAPITAL COSTS

A total of US$6.1 million was invested at Belaya Gora in 2016. This included capitalised expenditures and construction (US$2.9 million) and purchase of equipment (US$3.2 million).

OUTLOOK

The results of a comprehensive review of the processing plant flowsheet, carried out during the final quarter of 2016, are expected in the new financial year as is a new JORC-compliant reserve statement from SRK.

Blagodatnoye

In order to augment Belaya Gora’s mineral resource base, management has targeted further exploration of resources at the Blagodatnoye gold deposit, located some 40 km from Belaya Gora. The licence enjoys preliminarily measured С2 category reserves, suitable for open-pit mining, comprising some 10 million tonnes of ore. Initial metallurgical testwork has supported gold recovery of more than 90% via cyanidation.

Following an extensive 15,000 metre reserve verification drilling programme earlier in the year, work at Blagodatnoye in Q4 focused on the collation and interpretation of exploration results.

CAPITAL COSTS

A total of US$2.0 million was invested at Blagodatnoye in 2016 and represented a capitalised exploration and evaluation asset.3

OUTLOOK

A report on reserve estimates is expected to be submitted to the State Expert Review Panel during H1 2017. A JORC-compliant reserves statement is scheduled for publication within the same time frame.

In the consolidated financial statements, capital costs for Blagodatnoye are reported together with MNV.

ZABAIKALSKY REGION, RUSSIA Novoshirokinskoye (Novo)

Novo Units H12015 H2 2015 H12016 H2 2016 2015 2016
Underground development m 5,312 5,625 5,808 5,444 10,937 11,251
Ore mined t 327,629 373,790 401,983 359,131 701,419 761,114
Average grade 1 g/t 5.4 5.7 5.5 5.75 5.56 5.61
Ore processed 2 t 331,551 359,733 371,945 386,026 691,284 757,971
Average grade 1 g/t 5.4 5.8 5.6 5.63 5.58 5.62
Recovery rate 1 % 85.3 86.6 86.5 85.28 85.98 85.88
Gold produced 1 2 oz 48,634 57,288 57,960 59,617 105,922 117,577
1.   Calculated in Au equivalent in actual prices

(Metal grade of mined ore = Au 3.74 g/t, Ag 62.99 g/t, Pb 1.99 %, Zn 0.60 %)

2.   Excluding Sredny Golgotay ore processed

 

Production of gold and gold equivalent at Novo in 2016 recorded a 10% increase from 106,621 oz to 117,577 oz representing a 45% share of total production. The average grade showed a modest 0.7% improvement year-on-year from 5.58 g/t to 5.62 g/t, while the recovery rate shaded from 85.98% to 85.88%. Ore processed advanced by 9.6% to 757,971 tonnes (2015: 691,284 tonnes).

Plans to expand Novo’s annual ore processing capacity from 700,000 tonnes per annum to an annualised 1.3 million tonnes gathered momentum in Q4 2016. Geotechnical work was completed at construction sites together with inspections of buildings and various structures under renovation.

PRODUCTION COSTS

Total cash costs amounted to US$254 per oz (2015: US$302 per oz) while all-in sustaining costs were US$274 per oz (2015: US$353 per oz).4

CAPITAL COSTS

A total of US$11.0 million was invested at Novo in 2016. This included capitalised expenditures and construction (US$6.4 million) and purchase of equipment (US$4.6 million).

OUTLOOK

The preparation of design documentation in relation to the planned expansion is well under way and a selection process has commenced for contractors with regard to construction and installation work. The mine is expected to achieve targeted production capacity in late 2018.

A new JORC reserve statement is expected in Q2 2017.

All figures quoted as per oz of gold equivalent production without any by-product credits and refining charges.


Sredny Golgotay (Kaftan) Units H12015 H2 2015 H12016 H2 2016 2015 2016
Underground development m 766 0 766
Ore mined t 13,103 6,396 19,499
Average Grade g/t 2.50 3.07 2.69
*

Ore processed

t 5,722 4,501 10,794 5,722 15,295
Average Grade g/t   4.50 3.6 3.05 4.50 3.22
*

Gold produced

oz   699 433 882 699 1,315
* 2015 ore processing and gold production previously reported as part of Novo production data

 

The pilot mining project at the Sredny Golgotay (Kaftan site), designed to evaluate the provision of additional resources for the Novo mill versus a stand-alone operation, resulted in the processing of 15,295 tonnes of ore with an average grade of 3.22 g/t. Delivery to Novo and subsequent treatment yielded 1,315 oz of gold and gold equivalent.

During Q4 2016 the results of the grade control drilling programme conducted earlier in the year, totalling 7,330 metres, in conjunction with operating data, served to delineate ore bodies to facilitate any future mining at the Kaftan site. The drilling programme, designed to validate the quantity and quality of reserves in the area, was completed in July, having been performed from above and below the surface. The evaluation programme utilised 8,281 assay results.

CAPITAL COSTS

A total of US$0.6 million was invested at Sredny Golgotay-Kaftan in 2016.

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

As at the 2016 year end, a de-watering programme at the Taseevskoye open-pit, initiated the previous May, had resulted in the removal of more than 2 million m3 of water out of a total of 7 million m3. Water levels continue to decrease – there are no signs of inflow from the nearby Baley pit – and the pumping programme is scheduled to continue throughout 2017.

