Hillgrove Resources : Activity Report for Quarter Ended 30 Sept 2016

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PERIOD ENDING 30 SEPTEMBER 2016

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

• Despite the mining and processing operations being impacted by record rainfalls and the power outages experienced throughout South Australia in late September, the Company produced 3,103t of copper and 2,187oz of gold (in concentrate).

• 2016 copper production is forecast to be just below the lower end of guidance (14,500t to 16,500t) and 2016 gold production is expected to be above the top end of guidance (8,000oz to 10,000oz). On a copper equivalent basis, production is expected to be within guidance.

• The higher gold production is partly due to higher gold recoveries, which increased to 60% for the month of September by targeting a lower copper concentrate grade.

• A successful infill drilling campaign was completed, increasing near term forecast copper production in a tight liquidity period.

• C1 cost for the quarter increased from US$1.37/lb last quarter to USD1.90/lb, for a year to date of US$1.58/lb, below 2016 guidance (US$1.85/lb to US$2.25/lb).

• Revenue was $26.0 million at an average realised price of $2.87/lb (USD2.15/lb).

• The restructure to address the previously announced cash shortfall continued and included:

  • Sale and leaseback of containers, releasing working capital;

  • Deferral of price participation and reduction in precious metals royalty;

  • Liquidation of copper hedging to fund the debt repayment totalling US$13.65 million; and

  • Conversion of environmental bond obligations to security over the Company assets.

• Cash on hand was $0.6 million, with total debt decreasing from $22.4 million to $6.6 million (made up of the SA Government loan and a promissory note to a mining contractor).

• Announcement of a fully underwritten $5.0 million Pro-Rata Issue of Convertible Notes, subject to due diligence and signing of the underwriting agreement.

• Since 30 September 2016 an updated Ore Reserve Estimate was released which increased ore reserves by 14% (7.4kt of copper metal), and as a result

  • The cashflow shortfall reported in the 30 June 2016 Half Year report has been reduced from $15.0 million to $5.0 - $10.0 million, subject to copper price; and

  • The peak shortfall period has been deferred from March 2017 to June 2017, allowing the Company more time to seek any additional funding that may be required.

• 2017 Outlook - with the Giant Pit cutback expected to be completed in June 2017, the strip ratio will continue to decrease from the current ratio of 4.5 to 3.1 in the 1st half of 2017 and 2.3 in the 2nd half and 2017 forecast copper production is expected to be between 18,000t and 20,000t.

IIIIIIIIIIIIIIIIIIIIIIIII HILLGROVE RESOURCES LIMITED ACN 004 297 116

During the September 2016 quarter, the Total Recordable Injury Frequency Rate was 18.9, a slight increase from the previous quarter. Production was 3,103t of copper and 2,187oz of gold in concentrate for the quarter, at a C1 cash cost of USD1.90/lb. Revenue for the quarter was $26.0 million at an average realised price for copper of $2.87/lb (USD2.15/lb), with cash on hand at quarter end of $0.6 million.

The Giant pit cut back and mining performance in general has continued to be lower as activity has been constrained by the cash generated from the lower spot price of copper sales, which has led to working in confined mining areas and the prioritisation of ore bearing zones. In addition to this, the quarter was impacted by the continuation of one of the wettest winters recorded in Adelaide. As a result of this and along with the power outage

experienced throughout South Australia in late September, ore processed through the plant decreased from the last quarter. All of these factors contributed to the subsequent increases in the unit costs of both mining and processing.

The cashflow constraints and the wet weather impacts experienced in recent quarters are expected to moderate, with the completion of the previously announced underwritten rights issue and the onset of summer.

Despite the challenges that have been faced, it was pleasing to have completed a number of initiatives during the quarter, which are described in more detail in the Corporate section and include the completion of the debt restructure, the refinancing of the performance bonds, the improvement in liquidity, the successful infill drilling results, the improved Mineral Resource and Ore Reserve Estimate and the announcement of the fully underwritten $5.0 million Pro-Rata Issue.

As a result, the Company is on a stronger financial footing for the future and 2017 will see:

• The completion of the Giant Pit cutback in June 2017;

• Lower costs as the current strip ratio of 4.5 will decrease to 3.1 in the 1st half of 2017, 2.3 in the 2nd half of 2017, and to 1.2 from 2018 onwards; and

• Higher production with forecast 2017 copper production expected to be in the range of 18,000t to 20,000t, with 7,000t to 8,000t in the first six months and to 11,000t to 12,000t in the second six months.

Mining Lease 6345 (Hillgrove 100%) Overview

Mining was adversely affected by weather events during the quarter. The months of July and September were the wettest on record for Callington. However, mining continued in the Giant pit cutback, focussing on the development of the ore bearing benches in the southern end of the pit and waste stripping on the western wall. Towards the end of the quarter, the areas mined in the western wall also began to produce some ore. Backfilling of Nugent pit is largely completed with rehabilitation ongoing, and backfilling of the Emily pit is scheduled to commence this quarter.

The processing plant performed well, with copper recovery of 91% for the quarter. This was slightly better than predicted for the feed grade of material processed (0.51% copper). Periods where the processing plant was shut down through ore availability were used to conduct maintenance works using internal labour to keep costs down. Gold recovery improved to 60% in the month of September by targeting a lower copper concentrate grade and recovering more gold associated with iron sulphides. This brought the quarterly gold recovery up to 52.1% (49.7% previous quarter).

The Total Recordable Injury Frequency Rate (TRIFR) for the quarter was 18.9, with the increase from the previous quarter a result of injuries related to rough road conditions during wet weather and management of coarse oversize from rill in the previously mined Kavanagh Pit.

Mining production was 2,965kt (959k BCM) for the September 2016 quarter, of which 700kt was ore. The decrease in mining movements over recent quarters has been a result of a number of factors, including confined mining areas (narrow work areas and single lane ramps), prioritising ore bearing zones, one of the wettest winters recorded in Adelaide, but mostly managing cash constraints. This continued in the September 2016 quarter and is likely to further impact the mining operations in the December 2016 quarter as a result of the flow on effects from the recent quarters as well as the continuing heavy rainfalls in October 2016.

These factors however, are expected to be mitigated in the near future, with the onset of summer (which is traditionally drier in the region) and the subsequent opening up of the pit to increase the mining area available.

Mill run time continued to decline this quarter resulting in reduced milled tonnes. This was driven by ore availability as a result of the constraints that have been placed on mining in recent quarters as well as the state wide power outage which occurred in September 2016. With the constraints in mining expected to be released, the recent trend over the last five quarters should reverse, leading to increased run time and milled tonnes.