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By John Helmer in Moscow

These days investors in gold-mining stocks are behaving like diners in fashionable restaurants, subject to the same fitful appetites. On Tuesday, for example, they sold Highland Gold (HGM:LN) down 21%. But on Wednesday, they bought it up by 20%. Highland is now trading at its all-time low since listing in 2002. No doubt, like watercress soup, a sour taste goes out of fashion from time to time.

Saki once reported the trick of conveying information intended to impress in up-market restaurants. “By insisting on having your bottle pointing to the north when the cork is being drawn, and calling the waiter Max,” he wrote, “you may induce an impression on your guests which hours of laboured boasting might be powerless to achieve. For this purpose, however, the guests must be chosen as carefully as the wine.”

When Highland Gold was chaired by an English peer of the horse, betting and Tory set, a cultivar of Roman Abramovich, who brought Highland Gold into the London market, it was a simpler matter for the company to invite investors than it is today. However, Lord Daresbury stepped down in December 2004, to be replaced by James Cross, a deputy governor of the South African Reserve Bank, when certain monies required for Highland’s treasury were dispatched by Harmony Gold at the say-so of its then chairman, Adam Fleming, and his protégé, Bernard Swanepoel. They did much to charm over concerns about the transfers, and into subsequent troubles Highland ran into with Russian assets it didn’t quite own, and an asset Abramovich sold to Highland at a premium for himself. Those stories can be found in old Mineweb menus:

Mineweb Menus – Link

It might be expected that sudden gyrations in Highland’s market value, and a drop of GBP185 million in its market capitalization, from GBP390 million at the start of May to GBP205 million at the end, might occasion an explanation from the maitre d’hotel on Old Burlington Street. That is where Highland’s investment relations chief, Dominic Palmer-Tomkinson has his headquarters; he is son of Christopher Palmer-Tomkinson, whom Highland titles “senior independent director”; he is also chairman of Highland’s Nominations Committee and its Remuneration Committee.

Palmer-Tomkinson junior explained to Mineweb that he speaks only to investors, and is not allowed to speak to the press. There has been no announcement from the company’s registered office on Jersey, in the English Channel, and the last news posted on the company website appeared on April 23, when final results were issued for last year. They noted that production at the company’s principal asset, the Mnogovershinnoye (MNV) mine in Khabarovsk, had risen 8% to 167,544 troy ounces.

Since a disastrous and fatal fire in the main shaft of its Darasun mine (Chita region) last September, the MNV mine has been all-important for Highland. According to the 2006 results, it produced 151,146 oz, making 90% of total. The Darasun fire – followed by blame leveled in the direction of the Highland management by the federal authorities – triggered a 23% decline in the share price to 143 pence. That was the all-time low at the time. But this week it fell further to 105p.

What could be more price-negative than 25 dead goldminers; a halt to the Darasun mine’s production; an impairment writeoff of $79.3 million on the property; and compensation payments and other accident costs of $2.4 million?

Although it concedes that questions like these have been circulating in the market in recent days, and there have been rumours for some weeks now, Highland isn’t willing to answer. The company’s spokesman in Moscow, where its operational headquarters are located, is Dmitri Yakushkin; he was spokesman for Boris Yeltsin, when he was President of Russia and suffered from periodic over-indulgence in bottles uncorked towards the north. Asked to verify what has happened to explain the market movements, Yakushkin told Mineweb the company cannot speculate on the reason for the changes in the share price.

When asked to explain why gold production at MNV has collapsed in the first quarter, triggering loss of investor confidence, Yakushkin said: “I will be able to give you a comment at the beginning of August, when we release our production update.” When it was pointed out that Barrick Gold, now the controlling shareholder of Highland, had released the details of the production fall on May 1, Yakushkin declined to speed up his company’s disclosure, noting only that Barrick is “an independent company.”

Highland’s shareholding roster confirms that Barrick currently holds 33.9% of the company. The shareholding controlled by Roddie or Adam Fleming, and other Fleming family entities or nominees, remains substantial, but is divided into small lots and is not fully disclosed.