At Sredny Golgotay, R&D testwork continued regarding the advisability of utilising an X-ray fluorescence spectrometry (XRF) sorting plant to enable the pre-concentration of gold-bearing ores. The preliminary results of a pilot XRF operation, received in Q4 2016, fell short of expectations, primarily due to an insufficient level of the separation required to make the process viable. Nevertheless, the study continues utilising different equipment and finer grain sizes.

Exploration work also continued at Sredny Golgotay – in addition to the aforementioned work at the Kaftan site – where 1,757 metres of trenching during Q4 2016 took the year’s total to 2,027 metres with logging completed in full. Some 1,985 samples were extracted during the final quarter taking the year’s total to 2,210 samples. Contractor SGS Chita delivered 311 fire assay results during Q4 2016 with an additional 1,979 scheduled for subsequent delivery.

Diamond drilling activity totalled 5,146 metres in Q4 (with 5,695 samples extracted) and 15,919 metres for the year (with 16,508 samples extracted). A total of 14,001 fire assay results were received with results for the remaining 3,410 samples scheduled for subsequent delivery.

With the benefit of these results, work will continue in 2017 regarding the delineation of the licence’s ore bodies and the compilation of reserve estimates.

CAPITAL COSTS

A total of US$5.1 million was invested at the three Baley area licences in 2016, excluding Sredny Golgotay-Kaftan.

Lyubov Ore Cluster (ZIF tailings)

An outside contractor was retained to oversee a resource verification project at Lyubov during the second half of 2016. The project entailed the trial processing of material from the Khaverginskoye, Lyubov and Nikolaevskoye tailings dams and waste dumps within the Lyubov licence area and involved 4,200 m3 of trenching and 96 metres of exploratory drilling to evaluate available resources. Sample selection was carried out by SGS Chita. A total of 5,680 tonnes of ore was treated, yielding 170 oz of gold.

CAPITAL COSTS

A total of US$0.2 million was invested at Lyubov in 2016.

CHUKOTKA AUTONOMOUS DISTRICT, RUSSIA Kekura

Processing of results from the 25,000-metre Kekura exploration programme was completed during the fourth quarter of 2016. Drilling activity had focused on the eastern flank of the deposit for the purpose of confirming resource and potentially adding reserves suitable for underground mining.

The development of a definitive feasibility study (DFS) for the Kekura project by Fluor Canada commenced in October 2016. SRK was awarded a contract to draft the mining section of the DFS, a task that began two months later. The process will continue in 2017 as Fluor consolidates the various sections of the DFS into a single report.

Fluor is also involved in the tender process for processing plant equipment, and tenders have been received in respect of milling and crushing equipment, power generators and press filters.

Preparations for the 2017 construction season are ongoing, including the procurement of construction materials and work with contractors with regard to key infrastructure facilities. A winter road to the site has already been constructed and shipments of diesel fuel and key commodity supplies are being transported from the ports of Pevek and Magadan.

The results of a JORC-compliant resource re-evaluation are also expected in the second half of 2017.

Klen

Preparation of a revised pre-feasibility study (PFS) was ongoing throughout the second half of 2016. Contractor Hatch has provided data on mining methodology, processing plant design and infrastructure solutions together with a financial and economic model. Further clarification in respect of processing parameters is required and, following additional process testwork, an updated report is scheduled for 2017.

Unkurtash

The Company is currently considering different development options, including potential partnership opportunities with regard to its Kyrgyzstan licence in which three prospects — Unkurtash, Sarytube and Karatube – have been the subject of extensive exploration activity.

A scoping study, undertaken by SRK over the course of the year, was finalised and published in March 2017.

HEALTH, SAFETY AND THE ENVIRONMENT

The safety and welfare of our employees is of paramount importance and, sadly, a fatality at MNV during the year under review serves to underline the need for constant vigilance on the part of management and each and every member of the workforce.

We have always placed considerable emphasis on the need for employees to assume a sense of responsibility for their safety and for the safety of others and, to this end, various staff training courses and workshops are held each year. In parallel with such activities there is constant focus on the need to maximise safety measures in order to minimise occupational risks.

Our unvarying target is to achieve a zero incident rate, irrespective of the hazardous characteristics of the mining industry. In order to further these priorities a new Health and Safety Team was assembled last autumn for the specific purpose of improving the implementation of best safety practices across all operations. In line with our historic approach, the plan is to institute an occupational safety management system that prioritises the improvement of employees’ behaviour in respect of health and safety.

Senior staff from the Moscow management office Russdragmet (33 managers), Novo (18 managers) and MNV (19 managers), attended a highly informative course entitled “Conscious Safety Management” during the final quarter of 2016. At Novo, 36 managers, specialists and workers participated in a training course on “Internal Accident Investigation”.

New corporate standards for Internal Incident Investigation, a methodology for Behavioural Safety Audits and rules and regulations in respect of Occupational Safety Committees have been developed. Tools for Behavioural Safety Audits and Leader Bypass were introduced at Novo and MNV.

