Caledonia Min Regulatory News (CMCL)

3 Apr 2006 08:01

Caledonia Mining Corporation03 April 2006 Caledonia Mining Corporation Caledonia Mining Fourth Quarter and 2005 Annual Results and Appoints Chief Financial Officer Toronto, Ontario - March 31 2006: Caledonia Mining Corporation ("Caledonia")(TSX: CAL, NASDAQ-OTCBB: CALVF, AIM: CMCL) is pleased to announce its fourthquarter and 2005 annual operating and financial results. The financial resultsare reported in Canadian dollars, except where otherwise stated. Financial Highlights (in thousands of Canadian Dollars except per share amounts) Q4 '05 Q4 '04 2005 2004Revenue $453 $469 $2,642 $841Operating costs 1,724 1,686 7,917 6,451Gross Profit (loss) (1,271) (1,217) (5,275) (5,610)Cost and Expenses 783 3,352 4,405 4,382Cash 1,076 6,470 1,076 6,470Net (loss) for the period (2,205) (4,569) (9,680) (9,979)Net (loss) per share (basic & fullydiluted) (0.006) (0.015) (0.031) (0.034) For the year ended December 31, 2005, Caledonia recorded a net loss of $9.68million or $0.031 per share (2004: net loss of $9.98 million or $0.034 pershare), which included an operating loss of $5.3 million (2004: $5.6 million) asextensive surface and underground maintenance work associated with Barbrook'sincreasing production levels resulted in significant increased one-time cost. In2005, general and administrative expenses included a charge of $0.3 million forstock option grant expense (2004: $0.2 million). During 2005, $6.6 million from private placements and the exercise of warrantswas raised. Capital assets and mineral properties received an investment of $5.3million, mainly in South Africa. Cash available at year end totalled $879,000. Commenting on the Company's activities during 2005 Stefan Hayden, President andCEO, said "2005 was another busy year for Caledonia, as we continued to progressthe Barbrook mine towards economic gold production and advanced our explorationprojects towards development, with particular focus on the Nama cobalt project,the Rooipoort PGE/Ni/Cu Exploration Project and the Eersteling gold properties. Barbrook increased gold production, up 192% on 2004 to 4,951 ounces but stillexperienced operational challenges. However, work continued to focus onoptimizing the metallurgical circuits, with a plant expansion to treat 15,000tonnes per month approved mid-year and commissioned in January 2006. Undergroundthe work of proving up additional reserves and resources to establish asustainable and profitable production base and a more flexible mining area willcontinue into 2006. Caledonia anticipates returning Barbrook to economic goldproduction during 2006 following these enhancements, despite the benefits of astrong gold price being partially offset by a strong rand. In 2006, Caledonia will continue with its endeavours to finalise an acceptableBlack Economic Empowerment transaction during the year which will contributevalue to the South African assets. At Nama, although significant progress was made during 2005 with the signing ofa Memorandum of Understanding, negotiations have been impeded by unrealistictestwork requirements by this particular end-user. Discussions were also heldwith a number of other interested parties regarding a potential cobalt off-takeagreement. These discussions will continue during 2006 and the Company hopes toprogress to a final agreement and will start development once an acceptableoff-take agreement has been concluded, hopefully later this year. The Rooipoort PGE/Ni/Cu Exploration Project has made good progress with adrilling program during the year leading to an independent 43-101 compliantresource statement which confirmed an inferred resource of 18 million tonnes,containing an estimated 428,586 ounces of palladium, 274,193 ounces of platinum,33,313 tonnes of nickel and 20,114 tonnes of copper. The Qualified Person forthis resource estimate is Dr. Julian Verbeek of RSG Global. Further explorationwill continue in 2006 to follow up on additional targets. The rights to adjacentproperties have been acquired from Falconbridge (see news release March 13,2006). This acquisition virtually doubles our exploration area and greatlyenhances the potential viability of the Rooiport Exploration Project. At Eersteling, near surface gold potential of 8km of strike along the Doreen,Pienaar and Girlie structures was highlighted by an aeromagnetic survey. During2006, drilling is planned on identified extensions to the known ore zones on theEersteling and Zandrivier Mining Licence areas. On the corporate side, the listing on AIM in June 2005 has offered Caledoniagreater market exposure to the London and European based institutionalinvestors, providing analyst research, and further broadening of the shareholderbase, ultimately benefiting all shareholders. During the forthcoming year, we will continue to focus on