Hillgrove Resources

Published : July 27th, 2016

Activity Report for Quarter Ended 30 June 2016

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Activity Report for Quarter Ended 30 June 2016

QUARTERLY REPORT

IIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIII

PERIOD ENDING 30 JUNE 2016

Hillgrove Resources Limited (ASX: HGO) reports for the quarter ended 30 June 2016

HIGHLIGHTS

  • Proud winner of South Australian Premier's Award for Excellence in Supporting Communities.

  • Release of new Mineral Resource Estimate (MRE) for Kanmantoo Copper Mine, which contains an additional 11,080t of copper compared to the 2013 Resource Model.

  • Production against the MRE reconciles positively by 16% for first six months of this year.

  • C1 cost for the quarter of USD1.37/lb, driven by the high proportion of capitalised pre-strip.

  • Significant progress to address previously announced cash shortfall:

    • A 10% reduction and deferral in wage rates accepted by employees,

    • SA Government concessions, and

    • A secured $4.0 million working capital loan from the SA Government.

  • Agreement reached with financiers and SA Government to restructure balance sheet:

    • Macquarie Bank guarantee to be released and secured directly to SA Government,

    • Circa A$14-15m hedge book (subject to prevailing market prices) will be realised,

    • US$13.65m senior debt repaid from the hedge proceeds and restricted cash, and

    • Closing out of the hedge book has commenced (11% complete) while drafting of the documentation to implement the restructure is near completion.

  • 3,359t of copper and 2,428oz of gold (in concentrate) produced, guidance remains unchanged.

  • Revenue of $29.8 million at an average realised price of $3.04/lb (USD2.25/lb).

  • The last of the transitional and oxide material was processed.

  • Cash on hand was $6.6 million with total debt increasing from $17.8 million to $22.4 million (increase in debt due to the SA Government Loan and movement in the foreign exchange rate).

  • The 15% fall in consensus copper price forecasts over the last six months is anticipated to reduce the carrying value of the Kanmantoo operations to approximately $60 million as at 30 June 2016.

IIIIIIIIIIIIIIIIIIIIIIIII HILLGROVE RESOURCES LIMITED ACN 004 297 116

EXECUTIVE SUMMARY

The Total Recordable Injury Frequency Rate was 15.0, a 22% reduction over the last 12 months despite being impacted by a poor month of June. In addition, the Kanmantoo Callington Community Consultative Committee and Hillgrove Resources were the proud recipients of the SA Premiers Award for Excellence in Supporting Communities. Production was 3,359t of copper and 2,428oz of gold in concentrate for the quarter, at a C1 cash cost of USD1.37/lb. Revenue for the quarter was $29.8 million at an average realised price for copper of $3.04/lb (USD2.25/lb), with cash on hand at quarter end of $6.6 million.

The Giant pit cut back and mining performance in general was lower as activity has been constrained by the cash generated from the lower spot price of copper sales. The original plan for the first six months of 2016 was

to accelerate hedging to deliver 92% into the hedge book to offset the lower copper price during this period, but neither the acceleration nor the access to hedge proceeds was allowed by financiers. Instead, only 667 tonnes of hedges have been settled in the quarter and the resulting proceeds have been retained as restricted cash.

The successful negotiations with our financiers and the SA Government (refer Corporate section below for more detail) have led to an agreement to restructure the Hillgrove balance sheet by repaying the outstanding debt and for Hillgrove to provide assets as security for its obligations to the SA Government. A key element of this restructure is the closing out of its 11,999 tonne hedge book at a value close to the senior debt.

This is being done on a progressive basis at appropriate Australian dollar copper prices determined by the Board. Hillgrove can close the remaining 10,665 tonnes at its discretion (noting the first 11.1% have already been closed). The current mark to market is approximately $14 million to $15 million and is being closely monitored. Further updates will be provided as the close out progresses.