Such developments, set to gather momentum in 2017, come in the wake of a sharp uptick in Lost Time Incidents (defined as the number of “LTI” for every 1,000,000 man-hours worked) to 2.80 in 2016 compared with 1.85 the previous year. During the course of the year under review, 14 incidents were recorded across the Company including the aforementioned fatality, compared to 12 incidents, involving minor injuries, in 2015. Of these, six incidents occurred at MNV, three at Belaya Gora, four at Novo and one at Kekura.

During 2016, one-day courses in safety induction and fire & electrical safety induction were attended by 1,367 employees. A total of 176 managers and specialists passed self-tuition courses and tests using OlimpOKS software and were certified in respect of industrial safety (7-30 day programmes).

The auxiliary mine rescue crews, formed in 2014 and located at the mine sites, remain in a state of readiness to respond to emergencies.

The Company is committed to meeting all applicable environmental and regulatory requirements. Critical risks to the environment from operations are constantly evaluated and monitored in order to develop mitigation programmes. No environmental incidents were reported during the period.

Independent auditors DNV conducted a supervisory audit of the certified Environmental Management Systems (EMS) at Russdragmet, Belaya Gora and Novo during 2016 and confirmed respective compliance with international ISO 14001:2004 standards. Environmental safety training was given to 966 employees, while 406 employees received training and passed tests on Category I-IV hazardous waste handling.

CHIEF FINANCIAL OFFICER’S REPORT

The Company demonstrated a solid financial performance in 2016 benefiting from favourable macroeconomic conditions which included higher gold prices, a weak Rouble and the availability of cheaper credit facilities for Russian companies.

Highland Gold retained its position among the world’s lowest cost gold producers during the year. All of the Company’s operating assets generated positive free cash flow which served to achieve a 16% reduction in borrowings.

Improvements in the Company’s key performance indicators alongside a strengthened balance sheet enabled the delivery of an enhanced dividend distribution for the financial year to 31 December 2016 compared with 2015.

Total revenue increased by 10.8% to US$305.9 million, primarily driven by higher average realised gold prices. In 2016, the average LBMA gold price recorded a y-o-y increase of 7.8% to US$1,251 (2015: US$1,160) per oz. During the reporting period the Company sold 267,330 oz of gold and gold equivalent, representing a 3.5% volume increase versus 2015. Novo and MNV increased their respective sales volumes. Novo’s sales rose 18.7% to 125,021 eq. oz y-o-y, accounting for 46.8% of the total, while MNV increased its sales volume by 4.2% to 96,899 oz representing a 36.2% share. BG, with a 17.0% share, saw its sales volume decline to 45,411 oz (2015: 59,971 oz), a decrease of 24.3%.

During 2016, the Group continued to pursue a “no hedge” policy. The Company’s average realised price of gold and gold equivalent increased by 7.0% to US$1,136 per oz compared with US$1,062 per oz in 2015. The average realised price of gold in respect of MNV and Belaya Gora (net of commission) was US$1,247 per oz which was in line with the average market price. The improved quality of lead concentrates and higher prices for precious metals raised the average price of gold equivalent realised by Novo to US$1,008[1] per eq. oz against US$927 per eq. oz in 2015 ( +8.8% y- o-y).

The Company’s cost of sales net of depreciation decreased by 2.4% to US$123.8 million (2015: US$126.8 million). The positive effect of the Russian Rouble devaluation enabled the Company to offset the negative impact of overall inflation (5.4%) encompassing an increase in energy prices. Depreciation amounted to US$60.2 million, down 17.0% y-o-y largely due to the extension of life- of-mine at all operational assets.

Cash Operating Costs – Breakdown

  2016 2015 y-o-y
  US$000 US$000 change,

%

Cost of sales 183,995 199,365 (7.7%)
– depreciation, depletion and amortisation (60,212) (72,583) (17.0%)
Cost of sales, net of depreciation, depletion and amortisation 123,783 126,782 (2.4%)
Breakdown per item:      
Labour 42,261 40,448 4.5%
Consumables and spares 44,532 48,127 (7.5%)
Power 9,639 8,736 10.3%
Movement in ore stockpiles, finished goods and stripping assets (12,902) (12,745) 1.2%
Maintenance and repairs 23,972 26,286 (8.8%)
Taxes other than income tax 16,281 15,930 2.2%
 

The cost structure was little changed, other than a modest increase in labour costs. With the latter being Rouble denominated, the devaluation of the domestic currency offset the negative impact of salary increases, which reflected a shortage of qualified personnel, competition for labour with other mining companies and additional labour costs at Novo and BG in relation to increases in rock extraction and processing volumes.

Total cash costs[2] (TCC) decreased by 5.5% to US$454 per oz, which is below the industry average. Breaking this down by business units, total cash costs at our low cost producer Novo fell by 16.1% to US$254 per eq. oz, reflecting the increase in production volumes and improved grades. MNV, our oldest mine, also achieved lower total cash costs of US$607 per oz (2015: US$691 per oz) due to improvements in the average grade and recovery rate. As a result of lower grades and a decrease in recovery rates, total cash costs at Belaya Gora rose from US$465 per oz to US$678 per oz.

All-in sustaining costs[3] (AISC) per oz increased by 1.8%, from US$640 per oz in 2015 to US$652 per oz in 2016.

