Hillgrove Resources : Activity Report for Quarter Ended 30 June 2019

QUARTERLY REPORT

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PERIOD ENDING 30 JUNE 2019

Hillgrove Resources Limited (ASX: HGO) report for the quarter ended 30 June 2019

HIGHLIGHTS

Mining and Processing Operations - a solid quarter with:

• Quarterly production of 4,223 tonnes of copper and 801 ounces of gold; and
• Safe completion of open pit mining activities, significantly reducing cash operating costs.

Pumped Hydro - sale of the rights to develop, own, and operate the Kanmantoo pumped hydro energy storage (PHES) project to AGL Energy Limited (AGL) for $31M, subject to satisfaction of a number of conditions and payable in staged payments with the first $1.0M received during the quarter. Progress was made on satisfying conditions for the next milestone payment.

Cash Flow - the Company distributed $8.7M in fully franked dividends during the quarter (1.5c/share). Notwithstanding this, working capital remained steady, with current assets exceeding current liabilities at quarter end by $18.1 million (unaudited), including cash of $4.8 million.

Fixed Pricing - continued prudent management of fixed pricing contracts, with pricing fixed for 5,175 tonnes of copper at an average of $8,750 per tonne at quarter end.

Underground Exploration and Development - commencement of the diamond drilling program of the down-dip extensions of the Kavanagh lode systems beneath the Giant open pit and evaluation of Nugent underground mining targets and nearby South Hub exploration targets.

Rehabilitation - progressive rehabilitation continues with 84 hectares now shaped to their final landform and planted with native vegetation. This reduces closure liabilities, which is expected to be reflected in a reduced environmental bond.

LOOKING FORWARD

Processing Operations - with the completion of mining, focus continues to be on maximising the accumulation of cash from the remaining approximately 2.8 million tonnes of stockpiled low grade ore to be processed.

Pumped Hydro - continue to undertake work with AGL to achieve the milestones for staged payments.

Growth Opportunities - ongoing work underway, including:

• Underground development - evaluate and assess feasibility of underground opportunity as drill hole data is received.
• Exploration - resource outlines suitable for evaluation studies are being developed for the Kanmantoo South Hub underground opportunities.

Cashflow - with the completion of mining activities eliminating significant operating costs, combined with the fixed pricing contracts, the Company is focused on cash accumulation.

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MANAGING DIRECTOR'S STATEMENT

The open pit mining activities were completed safely during the quarter. Low grade stockpiles have been built adjacent to the processing plant during the mining phase, when higher grade ore was preferentially treated to optimise cash generation in order to pay down creditors and accumulate cash.

This cash accumulation enabled the Company to return surplus cash to shareholders during the June quarter through the first dividend payment since operations commenced at Kanmantoo.

The cessation of mining significantly reduces the operating costs. The combination of the reduced cash cost structure, together with fixed pricing will allow ongoing accumulation of cash as the remaining stockpiles are treated.

During the quarter Hillgrove sold the rights to develop, own and operate the PHES project to AGL1 and received the first payment of $1.0M. A further $4.0M will be payable by AGL on the completion of a number of conditions precedent which are currently being worked on.

Cash generation from processing of stockpiles together with pumped hydro proceeds should position the Company to make further returns to shareholders, and prudently consider growth opportunities.

While Hillgrove remains committed to assisting AGL work through a number of stages as they assess the potential for the Kanmantoo site to be South Australia's first pumped hydro energy storage facility, PHES is not our core business. Renewed focus has ramped up activities this quarter to determine the viability of an underground mining operation at Kanmantoo to maximise value from existing infrastructure, including the low cost 3.6Mtpa processing plant and permitted tailings storage facility.

The first phase of this strategy focusses on accessing the depth extensions of the orebody directly below the pit before the pumped hydro project prohibits access. This concept utilises the haul road into the 350m deep Giant Pit as a "quasi decline" to be able to access the ore below the open pit. Preliminary modelling indicates the potential for a viable underground operation for a relatively low capital investment.

