Highland sells loss-making Darasun mine

Highland Gold Mining (HGM-L) has sold its unprofitable Darasun mine in eastern Russia to a private mining company, Yuzhuralzoloto (Southern Urals Gold), for US$25 million.

Yuzhuralzoloto, which is owned by Konstantin Strukov, reportedly Russia’s 183rd richest businessman, will pay Highland Gold US$3 million in cash and repay the unit’s debt of US$22 million. Yuzhuralzoloto is one of the 10 largest gold-mining companies in Russia.

Talks to sell Darasun, whose total after-tax operating loss last year was US$101.4 million, began in May. Russia’s fourth-largest miner, Highland Gold reported increased annual losses of US$96.4 million in 2006, including writeoffs of US$79.3 million, after a fire deep at the Darasun mine in September of that year killed 25 workers.

The Associated Press reported the fire was believed to have been triggered by welding works. But the mine had been plagued with operational problems for more than a year before the fire broke out, delaying the schedule for raising output and contributing to Highland’s net loss in 2005.

The deal must be approved by Russia’s anti-monopoly body, but Highland Gold, which is 34% owned by Barrick Gold (ABX-T, ABX-N), says the deal should be completed before the end of the year.

Currently on care and maintenance, Darasun is one of the oldest mines in the country, located in eastern Russia’s Chita region. The area has long held a strategic geopolitical position at the border with Mongolia and China. Today it is a bustling trading route between Russia and China. Darasun is 250 km north of Chita, a vibrant city of 300,000 people.

The designed capacity of the Darasun plant is 375,000 tonnes of ore per year. Last year, Darasan produced 16,398 oz. gold.

Some analysts believe the sale will be positive for Highland Gold, as the mine requires significant investment to lower operating costs and increase production. Highland says its goal is to become the most profitable gold mining company in Russia and Central Asia.

Mining activities have taken place at Darasun for centuries. These led to the discovery in the late 1800s of a source vein deposit and the first shafts were sunk in 1905 and deepened in 1927. Darasun produced about 3 million oz. gold between 1927 and 2000, when financial constraints forced its closure. The mine reopened in June 2004.

The Darasun deposits occur within the Darasun-Mogocha zone of the Transbaikal gold-molybdenum belt. The deposits are located in a 60-sq.-km area containing gold and silver occurrences. The deposits occur as thin quartz-sulphide veins and roughly 140 individual veins have been discovered, so far.

Darasun is accessible year-round by road and the nearest rail station is Shilka, about 80 km to the south.

A significant portion of Darasun’s open-pit mining equipment, including trucks, a hydraulic excavator and a drilling rig, have been employed at its Novoshirokinskoye project.