our primary operatingasset, Barbrook and seeking to return it to economic gold production, whilstmaintaining the momentum on our key exploration assets, Nama, Rooipoort andEersteling, with a view to ultimately developing them and thus deliveringshareholder value." The Annual Information Form for 2005 is now available on SEDAR and on theCaledonia website at www.caledoniamining.com Mr. Mike Tombs will leave the employ of the company on March 31st at the end ofhis contract. He will be replaced as Chief Financial Officer by Mr. SteveCurtis. Mr Curtis has extensive experience as Financial Director in the SouthAfrican manufacturing industry. He is a member of the South African Institute ofChartered Accountants. For further information please contact: Caledonia Mining BuckBiasStefan Hayden, President and CEO Alex Buck / Nick BiasTel: +27 11 447 2499 Tel: +44 7932 740 452 Further information regarding Caledonia's exploration activities and operations,along with its latest financials may be found at www.caledoniamining.com. Certain statements included herein are "forward-looking statements". Managementcautions that forward-looking statements are not guarantees and that actualresults could differ materially from those expressed or implied in theforward-looking statements. Important factors that could cause the actualresults of operations, exploration or development programs, or the financialcondition of the Company, to differ include, but are not necessarily limited to,the risks and uncertainties discussed in documents filed by the Company with thevarious regulatory authorities having jurisdiction. 2005 OBJECTIVES AND ACHIEVEMENTS 2005 Objectives Achievements Return Barbrook Gold Mine in Almost 200% increase in gold productionSouth Africa to economic gold compared to 2004, from 1,693 ounces to 4,951production. ounces and tonnes milled increased from 26,592 to 66,365. Commenced capital projects to expand the mine and plant throughput to 15,000 tpm.Continue developing additional Development during the year was focused onreserves and resources at opening up the ore bodies for mining and onBarbrook Gold Mine. the development of additional ore reserves.Obtain the Prospecting Rights for Obtained the Prospecting Rights for Grasvally.the Grasvally portions of the Drilling program completed with 4,207 metresRooipoort Platinum Exploration drilled during the year on Grasvally.Project.Complete the feasibility studies Biox(R) testwork was completed. Updated Bioxof installing a Biox(R) bacterial (R) operating costs have been determined. Theleach and/or ultra-fine milling test results will enable a final Biox(R) plantand/or Dense Media Separation design to be completed. The design will becircuit at Barbrook Gold Mine and tailored to the current plant expansion,commence construction. however the decision to proceed with Biox(R) will be postponed until the plant expansion has been assessed. Ultra fine-milling testwork has been completed and shows a significant reduction in gold residue losses from the plant. There is also a potential saving in the milling cost. Ultra fine-milling is included in the 15,000 tpm plant expansion circuit.Identify the platinum resource on An independent resource estimate wasthe Rooipoort and Grasvally calculated and incorporated into a NI 43-101properties which form the report by RSG Global of Australia. The resultsRooipoort Platinum Exploration are given on page 12 of the annual report.Project in South Africa.From the existing exploration Follow-up aeromagnetic survey and gold-in-soilinformation and the recently results together with compilation of previouscompleted high resolution work has highlighted the near surface goldairborne Geophysics and Soil potential along 12km of known gold bearingChemical Programs, identify and structures in the Eersteling area. Similardrill possible extensions to the compilation in the Zandrivier area hasknown ore zones on the Eersteling identified a number of potential targetand Zandrivier Mining Licence structures for similar work.areas.Confirm the feasibility of Further testwork by Mintek continued.producing an economic cobalt Reinterpretation of the airborne geophysicalconcentrate from the Nama data was commenced and completed during theproperty in Zambia. Construct a year. A number of as yet untested areas havepilot plant at Nama to produce a been identified for follow-up.cobalt concentrate for testing.Conclude an agreement with a Signed Letter of Intent with a Refinery andcobalt end producer to purchase they have commenced preliminary testwork. Ancobalt concentrate produced at amendment to the existing Environmental BriefNama or possibly form a strategic to allow pilot plant operations has beenalliance to achieve this approved by the Environmental Council ofobjective. Zambia.Seek a joint-venture partner to Discussion ongoing