Drilling to prove up this target commenced in June. Hillgrove has also begun the associated studies required for the permitting process to ensure that, if viable, the underground mining opportunity has sufficient time to extract the ore prior to the commencement of the pumped hydro water filling program. In addition, negotiations continue with AGL regarding the interaction of the underground and pumped hydro to ensure that both projects proceed without hindering one another.

The second phase is centred on the Nugent orebody which sits entirely outside of the pumped hydro area. The conceptual design envisions a decline into Nugent passing in close proximity to the Critchley, Paringa and Emily exploration targets (collectively known as South Hub), providing opportunities for ore production at relatively low incremental costs. The viability of this is subject to further exploration of the South Hub.

In parallel, Hillgrove is employing low cost exploration techniques not used before in South East South Australia to establish this region as a highly prospective porphyry / IOCG (iron oxide copper gold) province. With a number of exciting targets identified, Hillgrove is considering exploration funding options which may include the introduction of JV partners.

This is an exciting period for Hillgrove as we evaluate the growth potential of the Hillgrove tenements.

In closing, I would like to acknowledge the stewardship of Steve McClare as Managing Director over the past three years, and in particular his unwavering confidence in the Hillgrove team to navigate through difficult operating conditions and very tight financial challenges. Steve departed from Hillgrove in May and on behalf of the Company, I wish Steve every success in his future.

1 Refer to ASX announcement dated 16 April 2019 for further details.

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CURRENT OPERATIONS

Kanmantoo Open Pit (Hillgrove 100%)

Safety

There were two recordable injuries during the quarter, both occurring in June. These injuries were cuts to fingers requiring stitches. In each case, following treatment, the injured employee returned to site to continue their shift. As a result of these injuries, and lower numbers of hours worked (completion of mining operations), the TRIFR increased to 9.9 at quarter end. Please refer to Figure 1 below.

FIGURE 1. TOTAL RECORDABLE INJURY FREQUENCY RATE (TRIFR)

Note to Figure 1: TRIFR is calculated per million hours worked

Operations Overview

Completion of open pit mining occurred in late May, refer Figure 2 below which shows the final bench of the Giant open pit being extracted.

This has now resulted in a significant reduction in cash costs with regards to equipment hire, diesel, staffing and contractors. As per recent quarters, difficult mining conditions continued due to single lane ramps, tight working areas, geotechnical conditions and wet weather.

At the end of the quarter, there was an estimated 2.8 million tonnes of stockpiled low grade ore to be processed (refer Figure 3). As processing of these stockpiles is critical to future cashflows, the Company has commenced a process to confirm the stockpile Reserves.

Mining production was 204k BCM for the quarter, down from 582k BCM for the previous quarter (refer Figure 6). This included 515kt of ore mined at a grade of 0.61%. This high grade ore was processed prior to the transition to processing low grade stockpiled ore in the second half of June.

In addition to mining production, there was 165k BCM of material movement associated with shaping and covering the final landform with topsoil as a growth medium. A further 4 hectares of landform were seeded in May (refer Figure 4) taking the total area seeded to 84ha.

Mill throughput for the quarter was 842k tonnes at a 93.5% mill run-time. The mill run-time was slightly lower than the previous quarter due to a planned shutdown undertaken in June. The copper feed grade for the quarter

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was 0.55% with a 90.8% copper recovery rate (refer Figure 7). The depletion of high grade ore stocks in June resulted in the lower feed grade relative to recent quarters. The copper recovery rate was also lower than previous quarters, driven by the lower feed grade processed, but was in line with expectations.

FIGURE 2. OPEN PIT - THE FINAL BENCH

FIGURE 3. LOW GRADE ORE STOCKPILE

1. HILLGROVE RESOURCES LIMITED ACN 004 297 116

FIGURE 4. REHABILITATION - HYDROSEEDING

FIGURE 5. REHABILITATION - AFTER ONE YEAR