KANMANTOO COPPER MINE, SOUTH AUSTRALIA

Mining Lease 6345 (Hillgrove 100%) Overview

Mining continued in the Giant cutback, focussing on the development of the ore bearing benches in the southern end of the pit and waste stripping on the western wall. All mining activity is now in primary sulphide material, with no further oxide/transitional material to be mined or processed. The previous twelve month stripping ratio was

  1. tonnes of waste for every tonne of ore, with the remaining three stages of the Giant Pit being:

    • Remainder 2016 - relatively high strip ratio (4.3:1)

    • FY2017 - reduced strip ratio (2.6:1) improves cash generation

    • FY2018 and beyond - very low strip ratio (1.2:1) and reduced mining costs drive rapid cash generation

Since the introduction of the Mineral Resource Estimate, the areas mined during the quarter returned more ore tonnes at higher grade than predicted in this updated estimate. The first quarter of the year reconciled positively by 13%, and the second quarter has lifted the outperformance to 16% for the full half year. Backfilling of the Nugent pit continued to provide a short haul option for the waste, and this assisted in managing cash flow constraints during the quarter. The processing plant performed well, completing the treatment of the transitional and oxide stockpiles in April which had reduced the quarterly recovery performance. However, it is pleasing to note that recovery from primary (sulphide) ore averaged over 91% for the quarter despite the low feed grade. This is the highest since the Giant/Kavanagh orebody was last processed in Q3 2014.

Safety and Community

The Total Recordable Injury Frequency Rate (TRIFR) is 15, a 22% reduction over the last 12 months. The quarter saw the twelve month TRIFR reduce to 11 in May, the lowest since operations began in 2011, before three injuries in June pushed the rolling average back up to 15.

FIGURE 1. TOTAL RECORDABLE INJURY FREQUENCY RATE

Operations

TABLE 1. KANMANTOO COPPER MINE PRODUCTION STATISTICS

FY15

MAR-16 QTR

JUN-16 QTR

12 MTHS

3 MTHS

3 MTHS

Ore to ROM from Pit

kt

3,290

665

595

Ore to long term stockpiles

kt

252

1

0

Mined Waste

kt

17,350

3,843

3,000

Total Tonnes Mined

kt

20,892

4,509

3,595

To ROM from LT Stockpiles

kt

784

427

0

Mining Grade to ROM

%

0.59

0.58

0.52

Ore Milled

kt

4,104

865

759

Milled Grade - Cu

%

0.52

0.54

0.56

- Au

g/t

0.11

0.32

0.20

Recovery - Cu

%

80.3

72.6

78.8

- Au

%

47.1

51.2

49.7

Cu Concentrate Produced

Dry mt

74,971

16,148

14,221

Concentrate Grade - Cu

%

23.1

21.0

23.6

- Au

g/t

2.8

8.8

5.3

Contained Metal in Con. - Cu

t

17,306

3,397

3,359

- Au

oz

6,790

4,587

2,428

- Ag

oz

114,399

29,828

23,569

Total Concentrate Sold

Dry mt

75,028

15,382

15,765

Mining production was 3,595kt (1,164k BCM) for the June 2016 quarter, of which 595kt was ore. The decrease in mining movements over recent quarters have been a result of a number of factors, including confined mining areas, prioritising ore bearing zones, one of the wettest winters recorded in Adelaide but mostly managing cash constraints due to the reduced revenue resulting from not being able to access the hedge proceeds to offset the lower copper prices.

FIGURE 2. KANMANTOO COPPER MINE TOTAL BCM

The treatment of oxide ore requires greater mill time and leads to lower recoveries. Notwithstanding this, mill throughput and reliability continued to be high, despite a significant portion of oxide ore processed.

FIGURE 3. KANMANTOO QUARTERLY MILL TONNES, COPPER RECOVER AND MILL RUN TIME

The combined CPS and Primary copper recovery was 78.8%. The copper recovery in areas of primary sulphide remained in line with expectations for those primary ores at 91.0%, with the tailings grade in line with plan.

CPS

A total of 142kt transitional and oxide material was processed during the quarter, with a feed grade of 0.63% and a recovery of 32.2%, to produce 282 tonnes of copper in concentrate. This was the last remaining oxide and transitional ore and as anticipated was the most difficult to treat. The oxide ore processed contained a high clay content, which had a detrimental effect on copper recovery rate compared to previous CPS campaigns.

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Hillgrove Resources

CODE : HGO.AX
ISIN : AU000000HGO6
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Hillgrove Res. is a zinc development stage company based in Australia.

Hillgrove Res. holds various exploration projects in Australia and in Indonesia.

Its main exploration properties are WHEAL ELLEN in Australia and SUMBA and BIRD'S HEAD in Indonesia.

Hillgrove Res. is listed in Australia. Its market capitalisation is AU$ 12.2 millions as of today (US$ 8.8 millions, € 7.7 millions).

Its stock quote reached its highest recent level on June 30, 1997 at AU$ 99.25, and its lowest recent point on June 03, 2016 at AU$ 0.03.

Hillgrove Res. has 218 720 000 shares outstanding.

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