TCC and AISC Calculation

  2016 2015 y-o-y
  US$000 US$000 change,%
Cost of sales, net of depreciation, depletion and amortisation 123,783 126,782 (2.4%)
– cost of by-products and other sales (2,123) (2,374) (10.6%)
– taxes other than income tax at nonoperating entities (380) (392) (3.1%)
Total cash costs (TCC) 121,280 124,016 (2.2%)
+ administrative expenses 14,293 13,127 8.9%
+ accretion and amortisation on site restoration provision 1,778 2,541 (30.0%)
+ movement in ore stockpiles obsolescence provision 9,869 120 8124.2%
+ sustaining capital expenditure 27,031 25,561 5.8%
Total all-in sustaining costs (AISC) 174,251 165,365 5.4%
Gold sold (gold and gold eq.oz) 267,330 258,292 3.5%
TCC (US$/oz) 454 480 (5.5%)
AISC (US$/oz) 652 640 1.8%
 

The Company’s administrative expenses increased by 8.9% y-o-y to US$14.3 million reflecting the changes in management structure and higher labour costs.

Higher sales volumes, a supportive macro environment and cost control initiatives resulted in a 21.9% increase in the Company’s EBITDA to US$162.5 million with Novo and MNV remaining the principal contributors to such growth.

The EBITDA margin8 rose from 48.3% to 53.1%, which ranks the Company among the most efficient gold mining producers.

EBITDA Reconciliation to Operating Profit

  2016 2015
Operating profit

Depreciation of mine properties and property, plant and

69,361 22,413
equipment 60,212 72,583
Impairment losses related to cash-generating units Individual impairment of property, plant and equipment and 22,832 35,982
mine assets 17 1,698
Movement in ore stockpiles obsolescence provision Movement in raw materials and consumables obsolescence 9,869 120
provision 600 521
Gain on settlement of contingent consideration (400)
EBITDA 162,491 133,317

EBITDA margin is defined as EBITDA divided by total revenue

 

EBITDA Bridge, US$ m

  9 23 5 7 1  
    ■ ■        
133           162
2015 1

Exchange

Metal Volume 1 1 Cost of sales 1

G&A

2016
Actual Rate Prices of Sales     Actual
200

150

100

50

0

The Company’s management analysed internal and external indicators of impairment as of 31 December 2016. An impairment loss was recognised in relation to the Belaya Gora project: BG’s goodwill was impaired by US$12.6 million and its property, plant and equipment, mine asset and stripping activity asset were impaired by US$10.3 million. The primary triggers for the impairment loss recognition were the effects of changes to the mine plan and higher prospective capital expenditure.

In 2016, the Company recognised a net finance cost of US$5.0 million compared with US$4.2 million in 2015. The principal components were the interest expense on bank loans in the amount of US$2.2 million in 2016 (2015: US$3.3 million) and the negative effect of a fair value reassessment of bonds amounting to US$1.0 million due to a weaker Pound sterling. In September 2016, all bonds held by the Company were sold.

A foreign exchange gain of US$1.9 million (2015: loss of US$4.3 million) resulted from the settlement of foreign currency transactions and the transfer of monetary assets and liabilities denominated in Russian Roubles into US Dollars.

Income tax charges totalled US$18.3 million in 2016 compared with US$23.9 million in 2015. Current tax expenses of US$36.6 million (US$22.1 million at Novo and US$14.5 million at MNV) and dividend withholding tax of US$3.1 million were partially offset by the release of US$21.4 million of deferred tax largely as a result of the Rouble appreciation at the end of the year and favourable change to the Russian Tax Legislation (tax losses generated after 2007 can now be utilised with no time limit).

Net profit for the financial year to 31 December 2016 totalled US$47.9 million compared to a net loss of US$10.0 million in 2015. Earnings per share amounted to US$0.145 (2015: loss US$0.032). Net profit free of impairment losses recorded a significant increase at US$70.7 million (2015: US$26.0 million).

The Company’s cash inflow from operating activities registered a 28.9% advance from 2015’s US$105.6 million to US$136.2 million driven by strong EBITDA and a reduction in working capital due to a decrease in inventories.

The Company’s capital expenditure for the reporting period amounted to US$59.3 million versus US$42.2 million in respect of 2015. This largely reflected higher development CAPEX at MNV, regarding near-mine exploration designed to replace reserves, and the evolution of the Kekura project.

Capital expenditures included US$16.0 million at MNV, US$11.0 million at Novo, US$6.1 million at Belaya Gora, US$19.8 million at Kekura, US$ 0.6 million for Sredny Golgotay-Kaftan, US$5.1 million at the Baley hub projects (Taseevskoye, Sredny Golgotay, ZIF-1 tailings, excluding Kaftan)

and US$0.7 million in respect of other exploration and development projects. Capital expenditures were entirely funded by operating cash flow.

The Company’s total debt is denominated in USD. The debt in relation to facility agreements with banks showed a decrease of 16.5% to US$211.6 million as of 31 December 2016 (2015: US$253.4 million) accompanied by a fall of 18.2% in the effective annual interest rate to 4.5% (2015: 5.5%).

At the end of the reporting period, cash and cash equivalents amounted to US$8.7 million, compared with US$24.2 million as of 31 December 2015. The Company’s net debt position including lease liabilities was US$205.5 million as of 31 December 2016, compared with uS$231.4 million as of 31 December 2015.

