A1 Gold Mine

Location and orientation of drilling completed (Green area - Dyke, Red/Brown - Areas of previous development, Blue lines existing development)

Coarse gold recovered from one of the commissioning samples from the gravity circuit of the A1 sample plant

Heron option to purchase 100%

Safety

To the end of March, the A1 site has operated for a total of 146 days loss time injury free. This is an excellent result for a start up underground mining operation and reflects a strong focus on safety from all employees, contractors and management. A strong safety management system is in place and subject to external independent audit. The first A1 Mines Rescue Team completed its training this quarter.

Geology and Drilling

Geology

The A1 gold mineralisation is hosted in a vertical dipping north plunging mafic dyke which outcrops intermittently through the leases. Mafic dyke hosted mineralisation is common in the Woods Point district of eastern Victoria and differentiates this district from the sediment-hosted saddle reefs encountered in central-western Victoria.

In the upper levels gold mineralisation has been worked over a strike of 150 metres between the A1 south shaft and the A1 main shaft, however by the 14 Level mineralisation was developed over a strike length of nearly 400m and the host dyke is up to 80m wide across strike. One of the key exploration targets is the upward continuation of the mineralisation above the 14 Level. Two styles of gold mineralisation are recognised. Firstly high grade reef mineralisation which was the focus of previous mining and secondly lower grade stockwork mineralisation which was below the lower cut off grade dictated by the inefficient antiquated mining methods employed when the mine last operated.

Heron believes the stockwork mineralisation may host gold at sufficient grade to be mined economically using modern small scale mechanised bulk mining methods and these stockworks are the main target of the current evaluation. Stockworks are reported from the 7, 10 and 14 Levels with those on the 14 Level reported as the highest grades from historic drilling. This historic drilling on the 14 Level includes hole DDH_138 with 10m @7g/t Au and 5m @11.2g/t Au, Hole DDH_139 with 10.5m @ 5.7g/t Au and DDH_140 with 5.4m @ 13g/t Au all from stockwork zones. There are no available drill records for stockworks on either the 7 or 10 Levels.

Access by Heron between the 7 and 4 Levels has confirmed the presence of stockwork on the 7 Level, with sampling having commenced to establish the potential grade of this zone. The zone is noted on the 6 Level and is reported from the 8 Level, providing good tonnage potential. This part of the mine was in closest haulage proximity to the old A1 mill and at times of constrained ore feed during the mine's 100 year history, 7 Level low grade and main A1 shaft mullock (grade around 2g/t Au) were the principle mill ore feeds.

Gold mineralisation in both stockworks and reefs is expected to be free milling with a large proportion recoverable from gravity processing. Commissioning of Heron's gravity circuit using underground "mullock" is already confirming free gold.

Drilling

Drill access was established late in the quarter, with a total of 337m of core drilling completed in 6 drillholes. Drill core was logged and sampled, with gold analysis being undertaken via one kilogram Leachwell analysis technique at On Site Laboratory Services' laboratory in Bendigo Victoria. The majority of results are pending. The Leachwell technique allows for a larger sample to be analysed in comparison to fire assay; in this case one kilogram as against 50 grams.

This larger sample minimises the impact of nugget effect on sample results providing a more representative assay result and is commonly used in deposits with coarse gold. Current orientation studies on samples from the A1 have indicated a move to 3kg Leachwell will further improve analytical estimates of gold grade.

Drilling targeted the northern extensions of the host dyke on the 7 Level. Hole L7_0001 intersected 6m of bleached altered dyke some 120m north of the historical workings and returned 0.6m of dyke grading 3.68g/t Au. This intersection is important as it demonstrates the presence of the dyke 260m above the known 14 Level stockwork zone. Exploration will work to identify where the width of dyke increases from the observed 6m on 7 Level to the 80m mapped on 14 Level. Areas of wider dyke are believed to correlate with strong development of reefs and stockworks and consequently gold grades.

Stockwork zones were intersected from 8m to 13m in hole L7_0004 associated with strong bleaching and sulphide alteration, assays are pending for this hole. Currently there are two diamond drill rigs operating underground which will move to a double shift drilling roster in the coming quarter as additional drill sites become available through decline development. A schematic long section of the mine is shown on figure 1 showing the location and orientation of drilling completed as red coloured drill holes.

Access has been gained to the historic levels between the 7 and 4 Level and ground conditions observed are very good. Historic stopes are typically 2m to 3m in height and estimates of extracted tonnes of mineralisation are up to 13,000 tonnes per stope.