with various interestedcommence an exploration program parties.at the Kadola copper/cobalt andthe Eureka copper/gold propertiesin Zambia.Expand the Board of Directors to Rupert Pardoe joined the Board asaddress ongoing Corporate non-executive Chairman and the various BoardGovernance requirements. Committees were restructured accordingly. Implement succession plans for senior executive Succession plan developed andand operational staff. being considered.Strengthen the Investor Relations and Public Appointed BuckBias asRelations functions. Caledonia's IR and PR consultants for all markets.List Caledonia on the London Stock Exchange Caledonia successfully listedAlternative Investment Market with an issue of on AIM on June 27 with an issuenew shares to support the activities required to of 34,888,888 new shares.meet these objectives. 2006 OBJECTIVES - Optimise gold production at Barbrook Mine in South Africa to treat at least 15,000 tpm. - Continue developing additional reserves/resources at Barbrook Mine. - Complete metallurgical studies to confirm viability of economic gold recovery from Daylight & Victory ores at Barbrook Mine. - Improve safety awareness at Barbrook Mine and further develop necessary programs to ensure a safe operation. - Further explore the polymetallic resource on the farms Rooipoort and Grasvally which form the Rooipoort PGE/Ni/Cu Exploration Project in South Africa. - Increase the land holdings around the Rooipoort Exploration Project area. - Drill identified extensions to the known ore zones on the Eersteling and Zandrivier Mining Licence areas. - Continue with efforts to conclude an agreement with a cobalt end producer to purchase cobalt concentrate produced at Nama and/or form strategic alliances to achieve this objective. - Seek a joint-venture partner to commence an exploration program at the Kadola copper/cobalt and the Eureka copper/gold properties in Zambia. - Pursue possible acquisitions and/or strategic partnerships to expand Caledonia's portfolio of properties in Southern Africa. - Expand the Board of Directors to address ongoing Corporate Governance requirements. - Implement succession plans for senior executive and operational staff. - Strengthen the Investor Relations and Public Relations functions within Caledonia. - Conclude necessary agreements to satisfy the South African Black Economic Empowerment ("BEE") requirements. - Arrange necessary financing to support the activities required to meet these objectives. PERFORMANCE HIGHLIGHTS ------- -------- ------- -------- ------- 2005 2004 2003(1) 2002(1) 2001(1) ---------------- ------- -------- ------- -------- ------- Financial - C$ 000's ---------------- -------- -------- -------- -------- Revenue from Sales 2,642 841 646 27 124 ---------------- ------- -------- -------- -------- -------- Gross Profit (Loss) (5,275) (5,610) (2,984) (118) (143) ---------------- ------- -------- -------- -------- -------- Expenses (General and Administration, Interest and 4,405 2,959 1,841 1,585 1,130 Amortization) ---------------- ------- -------- -------- -------- -------- Net Income (Loss) - before (9,528) (8,917) (4,737) (1,856) (1,096) Write-Downs ------- -------- -------- -------- -------- ---------------- Net Income (Loss) - after Write-Downs (9,680) (9,979) (14,496) (4,446) (1,096 ---------------- ------- -------- -------- -------- -------- Cash 1,076 6,470 4,179 1,864 90 ---------------- ------- -------- -------- -------- -------- Current Assets 2,264 7,481 4,573 2,094 184 ---------------- ------- -------- -------- -------- -------- Assets 22,338 23,666 19,530 24,969 25,183 ---------------- ------- -------- -------- -------- -------- Current Liabilities 2,589 1,062 790 1,336 2,701 ---------------- ------- -------- -------- -------- -------- Long Term Liabilities 377 423 1,089 1,073 1,499 ---------------- ------- -------- -------- -------- -------- Working Capital (325) 6,419 3,783 758 (2,517) (Deficiency) ------- -------- -------- -------- -------- ---------------- Shareholders' Equity 19,372 22,181 17,651 22,560 20,983 ---------------- ------- -------- -------- -------- -------- Total Capital Expenditures 5,284 3,813 2,279 613 23 including Mineral ------- -------- -------- -------- -------- Properties ---------------- Expenditures on Mineral Properties 2,583 2,298 2,042 624 23 ---------------- ------- -------- -------- -------- -------- Financing Raised 6,588 14,314 9,511 5,174 1,078 ---------------- ------- -------- -------- -------- -------- Share Information ---------------- -------- -------- -------- -------- Market Capitalization ($ Thousands) 42,632 39,145 105,955 86,836 9,086 ---------------- ------- -------- -------- -------- -------- Shares Outstanding (Thousands) 370,715 301,112 252,274 211,795 165,202 ---------------- ------- -------- -------- -------- -------- Warrants & Options (Thousands) 34,748 52,342 27,348 28,055 19,566 ---------------- -------- -------- -------- -------- -------- Earnings (Loss) per Share (0.03) (0.03) (0.06) ( 0.02) ( 0.01) ---------------- -------- -------- -------- -------- -------- TSE Share Price High 0.18 0.465 0.610 0.44 0.09 ---------------- -------- -------- -------- -------- -------- TSE Share Price Low 0.10 0.12 0.215 0.060 0.04 ---------------- -------- -------- -------- -------- -------- TSE Share Volume 61,214 56,934 99,233 81,234 22,310 (Thousands) -------- -------- -------- -------- -------- ---------------- NASDAQ Share Price High 0.15 0.37 0.39 0.281 0.06 (US$) -------- -------- -------- -------- -------- ---------------- NASDAQ Share Price Low 0.08 0.10 0.16 0.040 0.02 (US$) -------- -------- -------- -------- -------- ---------------- NASDAQ Share Volume (Thousands) 105,151 210,251 440,811 271,404 74,714 ---------------- -------- -------- -------- -------- -------- AIM Share Price High 6.25 - - - - (pence) -------- -------- -------- -------- -------- ---------------- AIM Share Price Low 4.50 - - - - (pence) -------- -------- -------- -------- -------- ---------------- AIM Share Volume 856 - - - - (Thousands) -------- -------- -------- -------- -------- ---------------- Operating Results (1) ---------------- ------------------------------- -------- -------- -------- -------- Gold Production (Ounces) 4,951 1,693 1,187 52 114 ---------------- -------- -------- -------- -------- -------- Silver Production 264 66 42 4 - (Ounces) -------- -------- -------- -------- -------- ---------------- Average Cost per Ounce Gold 1,241 2,310 3,129 - - (US $) Sold -------- -------- -------- -------- -------- ---------------- Average Revenue per Ounce Gold (US $) Sold 441 415 402 - - ---------------- -------- -------- -------- -------- -------- Year End Gold Resource (Thousand Ounces) 2,478 2,459 2,478 2,489 2,930 ---------------- -------- -------- -------- -------- --------(1) Restated for the adoption of the Asset Retirement Obligations change inaccounting policy LETTER TO SHAREHOLDERS 2005 has been another challenging and exciting year for Caledonia as we worktowards increasing the mining and milling rates at Barbrook Gold Mine andreturning the mine to profitable gold production and consolidate work on ourexciting Nama Cobalt/Copper Deposit in Zambia. While the macro-economicenvironment in South Africa continues to be favourable, the overall outlook forcommodity prices is positive but a stronger South African Rand has had anegative impact on the profitability of the South African mining industry as awhole. Work at Barbrook Gold Mine in South Africa continued to focus on optimizing themetallurgical circuits. By mid year, after considering the development of theadditional mining resources and the extended mining areas, it was decided thatthe mineral resources would support a larger plant on a sustainable basis. Themetallurgical plant expansion to treat 15,000 tonnes per month was designed andconstructed during the second half of the year. The plant expansion wascommissioned in January 2006 as soon as the holiday season was over. This plantexpansion incorporates the re-commissioning of the existing 1300kw AllisChalmers mill, the installation of an expanded flash flotation, carbon cleaningcircuits, ultra-fine grinding circuit and RIL circuits. Underground the work ofproving up additional reserves and resources to establish a sustainable andprofitable production base and a more flexible mining area is continuing.Following these enhancements, we remain confident that we will be able to returnBarbrook to economic gold production during 2006 despite the benefits of astrong gold price being offset by a strong rand. Exploration work continued throughout the year at the Rooipoort and Grasvallyproperties of the Rooipoort PGE/Ni/Cu Exploration Project, south of Mokopane and54 holes totalling 18,450 meters were drilled. RSG Global completed anindependent NI 43-101 compliant resource calculation and declared an inferredresource of 18 million tonnes, containing an estimated 428,586 oz Pd, 274,193 ozPt, 33,313 tonnes Ni, 20,114 tonnes Cu. Additional exploration is planned tofollow up on additional targets within the property. Caledonia subscribes to the Black Economic Empowerment ("BEE") legislation,which was introduced to reverse previous discriminatory practices in SouthAfrica, and is actively seeking suitable BEE partners for its South Africanoperations in the strong conviction that, in the long term, this approach willadd significant value for Caledonia shareholders. Significant progress was madeduring 2005, however no agreements were concluded. We hope to updateshareholders on progress in this regard during the course of 2006. Our exciting cobalt project Nama, in northern Zambia, has made steady progress.Nama could