The ratio of net debt to EBITDA was 1.26 as of the end of 2016. This is substantially lower than the 1.74 ratio as of the end of 2015 and is well within the Board of Directors’ debt policy.

Taking into account the improvements in the Company’s target financial indicators and favourable market conditions, the Board is pleased to recommend a final dividend of GBP 0.054 per share.

The final dividend for the year ending 31 December 2015 in the amount of US$11.9 million was paid on 19 May 2016.

The Group paid an interim dividend of GBP 0.050 per share (2015: an interim dividend of GBP 0.020 per share) which resulted in an aggregate interim dividend payment of US$19.8 million (2015: US$10.0 million). The interim dividend was paid on 13 October 2016.

The Board has recommended a final dividend of GBP 0.054 per share which, taking into account the interim dividend paid in October 2016, gives a total dividend of GBP 0.104 per share for the year (2015: GBP 0.045 per share). The final dividend will be paid on 19 May 2017 to shareholders on the register at the close of business on 21 April 2017 (the record date). The ex-dividend date will be 20 April 2017.

EVENTS AFTER THE REPORTING PERIOD

In March 2017, the Group signed a new long-term credit facility agreement with Gazprombank, with an overall limit of US$100.0 million, thereby providing an extension of the final maturity until March 2020.

Alla Baranovskaya Chief Financial Officer

Rounding of figures may result in computational discrepancies


Profit/(Loss) for the year 47,909 (10,019)
 
Total comprehensive profit/(loss) for the year 47,909 (10,019)
Attributable to:    
Equity holders of the parent 47,235 (10,316)
Non-controlling interests 674 297
Profit/(loss) per share (US$ per share)    
Basic, for the profit for the year attributable to ordinary equity holders of the parent 0.145 (0.032)
Diluted, for the profit for the year attributable to ordinary equity holders of the parent 0.145 (0.032)

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

as at

31 December           31 December

2016                           2015

US$000                   US$000

ASSETS    
Non-current assets
Exploration and evaluation assets 85,459 309,101
Mine properties 567,762 318,068
Property, plant and equipment 295,019 320,986
Intangible assets 57,802 70,365
Inventories 8,989 16,372
Other non-current assets 4,151 3,845
Deferred income tax asset
Total non-current assets 1,019,182 1,038,737
Current assets
Inventories 56,140 67,758
Trade and other receivables 32,296 31,188
Income tax prepaid 1,032 3,770
Prepayments 1,975 888
Financial assets 21,150
Cash and cash equivalents 8,748 3,058
Other current assets 1,226 602
Total current assets 101,417 128,414
TOTAL ASSETS 1,120,599 1,167,151
 
EQUITY AND LIABILITIES    
Equity attributable to equity holders of the parent
Issued capital 585 585
Share premium 718,419 718,419
Assets revaluation reserve 832 832
Retained earnings 33,947 18,176
Total equity attributable to equity holders of the parent 753,783 738,012
Non-controlling interests 1,859 1,566
TOTAL EQUITY 755,642 739,578
Non-current liabilities
Interest-bearing loans and borrowings 164,587 183,000
Liability under finance lease 1,590 1,526
Long-term accounts payable 254 223
Provisions 17,199 16,026
Deferred income tax liability 114,045 135,457
Total non-current liabilities 297,675 336,232
Current liabilities
Trade and other payables 17,633 20,201
Interest-bearing loans and borrowings 47,000 70,375
Income tax payable 1,613 16
Liability under finance lease 1,036 749
Total current liabilities 67,282 91,341
TOTAL LIABILITIES 364,957 427,573
TOTAL EQUITY AND LIABILITIES 1,120,599 1,167,151
 

The financial statements were approved by the Board of Directors on 07 April 2017 and signed on its behalf by: John Mann and Alla Baranovskaya.

  2016 2015
Operating activities US$000 US$000
Profit before income tax 66,228 13,894
Adjustments to reconcile profit before income tax to net cash flows from operating activities: 66,228 13,894
Depreciation of mine properties and property, plant and equipment 60,212 72,583
Impairment losses related to cash-generating units 22,832 35,982
Movement in ore stockpiles obsolescence provision 9,869 120
Movement in raw materials and consumables obsolescence provision 600 521
Write-off of mine properties and property, plant and equipment 1,180 1,916
Individual impairment of property, plant and equipment and mine assets 17 1,698
Loss on disposal of property, plant and equipment 318 172
Bank interest receivable (138) (75)
Bonds fair value movement 1,013 (1,246)
Interest expense on bank loans 2,247 3,297
Accretion expense on site restoration provision 1,674 2,117
Gain on change in estimation – site restoration asset (2,104)
Gain on settlement of contingent consideration (400)
Net foreign exchange loss (1,909) 4,321
Movement in provisions 545 177
Unwinding costs other (7)
Other non-cash expenses/ (income) 1 983
Working capital adjustments:
(Increase)/ decrease in trade and other receivables and prepayments (5,313) (8,295)
Decrease in inventories 10,215 147
Increase/ (decrease) in trade and other payables 1,770 839
Income tax paid (34,790) (21,444)
Net cash flows from operating activities 136,164 105,603
Investing activities
Proceeds from sale of property, plant and equipment 1,494 98
Purchase of property, plant and equipment (59,349) (42,195)
Capitalised interest paid (9,624) (12,359)
Increase in stripping activity assets (5,884) (9,399)
Interest received from deposits 138 75
Interest received from bonds 2,534
Purchase of investments – bonds (3,818)
Novo shares purchase (138) (432)
Sale of investments – bonds 20,136 24,337
Net cash flows used in investing activities (53,227) (41,159)
Financing activities
Proceeds from borrowings 314,500 673,924
Repayment of borrowings (356,450) (724,472)
Dividends paid to equity holders of the parent (31,705) (20,075)
Payment under finance lease, including interest (1,277) (827)
Interest paid (2,132) (3,087)
Net cash flows used in financing activities (77,064) (74,537)
Net increase/(decrease) in cash and cash equivalents 5,873 (10,093)
Effects of exchange rate changes (183) 205
Cash and cash equivalents at 1 January 3,058 12,946
Cash and cash equivalents at 31 December 8,748 3,058
 