Mapping and face sampling has commenced on the 7 Level access and stopes with a total of 150 samples collected. A further 150 samples are planned to be collected from historic workings on the 7 Level. Samples were taken as chipped channels from the face, sampled to geological boundaries, samples weighed between 3 and 6 kg.

These were processed by 1kg Screen Fire Analysis. A total of 32 samples reported results above 1 g/t Au with a peak assay of 41.4g/t reported from a laminated quartz reef within a stope pillar (indicating the style of grade historically recovered). Anomalous mineralisation was identified over 100m of strike length in the 7L drive, with a best result of 1m @14.9g/t in a extensional quartz vein and 1m @ 7.5g/t in the stockwork zone. Bulk samples of the laminated reefs and stockworks will be collected in the coming quarter, for processing through the newly commissioned A1 gravity circuit. This will provide more quantitative grade estimates.

The 7 Level was the main access route to the mine for at least 100 years of operations. Levels above and including the 7 Level also had the lowest cost of ore extraction since no shaft haulage was required to get the ore to surface. Therefore identifying remnant ore on these upper levels is surprising and positive indication for finding additional remnant ore outside the main stockworks targets.

A zone of stockwork mineralisation was mapped and sampled over 80m along the 7 Level adit, returning results ranging from 0.2g/t to 7.5g/t. This stockwork has been observed on the 6 Level suggesting at least 30m of vertical extent. Historic records report the stockwork on the 8 Level extending it downwards for a further 30m. Drilling is planned to determine the cross strike dimensions of this zone along with a more detailed sampling program in the coming quarter. The confirmation of the first of the stockwork mineralisation zones is encouraging. Further work is being undertaken to accurately determine the grade of this zone.

The flow of drilling and face sampling results will increase during the coming quarter as further drill positions become available.

Sample Preparation and Gravity Gold

To mitigate the effect of nugget gold impacting the estimation of grade a small crushing and gravity separation plant has been installed on site under the supervision of the company's metallurgists. To assist in estimation of grade a larger sample between 25 and 200kg is taken from the zone of interest underground and crushed to a nominal 0.6mm prior to processing through a small gravity circuit to remove the coarse gold for separate analysis. The coarse gold recovered from one of the 26kg commissioning samples from waste left in a 7 Level stope is shown on the cover photograph. By total assay of the gravity recovered fraction and analysis of the tail sample, the sample head grade is calculated and the adverse impact of small sample size and coarse gold is mitigated. This plant is capable of processing between 200 and 300kg of sample per day and will play an increasingly important role as drilling and face sampling identifies areas where coarse gold grade estimation is required.

Surface Infrastructure

Site infrastructure was completed this quarter with connection of grid power and services connections. The sample preparation facility (for processing bulk samples to ameliorate coarse gold sampling issues) was installed and commissioned this quarter. Additionally a drill core preparation facility was commissioned.

Decline Development

To the end of March a total of 292m of decline development has been achieved.

Although water quality in the mine is generally close to potable standard, higher than expected contaminant levels in the mine water require the addition of a metals extraction water treatment plant which is currently going through permitting. Dewatering is now scheduled to re-commence at the end of August.

To bring forward drill testing of the important 14 Level target zones and to obtain the best drilling orientation for the ore body, a drill drive is being established along the strike of the dyke on the 7 Level. This has a number of benefits including:

• not impeded by dewatering or decline development rates;
• providing a drilling angle which is better suited to the dip of the veins giving greater probability of maximising intercepts;
• drilling predominantly in dyke increasing the exploration value of the holes; and
• early drill positions are well suited to test the 14 Level northern dyke and stockworks earlier in the programme, which represent one of the better known targets.

At the end of April, the 7 Level drill drive access and first drill cuddy has been completed, and the drill drive is being pushed south along the dyke towards the main shaft.

Studies and Permitting

A second round of community consultation for the project was held with the local communities of Gaffneys Creek, Woods Point and Jamieson/Kevington. Generally the local communities are very supportive of the project. The Company has greatly appreciated this community input.

Ecology and flow modelling studies have been conducted for Raspberry Creek near A1 in support of the EPA water treatment plant Works Approval application.

Water treatment testwork has been completed by a number of vendors for the design and specification of a water treatment plant.

An option study analysing the relative benefits of two available sites for waste rock and tailings storage has been completed. Preliminary site surveys have been completed covering Aboriginal and European heritage, Flora and Fauna, with focus on the sites being investigated for future waste rock and tailings storage. No significant issues have been uncovered for either site, and evaluation of the favoured option is continuing based on technical merits.