be one of the largest primary cobalt deposits in the world.Negotiations with large potential end-users continue and Caledonia expects toenter into long term supply contracts during 2006. At the Mulonga Plain Diamond Project in Zambia and the Kikerk Lake DiamondVenture in Northern Canada, our joint venture partners have continued theirobligations to fund the exploration programs. Both projects were drilled duringthe year. Results of these programs are provided later in this report.Caledonia's interest in Mulonga Plain remains 40% and 17.5% at Kikerk Lake. Caledonia continues to believe the gold price will maintain its upward trend inthe near term. The US$ gold price has continued to rise, reaching in excess ofUS$530 per ounce in December 2005. Caledonia management believes that goldbullion and gold shares remain in a long-term bull market. To maximise thebenefit of the current strong price, Caledonia has decided to remain unhedged.It should be noted that the South African Rand gold price has increased comparedto 2004. As Barbrook's operating costs are in Rand this increase enhances theproject economics. Turning to the financial performance of the company, Caledonia continues to bedebt-free having raised $6.6 million from private placements and exercise ofwarrants. During 2005, the company suffered a loss of $9.9 million whichincluded an operating loss of $5.3 million. $5.3 million was invested in capitalassets and mineral properties, mainly in South Africa. Net cash available atyear end totalled $879,000. In June 2005, Caledonia listed the company's shares on the AlternativeInvestment Market in London, England with the symbol "CMCL" in conjunction witha financing. The Board believes this listing will introduce Caledonia to theLondon and European based institutional investors, offer Caledonia greatermarket exposure and analyst research coverage, and further broaden theshareholder base, ultimately benefiting all shareholders. This year, the company will continue to focus on implementing succession plansfor senior executive and operational staff, as well as expand the Board ofDirectors to address ongoing Corporate Governance requirements. The future for Caledonia shareholders is promising as the company is uniquelypositioned during 2006 to expand and develop its gold production, its cobalt/copper project, its nickel/platinum exploration project and its diamondprojects. The further strengthening of its Board of Directors should also showbenefits in ensuring that the company meets its Corporate Governance andStrategic objectives. At the end of 2005 Chris Harvey retired from Caledonia. He has however agreed tocontinue to make himself available to serve as a director. In addition, he willcontinue to provide technical consulting services to the Company as required, sohis vast expertise and knowledge will not be lost to the Group. I'm sure myfellow directors will join me in thanking Chris sincerely for his enormouscontribution to Caledonia over the past decade, and wishing him and Eileen everyhappiness for the future. Finally, my thanks go to Caledonia's management, directors, staff, joint venturepartners, and particularly to our shareholders for supporting Caledonia duringthe challenges and opportunities of another year. The management and directorslook forward to your continued confidence as we work diligently towards theobjective of building Caledonia into a significant diversified internationalmining company. On behalf of the Board of Directors, (Signed) S. E. HaydenPresident and Chief Executive Officer CALEDONIA MINING CORPORATION Management's Discussion and Analysis This discussion and analysis of the consolidated operating results and financialcondition of Caledonia Mining Corporation (the "Company", "Caledonia") for thefiscal years ended December 31, 2005, December 31, 2004 and December 31, 2003should be read in conjunction with the Consolidated Financial Statements and theAnnual Information Form and Press Releases issued by the company, all of whichare available from the System for Electronic Data Analysis and Retrieval atwww.sedar.com or from the Company website at www.caledoniamining.com. TheConsolidated Financial Statements and related notes have been prepared inaccordance with Canadian Generally Accepted Accounting Principles ("GAAP"). Caledonia was formed in February 1992 and is listed on the Toronto StockExchange as "CAL", on NASDAQ-OTCBB as "CALVF", and on London's AIM as "CMCL". VISION AND STRATEGY Caledonia is an exploration, development and mining company with a producinggold operation in South Africa and a diversified exploration portfolio ofprojects in Canada, South Africa and Zambia, some of which are joint ventures.Caledonia's objective is to develop the asset base into a significantdiversified international mining company through profitable gold