SELECTED POLICIES AND NOTES TO THE FINANCIAL INFORMATION

Corporate information

The consolidated financial statements of Highland Gold Mining Limited for the year ended 31 December 2016 were authorised for issue in accordance with a resolution of the Directors on 07 April 2017.

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

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

Basis of preparation

The consolidated financial statements have been prepared on a historical cost basis except for financial instruments carried at fair value through profit or loss and assets and liabilities acquired in business combination that have been measured at fair value. The consolidated financial statements are presented in US dollars, which is the parent company’s functional and the Group’s presentation currency. All values are rounded to the nearest thousand (US$000) except when otherwise indicated.

Statement of compliance

The consolidated financial statements of Highland Gold Mining Limited and all its subsidiaries (the Group) have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and the Companies (Jersey) Law 1991.

Basis of consolidation

The consolidated financial statements comprise the financial statements of Highland Gold Mining Limited and all its subsidiaries as at 31 December each year.

A subsidiary is an entity, including an unincorporated entity such as a partnership, that is controlled by another entity (known as the parent). Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases.

The financial statements of the subsidiaries are prepared for the same reporting year as the parent company, using consistent accounting policies.

All intra-group balances, transactions, unrealised gains and losses resulting from intra-group transactions are eliminated in full.

Segment information

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

  • Gold production;
  • Polymetallic concentrate production;
  • Development and exploration; and

The gold production reportable segment comprises two operating segments, namely Mnogovershinnoye (MNV) and Belaya Gora (BG) at which level management monitors its results for the purpose of making decisions about resource allocation and evaluating the effectiveness of its activity. MNV and BG have been aggregated into one reportable segment as they exhibit similar long-term financial performance and have similar economic characteristics: nature of products (gold and silver), nature of the production processes, type of customer for their products (banks), methods used to distribute their products and nature of the environment (both are located in the Khabarovsk region).

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

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

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

Segment performance is evaluated based on EBITDA (defined as operating profit/ (loss) excluding depreciation and amortisation, impairment losses, movement in ore stockpiles obsolescence provision, movement in raw materials and consumables obsolescence provision, result of disposal of a non-core entity and gain on settlement of contingent consideration). The development and exploration segment is evaluated based on the life-of-mine models in connection with the capital expenditure spent during the reporting period.

The following tables present revenue, EBITDA and assets information for the Group’s reportable segments. The segment information is reconciled to the Group’s profit/(loss) after tax for the year.

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

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

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

In 2016 the gold and silver revenue reported in the gold production segment was received from sales to Gazprombank (US$179.5 million) in the territory of the Russian Federation.

In 2015 the gold and silver revenue reported in the gold production segment was received from sales to Gazprombank (US$178.1 million) in the territory of the Russian Federation.

In 2016 the concentrate revenue reported in the polymetallic concentrate production segment in the amount of US$97.8 million was received from sales to Kazzinc (2015: US$97.6 million) in the territory of the Republic of Kazakhstan and to Hyosung corporation in the territory of the People’s Republic of China in the amount of US$28.2 million (2015: Nil).

Other third-party revenues in both 2016 and 2015 were received in the territory of the Russian Federation.

Inter-segment revenues mostly represent management services.

Year ended Gold Polymetallic Development & Other Eliminations Total
  production concentrate Exploration      
31 December 2015 segment production        
    segment        
  US$000 US$000 US$000 US$000 US$000 US$000
Revenue

Gold revenue

176,625         176,625
Silver revenue 1,519 1,519
Concentrate revenue 97,602 97,602
Other third-party 221 186 22 429
Inter-segment 76 5 11,639 (11,720)
Total revenue 178,441 97,788 27 11,639 (11,720) 276,175
Cost of sales 145,201 53,202 873 89   199,365
EBITDA 77,285 62,816 (4,558) (2,226) 133,317
Other segment information            
Depreciation Movement in ore (51,276) (21,185) (37) (85) (72,583)
stockpiles obsolescence (120) (120)
provision Movement in raw materials and consumables obsolescence provision (518) (3) (521)
     
Impairment losses related to cash-generating units (35,982) (35,982)
Individual impairment of property, plant and equipment (1,698) (1,698)
Finance income           1,331
Finance costs           (5,529)
Foreign exchange loss Profit before income tax           (4,321)

13,894

Income tax           (23,913)
Loss for the year           (10,019)
 
