Hillgrove Resources : 2016 Annual Report

ANNUAL REPORT

for the year ended 31 December 2016

Hillgrove Resources Limited ACN 004 297 116

Limited

Resources Hillgrove

Corporate Directory

CORPORATE AND REGISTERED OFFICE

5-7 King William Road, Unley S.A. 5061, Australia

Tel: [phone]

KANMANTOO COPPER MINE

Eclair Mine Road

Kanmantoo S.A. 5252, Australia

Tel: + 61 8 8538 6800

Fax: + 61 8 8538 5255

SHARE REGISTRY

Boardroom Pty Limited Level 12, 225 George Street

Sydney N.S.W. 2000, Australia

Tel: + 61 2 9290 9600

Fax: + 61 2 9279 0664

BANKERS

Westpac Banking Corporation 31 Willoughby Road

Crows Nest N.S.W. 2065, Australia

Macquarie Bank Limited 1 Martin Place

Sydney N.S.W. 2000, Australia

AUDITORS

Deloitte Touche Tohmatsu 11 Waymouth Street

Adelaide S.A. 5000, Australia

WEB SITE

www.hillgroveresources.com.au

GENERAL ENQUIRIES

[e-mail]

CONTENTS

Chairman and Managing Director's Statement 1

Kanmantoo Copper Mine 3

Exploration 6

Sustainability: Environment, Safety and Community 8

Mineral Resource and Ore Reserves 9

Financial Statements 10

Directors' Declaration 67

Independent Auditor's Report 68

Shareholder Information 74

Chairman and Managing Director's Statement

In the 2016 calendar year, Hillgrove has achieved significant progress in overcoming an identified cash flow gap and implementing initiatives that have built solid foundations for the future of your Company.

The Hon. Dean Craig Brown, AO Independent Non-Executive Chairman

Mr Steven McClare - Chief Executive Officer and Managing Director

There is significant residual value in the Kanmantoo Copper Mining Operation. Having sufficient liquidity through the investment phase of the Giant cutback and retaining ownership has been critically important to enabling the future delivery of this value to shareholders.

Annual Report 2016

1

In the first quarter, the new Executive Team under the direction of the Board, critically assessed the past performance of Kanmantoo.

The depressed copper prices at the time and the deferred copper production associated with the new Mineral Resource Estimate (announced in May 2016), led to the identification and declaration of a forecast cash shortfall throughout 2016 and early 2017. Facing this challenge as a real and imminent threat, galvanised the Company and led to an extraordinary effort to successfully implement a wide range of initiatives.

One initiative was to unwind the forward sold copper hedges. We were fortunate that a series of circumstances allowed the decision to be made at a significant downturn in the market. This enabled the Company to fully repay the USD debt early. It should be noted that at the close of 2016, the copper price increase would have led to a negligible monetary hedge book value.

Other initiatives included securing a

$4m loan with the South Australian Government, targeting gold during a high price period, lowering the cash costs of production to offset lower revenues, deferring salaries by 10%, completing an infill drilling programme, selling and leasing back concentrate containers, deferring price participation with our offtake company, securing with owned assets the South Australian Government Performance Bond and releasing securities held by Macquarie

Bank, successfully raising funds through a fully underwritten convertible note issue and lifting mining rates post funding.

There are also a number of initiatives that were arranged in 2016, that impact 2017. These include gaining a Swiss Re provided Bond to Electranet thus

removing the cash backing requirement, negotiating significant rate reductions and payment terms (liquidity benefit) associated with our newly merged mining contractor, as well as negotiating a debt for equity swap and copper

price linked deferment with our drilling contractor.

Being able to implement these initiatives required the co-operation, assistance and belief of a large number of stakeholders. These stakeholders include employees, suppliers, contractors, offtake partners, shareholders, the surrounding community and the South Australian Government. We would like to once again sincerely thank all involved and look forward to sharing in our future success.

As can be seen in the consolidated financial results, revenue decreased, however this was more than offset by lower costs of production. This resulted in an improved EBITDA and operating cashflows, with operating cashflow increasing to $21.0 million. The Giant cutback investment (expenditure attributable to future

earnings) capitalised in 2015 - 2016 is

$65.1 million. At the end of 2016 this represented 94% of the cash outlay required to complete the cutback. It should be noted that guidance of C1 cash costs includes this attributable past expenditure, which is often overlooked when looking at cash requirements.

Hillgrove Resources Limited

2

Chairman and Managing Director's Statement (cont.)

The copper equivalent metal produced was within guidance, with lower copper and higher gold production. The loss after tax for CY16 was $109.1 million, which was mostly associated with impairment write downs of Kanmantoo mine assets at $67.1 million and deferred tax assets at $19.2 million.

Whilst the improved copper price may have given reason to considering reversing these impairments at year end, the Board felt it prudent to ensure the operational improvements, finalisation of initiatives and improved copper price, were sustained over an extended period.

There has been a significant focus on assessing the potential options of

mine life extensions. These efforts have identified several targets with minimal capital investment requirements, as they can utilise the existing processing facility. These targets include both surface and underground and are either at Kanmantoo or within a sixty kilometre radius. With cashflow improving the Company will finalise this review of

the targets and recommence active field exploration. We look forward to

announcing further details in the coming months as this work progresses.

While 2016 was a very challenging year, we are delighted to have won the South Australian Premier's Award for Excellence in Supporting Communities. The local Kanmantoo Callington Community Consultative Committee is a proud and hardworking team and we acknowledge the extremely important role they play in the success of the Kanmantoo Copper Mine. Through working together, we have successfully achieved improved outcomes for

all parties. The Company remains committed to being the best neighbour that we can be as a progressive and professional mining company.

We would like to sincerely thank all shareholders for your patience and continued support. The balance sheet restructuring, improved operational performance and copper price outlook place the Company on a much stronger financial footing than at the same time a year ago. With the vast majority of the Giant cutback completed, the operation is poised to generate significant free cash flows over the remainder of Life

of Mine. We look forward to rewarding you for your investment in Hillgrove Resources Limited.

The decision made in 2015 to simplify and consolidate the Company with a clear focus on the Kanmantoo copper mine was the right one. This strategy has been critical to ensure all non- essential expenditure is directed to near term income generating activities.

Hillgrove has been methodically cutting costs for several years through its ingrained culture of cost control and waste reduction. At current consensus pricing Kanmantoo has the potential to generate significant free cash over the remaining mine life.

From mid-2017 when the Giant Pit cutback is scheduled to be completed and free cash is being generated, the creditors will be reduced and near mine exploration targets capable of supplying existing assets will be prioritised.

The Board is determined to ensure that any future growth or life extensions

must deliver value for shareholders over and above the base case of returning otherwise invested cash to shareholders. To this end, the Company will undertake a measured exploration programme which will aim to extend mine life through near mine extensions and or regional exploration targets (refer Near Mine and Regional Exploration section of this report).