CMCL

Business Context and Reporting Period

Company: Caledonia Mining Corp Plc
Filing Type: Form 20-F Annual Report
Reporting Period: Fiscal year ended December 31, 2010
Business Overview: Caledonia is a mining company focused on exploration and development in Southern Africa. Its primary operating asset is the Blanket Gold Mine in Zimbabwe. Other key assets include the Nama copper/cobalt project in Zambia, the Rooipoort platinum group elements (PGE) project in South Africa, and the Eersteling gold mine (held for sale) in South Africa.

Key Financial Metrics (2010)

Note: All figures are in Canadian Dollars unless otherwise specified.

Material Changes vs. Prior Period

• Profitability Turnaround: The Company returned to profitability in 2010 with a net income of $2.26 million, compared to a net loss of $3.95 million in 2009. This was driven by increased gold production and higher gold prices.
• Production Increase: Gold production at the Blanket Mine rose to 17,707 ounces in 2010 (11,295 ounces in 2009). Revenue doubled to $22.4 million.
• Capital Investment: Capital expenditures increased significantly to $7.29 million in 2010, primarily due to the completion of the No. 4 Shaft Expansion Project at Blanket Mine, compared to $1.55 million in 2009.
• Non-Cash Charges: Net income was impacted by non-cash items totaling $3.49 million, including a $1.04 million write-down of Reserve Bank of Zimbabwe (RBZ) Gold Bonds and a $577,000 impairment of mineral properties (Rooipoort).
• Asset Base: Total assets grew by 24.4% to $27.5 million, reflecting capital additions and mineral property investments.

Guidance, Outlook, and Risks

Outlook and Guidance

• Production Targets: Management aims to achieve an annualized gold production rate of 40,000 ounces in 2011 following the completion of the No. 4 Shaft Expansion Project. However, production in Q1 2011 was lower than expected due to raise-boring operations.
• Cost Reduction: Production costs per ounce are expected to decrease significantly as fixed employment costs are amortized over higher production volumes.
• Exploration: Diamond drilling programs are underway at the Nama Project (Zambia) and exploration continues at the GG and Mascot projects in Zimbabwe.

Material Risks and Contingencies

• Zimbabwe Indigenization: The Zimbabwean government's Indigenisation and Economic Empowerment Act requires 51% local ownership. The Company has submitted a plan but awaits clarity on implementation, which could materially affect profitability and control.
• RBZ Gold Bonds: Approximately $3 million in foreign currency owed by the Reserve Bank of Zimbabwe for gold sales was converted into bonds. These were written down to nil fair value in 2010 due to non-redemption, though legal title remains.
• Power Supply: Operations are subject to electrical interruptions. The Company is installing diesel generators to mitigate this risk.
• Internal Controls: Management disclosed material weaknesses in internal controls over financial reporting due to insufficient personnel and lack of segregation of duties at the head office.
• Commodity Prices: The Company has no hedging strategy and is fully exposed to fluctuations in gold, copper, and cobalt prices.

Investor Verification Checklist

• RBZ Bond Recovery: Verify the current status of the Reserve Bank of Zimbabwe Gold Bonds and any potential for future recovery or further write-downs.
• Indigenization Implementation: Monitor the finalization of the Indigenization Plan in Zimbabwe and its impact on the Company's ownership structure and cash flows.
• Production Ramp-up: Confirm if the Blanket Mine achieves the targeted 40,000 ounces per annum production rate in 2011 despite operational delays.
• Internal Control Remediation: Review subsequent filings for updates on the remediation of material weaknesses in financial reporting controls.
• Capital Requirements: Assess the Company's ability to fund the 22 Level Haulage Development Project and exploration activities without further equity dilution, given the cash balance of $1.1 million.