Segment assets at 31 December 2015            
Non-current assets Capital expenditure* 210,489 170,688 566,426 552 948,155
Goodwill 22,253 5,134 42,978 70,365
Other non-current assets 18,959 387 544 327 20,217
Current assets** 83,545 26,101 4,098 28,656 (13,986) 128,414
Total assets           1,167,151
Capital expenditure – additions in 2015***, including: 31,907 6,801 28,309 86 67,103
Stripping activity assets 9,399 9,399
Capitalised bank interest 12,359 12,359
Unpaid/ (settled) accounts payable 733 1,924 557 (64) 3,150
Cash capital expenditure 21,775 4,877 15,393 150 42,195
 

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

** Current assets include corporate cash and cash equivalents of US$3.1 million, investments of US$21.2 million, inventories of US$67.8 million, trade and other receivables of US$31.2 million and other assets of US$5.1 million. Eliminations relate to intercompany accounts receivable.

*** Capital expenditure – additions in 2015 – includes additions to property, plant and equipment of US$54.5 million, capitalised interest of US$12.4 million and prepayments made for property, plant and equipment of US$0.2 million.

Non-current assets for 2015 are located in the Russian Federation (US$995.7 million) and in the Kyrgyz Republic (US$43.0 million). Current assets for 2015 are located in the Russian Federation.

The major components of income tax expense for the years ended 31 December 2016 and 2015 are:

2016                      2015

US$000                US$000

Consolidated statement of comprehensive income

Current income tax:

Current income tax charge 36,596 15,867
Withholding tax 3,135
Adjustments in respect of prior year tax 804
Adjustments in respect of prior year withholding tax 738
Deferred income tax: 39,731 17,409
Relating to origination of temporary differences (21,412) 6,504
Income tax expense reported in the statement of comprehensive income 18,319 23,913
 

The majority of the Group entities are Russian tax residents. A reconciliation between the actual tax expense and the expected tax expense based on the accounting profit multiplied by Russian statutory tax rate of 20% for the years ended 31 December 2016 and 2015 is as follows:

2016                      2015

US$000                US$000

Accounting profit before income tax                                                   66,228_______ 13,894

At Russian statutory income tax rate of 20% 13,247 2,779
Non-deductible expenses 4,679 2,748
Effect of translation of tax base denominated in foreign currency (8,254) 8,758
Adjustments in respect of prior year tax 804
Adjustments in respect of prior year withholding tax 738
Withholding tax 3,135
Lower tax rates on overseas losses 6,575 3,218
Unrecognised losses (3,904) 1,305
Loss/ (gain) from other unrecognised temporary differences 328 212
Losses arising from goodwill impairment 2,513 3,351
Income tax expense at the effective tax rate of 28% (2015: 172%) Income tax expense reported in the consolidated statement of 18,319 23,913
comprehensive income 18,319 23,913
 

Deferred income tax

Deferred income tax at 31 December relates to the following:

Consolidated statement of         Consolidated statement of

    financial position comprehensive income
  2016 2015 2016 2015
  US$000 US$000 US$000 US$000
Deferred income tax liability        
Property, plant and equipment (138,754) (146,570) (7,816) 4,299
Inventory (3,377) (9,384) (6,007) (496)
Accounts receivable and other debtors (993) (710) 283 (93)
Deferred financing costs (83) (25) 58 (33)
  (143,207) (156,689) (13,482) 3,677
Deferred income tax assets        
Accounts receivable and other debtors 212 (60) (272) 724
Finance lease obligations 334 212 (122) (212)
Trade accounts and notes payable 1,290 772 (518) 321
Tax losses 27,326 20,308 (7,018) 1,994
  29,162 21,232 (7,930) 2,827
Net deferred income tax liabilities (114,045) (135,457) (21,412) 6,504
 

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

The amount of the deductible temporary differences for which no deferred tax asset has been recognised in respect of the site restoration provision at 31 December 2016 is US$17.2 million (31 December 2015: US$15.3 million).

No deferred tax benefit is recognised in relation to the provision for obsolete inventory. These materials are unlikely to be used for production purposes in the future and therefore future tax relief is not assumed. The amount of the deductible temporary differences for which no deferred tax asset has been recognised in respect of the obsolescence provision at 31 December 2016 is US$15.6 million (31 December 2015: US$15.9 million).

The amount of the deductible temporary differences for which no deferred tax asset has been recognised in respect of the tax losses at 31 December 2016 is Us$21.7 million (31 December 2015: US$32.5 million). The non-recognition of tax losses is due to insufficient expected future income against which these losses could be offset.

Russian tax legislation in respect of treating tax losses was changed in 2016: tax losses generated after 2007 can be utilised with no time limit.

The temporary differences associated with investments in subsidiaries, for which deferred tax liability in respect of withholding tax on dividends has not been recognised aggregate to US$486.9 million (2015: US$298.2 million). No deferred tax liability has been recognised in respect of these differences because the Group is able to control the timing of the reversal of the temporary differences and it is not probable that the temporary differences will reverse in the foreseeable future.

The total deferred tax liabilities arising from these temporary differences should be between US$0 and US$73.0 million (2015: US$0 and US$14.9 million), depending on the manner in which the investments are ultimately realised.