production andsuccessful exploration activity, focused primarily on Southern Africa. Caledonia's business model is to identify and acquire properties or projectsearly in the development cycle, which have the potential to become low costoperations, and then add value by developing the asset, either as an operator orthrough a joint venture agreement. The possibility of divestiture in whole orpart will be considered at different points in time on the valuation curve andwill be governed by the benefit to shareholders. Where appropriate, Caledoniawill seek strategic alliances with well-managed exploration or operatingcompanies through existing or new joint ventures. The Company has a strong management team and Board of Directors with diverseexpertise in gold production, mineral exploration, mine development, finance andmarketing. With the expectation of continuing improvements in commodity prices over thelong term, Caledonia is following the strategy of diversification through itscurrent exploration activities for diamonds, gold, platinum group metals andbase metals. With the potential of improved political conditions in manySouthern African countries, Caledonia is reviewing mining opportunities in thesecountries. CORE BUSINESSES GOLD MINING Barbrook Mines Limited The 100% owned Barbrook Mines Limited ("Barbrook") is located near the historicgold-mining town of Barberton in the Mpumalanga province of the Republic ofSouth Africa, approximately 375 km east of Pretoria and Johannesburg. Barbertonhas a history of gold mining dating back more than 100 years. The Barbrookproperty, which covers an area of 10,625 acres and extends for a distance ofabout 28 km along strike, represents a consolidation of approximately twentypreviously worked gold mines. The Barbrook gold deposits occur in the Barberton Greenstone belt, the host forthe other gold deposits in the area. The belt is of Archean age and includessome of the oldest volcanic and sedimentary rocks in the World. The belt trendssouthwest to the northeast and has been intruded and deformed by various graniteplutons along the margins. The Barbrook property covers two steeply-dipping,banded iron formation units trending in an east-west direction. These two shearzones, called the Zwartkoppie and Barbrook lines, are the host to the Barbrookgold deposits. The gold mineralization at Barbrook is complex, the gold isgenerally extremely fine-grained, associated with refractory minerals such aspyrite, pyrrhotite and arsenopyrite, and contains significant concentrations of"preg-robbing" amorphous carbon. Mining at Barbrook is from underground using an open-stope, sub-level benchingmethod. Broken ore is trammed to the surface crushing area along the main 10Level haulage way. At present all workings are on or between 6 Level and themain 10 Level haulage. A vertical shaft is currently planned on the French Bob'sore zone to access the ore blocks below 10 Level. The hoist room and associatedaccesses on 10 Level have been developed and sinking is expected to commenceduring the second quarter of 2006. Barbrook Mine gold reserves and resources are as follows: GOLD RESERVES & RESOURCES (Undiluted) - as at December 31, 2005 Category Tonnes * Gold Grade grams/ Gold Ounces tonne ** **RESERVES Proven 255,000 5.88 48,100Probable 53,000 6.11 10,400Total 308,000 5.92 58,500 RESOURCESMeasured 495,000 2.96 47,100Indicated 1,254,000 5.35 216,000Total 1,745,000 4.67 263,100 Inferred 8,781,000 5.76 1,627,000 * 1 Tonne=1,000 kilograms=2,204.6pounds**Some numbers may not add due to rounding. Mr. David Grant, C.Geol., FGS, Pr.Sci.Nat., an independent consultant is the"Independent Qualified Person" for Barbrook's reserves and resources as requiredby National Instrument 43-101 of the Canadian Securities Administrators. In the metallurgical processing plant, the broken ore is de-slimed, crushed tominus 13mm size and stored in a coarse ore storage bin. From this bin, ore isconveyed to the 1300 kW Allis Chalmers primary ball mill, with its associatedflash flotation cell. This flash flotation cell recovers and produces aconcentrate containing up to 70% of the gold from the mill discharge. The milledore then passes to the flotation plant, which includes scavenger and cleanercircuits. The combined flotation concentrates with a gold grade of between 30 to40 g/t is processed through a carbon removal circuit consisting of DiesterTables and cyclones to remove most of the amorphous carbon that is a goldpreg-robber and previously caused metallurgical problems in gold recovery. Theamorphous carbon is discarded with the main flotation tailings. The plus 140micron oversize "carbon-free" concentrate is batch separated from the slurry inthe Sala 90 kW regrind mill, and then fed into the 95% -25 microns ore streamfeed to the Deswik ultra-fine-grinding mill. This fine-milled