The tale of how Peter Munk, Barrick’s chairman, ignoring the skepticism of his senior executives, did a deal for Highland with Abramovich and intermediaries, was told by Mineweb, shortly after it happened in the autumn of 2003. Less public is the story of Highland’s subsequent due diligence on the deal, which resulted in a substantial cut in the terms Munk had shaken his hand on. A continuing series of disclosures has worn away at Barrick’s confidence. These included a 33% cut in the gold resource estimate at Highland’s Taseevskoye deposit, disclosed by the company, confirmed by Barrick, and reported by Dorothy Kosich in Mineweb on July 1, 2005: Links Here

Barrick spokesman Vince Borg confirmed to Mineweb this week that Highland’s gold output had dropped by 64%, compared to the first quarter of 2006. He also confirmed that the figure is so minuscule, compared to Barrick’s total annual production of about 8 million oz, Barrick’s financial and production reports don’t mention it by name, analyze its ups and downs.

The market, however, has had no difficulty making the calculations for Highland, based on Barrick’s First Quarter report, dated May 1. At page 11, Barrick reports aggregate gold output totaling 2,079,000 oz at an average cash cost of $313/oz. The anonymous looking “Other” category is reported to have produced 6,000 oz for the quarter, down from 10,000 oz in Q1 2006. Cash cost is reported at $316/oz, an improvement over $355/oz the year earlier.

This is Highland Gold’s MNV mine, Borg told Mineweb. He also confirms that the decline in output at the mine is greater than it looks. For the first-quarter volume is calculated according to Barrick’s 34% stake in Highland. In the first quarter of 2006, Barrick’s equity had been less, and the calculation based on a 20% shareholding; Barrick converted individual project stakes into the larger shareholding in December of 2006, and took management control of Highland at the same time. Also in the earlier period, Darasun was producing part of the Highland total; since the last quarter of 2006, the mine is on care and maintenance, while gold production is reduced to extraction from ore stockpiles on the surface.

Taking these differences into account, the aggregate production of gold by Highland for the first quarter ending March 31, this year, turns out to be 17,634 oz. This compares with 50,000 oz in Q1 2006. The decline is 65%.

Another way of assessing the damage is to annualize the latest figure for MNV, and compare it to last year’s performance at the mine. Thus, if the current production rate continues, MNV can be expected to produce about 70,000 oz for the full year. Last year, Highland reports that MNV produced 151,146 oz. The current decline at MNV appears to be more than 50%. Highland will neither admit this, nor explain it

A Russian gold-miner, with operations in the Russian fareast, told Mineweb “the main reasons are the unreadiness of resources, incomplete capping works – all management problems.” He added that he expects Highland will abandon Darasun because “it is too expensive and they don’t want to work on that.” Regarding the Maiskoye deposit, in the Chukotka region, which Abramovich deftly disposed of in 2003, the source said: “According to their licensing agreement, they have to start extraction at Maiskoye this year, and as far as I know they haven’t done the feasibility study yet.” Highland reported in April: “the Mayskoye feasibility study is progressing well, although delays in the development of the geological model due to data validation will postpone the study to the middle of 2007. We have confirmed the metallurgical process which incorporates bio-oxidation.”

The speculation in the industry in Moscow is that “data validation” may be a polite way of saying the asset isn’t as good as it has been cracked up to be. This, plus the known problems at Darasun and Taseevskoye, and the newest problems at MNV, triggered a Russian wire service report last week. This claimed that Barrick “is dissatisfied with results and prospects of work at HGM.” The report went on to suggest that Barrick has decided it does not want to leave Russia, but is not interested in working in the country through Highland. The wire also claimed that a Russian bank is doing the rounds offering Barrick’s shares for sale.

A major Russian gold investor told Mineweb he is aware of the buy-out possibility. This is not new, he said — the Flemings have been trying to sell for some time, but their price has always been too high. He added that if MNV’s production is collapsing, the lower share price doesn’t make an acquisition attractive. This could be a ploy to drive the share price even lower.

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