Profits arising in the Company for the 2016 and 2015 years of assessment will be subject to Jersey tax at the standard corporate income tax rate of 0%.

Impairment testing of non-current assets

In accordance with the accounting policies and processes, each asset or CGU is evaluated annually at 31 December, to determine whether there are any indications of impairment. If any such indications of impairment exist, a formal estimate of the recoverable amount is performed.

Management has determined the recoverable amounts in 2016 and 2015 using fair value less costs of disposal (FVLCD) calculations. FVLCD is determined at the cash-generating unit level, in this case being the separate gold production and development and exploration assets, by discounting the expected cash flows estimated by management over the life of the mine:

  • MNV until 2022;
  • BG – 2026;
  • Novo – 2029;
  • Klen – 2029;
  • Kekura – 2030;
  • Taseevskoye – 2029;
  • Unkurtash – 2037;
  • Lubov – 2028.

The calculation of the FVLCD is sensitive to the following assumptions:

  • Recoverable reserves and resources;
  • Production volumes;
  • Real discount rates;
  • Metal prices;
  • Capital expenditure and
  • Operating costs.

Recoverable reserves and resources are based on the proven and probable reserves and a portion of resources expected to be converted into reserves in existence at the end of the year.

Estimated production volumes are based on detailed life-of-mine plans and take into account development plans for the mines approved by management as part of the long-term planning process.

Metal prices are based on management judgement with reference to well-known analysts forecasts.

Operating costs are based on management’s best estimate over the life of the mine.

Discount rates represent the current market assessment of the risks specific to each project, taking into consideration the time value of money and individual risks of the underlying assets that have not been incorporated in the cash flow estimates.

  2016 2015
Post-tax discount rate for cash flows in the operating gold mining company (MNV), % 7.25 7.54
Post-tax discount rate for cash flows in the operating gold mining company (BG), % 8.25 8.54
Post-tax discount rate for cash flows in the polymetallic mining company (Novo), % 7.25 7.54
Post-tax discount rate for cash flows in the gold mining company being at development stage (Klen), % 9.25 9.54
Post-tax discount rate for cash flows in the gold mining company being at development stage (Taseevskoye), % 9.25 9.54
Post-tax discount rate for cash flows in the gold mining company being at exploration stage (Kekura), % 9.25 9.54
Post-tax discount rate for cash flows in the gold mining company being at exploration stage (Unkurtash), % 9.25 9.54
Post-tax discount rate for cash flows in the gold mining company being at exploration stage (Lubov), % 9.25 9.54
Gold price, US$ per ounce in the future year 1,200 1,050
Gold price, US$ per ounce in the year after the next 1,250 1,150
Silver price, US$ per ounce in the future periods 16 15
Lead price, US$ per tonne in the future periods 1,800 1,700
Zinc price, US$ per tonne in the future periods 2,200 1,700
The table below shows the key assumptions used in the fair value calculation at 31 December 2016 and 2015.

An impairment loss was recognised in 2016 in relation to the Belaya Gora project. The triggers for the impairment loss recognition were primarily the effect of changes to the mine plan which resulted in lower recovery rate and higher future capital expenditure accompanied by higher costs due to a stronger Rouble. As part of the Group’s annual impairment assessment, it was determined that due to the changes in estimates of the mine plan, the carrying amount of goodwill, mine assets, stripping activity assets, buildings, property, plant and equipment and construction in progress exceeded their recoverable amounts. The carrying amount of goodwill allocated to Belaya Gora has been reduced to Nil via the recognition of an impairment loss of US$12.6 million during the year ended 31 December 2016. US$10.2 million was recognised as an impairment loss in respect of other non-current assets.

An impairment loss was recognised in 2015 in relation to the Kekura project. The triggers for the impairment loss recognition were primarily the effect of lower gold price assumption and changes to the mine plan which resulted in postponing the development activities at Kekura. As part of the Group’s annual impairment assessment, it was determined that due to the changes in estimates of the mine plan, the carrying amount of goodwill and exploration and evaluation assets exceeded their recoverable amounts. The carrying amount of goodwill allocated to Kekura has been reduced to Nil via the recognition of an impairment loss of US$16.8 million during the year ended 31 December 2015. US$14.0 million was recognised as an impairment loss in respect of exploration and evaluation assets at Kekura and US$5.2 million was recognised as an impairment loss in respect of property, plant and equipment at Kekura.

Any increase in the post-tax discount rate, any decrease in gold prices below US$ 1,200 per ounce in 2017 or any increase in operating or capital costs at Belaya Gora would result in a further impairment of mine properties and property, plant and equipment.

For impairment of property, plant and equipment and intangible assets, fair value less costs of disposal are determined by discounting the post-tax cash flows expected to be generated from future gold production net of selling costs taking into account assumptions that market participants would typically use in estimating fair values. These estimates are categorised within Level 3 of the fair value hierarchy. Post-tax cash flows are derived from projected production profiles for each asset taking into account forward market commodity prices over the relevant period and where external forward prices are not available the Group’s Board approved life-of-mine model assumptions are used. As each asset has different reserve and resource characteristics and contractual terms, the post-tax cash flows for each asset are calculated using individual economic models which include assumptions around the amount of recoverable reserves, production costs, life of mine/ licence period and the selling price of the gold produced.

[1]

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

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

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