concentrate ispumped to the 3-stage, newly developed Aachen pre-oxidation circuit where oxygengas is added to satisfy the high oxygen demand of the fine sulphide concentrate.Paraffin is added to mask any residual carbon preg-robbers and lime is added toincrease the pH to above 10 and the slurry is then pumped to the resin-in-leach(RIL) circuit. Gold is then recovered from the loaded resin in the elution andelectrowinning circuits. The high-grade gold bullion bars produced are sent to aSouth African refinery for further processing and sale of gold. The present metallurgical circuit has a design capacity +/- 20% of 15,000 tonnesper month. Mining production is planned to reach 15,000 tonnes per month as theunderground and stope development progresses and provides greater miningflexibility. As additional ore resources are developed increased production maybe possible. Tailings are pumped to the tailings deposition area located about3km from the mine site. Tailings deposition operations are managed by a licensedcontractor and are fully compliant with all requisite legislation and codes ofpractice. Barbrook owns a full mine infrastructure including administration areas,change-house, lamp room, security barracks, training and first aid rooms, minestores, engineering/maintenance workshops, assay and metallurgical laboratories,explosive magazines and the tailings deposition area. Eersteling Gold Mining Company Limited The 100% owned Eersteling Gold Mining Company Limited ("Eersteling") is located36 km south of the city of Polokwane in Limpopo Province of the Republic ofSouth Africa, 300 km north of Johannesburg. The Eersteling Mine and nearby Zandrivier property covers an area of 47,000acres (19,020 hectares), extending for a distance of about 25 km east-west. Theyare located in the Pietersburg Greenstone Belt which is of Archean ageconsisting of an upper and lower sequence. The upper sequence is a sedimentaryunit consisting mainly of conglomerate, grit and sandstone while the lowersequence is undifferentiated mafic and ultramafic volcanic rocks and intrusives,with banded iron formation and chert. The Willemse shear feature is the locus ofgold mineralization in the Eersteling area. The Eersteling mine has been on care and maintenance since early 1997 whenproduction was suspended due to the then prevailing low gold price. In 2002,Eersteling applied for its required Section 9 permanent mining licence which wasgranted during April 2003. Caledonia intends, subject to a sustainable economicrand gold price and favourable Eersteling exploration results, to re-commencecommercial production at Eersteling in the future. The Eersteling Mine gold resource estimate based on the 1997 data before themine was placed on care and maintenance, is as follows: GOLD RESOURCES (Undiluted) - as at December 31, 2005 Resource category Tonnes Gold Grade g/tonne Gold OuncesMeasured 60,500 7.43 14,500Indicated 537,000 7.78 134,400 Total 597,500 7.74 148,900 Inferred 2,049,000 5.79 381,000 The above resource estimate is historic and the company does not consider thisestimate to be a defined resource in terms of National Instrument 43-101. TheCompany has not completed the work necessary to verify the classification of theresource in terms of National Instrument 43-101 and as such the historicestimate should not be relied upon. Eersteling has a number of exploration prospects on its mineral holdings,including the Roodepoort Gold Exploration Project and the Rooipoort PGE/Ni/CuExploration Project. These are detailed in the Exploration section of thisreport. Eersteling owns a full mine infrastructure, including administration areas,change-houses, lamp room, security barracks, hostels, kitchen and dining areas,training and first aid rooms, mine stores, engineering/maintenance workshops,assay and metallurgical laboratories, explosive magazines and a licensedtailings deposition area. In the event that mining operations resume atEersteling, these facilities will require some refurbishing prior to beingreturned to use. MARKETING All gold bullion produced is delivered to Rand Refinery in Germiston, SouthAfrica and sold at spot at the discretion of the company. The company nominatesthe currency of settlement for each individual sale. KEY PERFORMANCE FACTORS The key performance factor of a gold mine is the ability to produce gold at acost per ounce that is low enough to pay all obligations and generate anacceptable return to shareholders. The price of gold is established in aninternational market and is considered a commodity. The Rand price of gold playsa large part in determining the profitability of South African gold mines.During 2005, the South African Rand strengthened by 1.2% against the UnitedStates dollar and this, coupled with an 8.9% increase in the US$ gold price,resulted in a 7.8% increase in the market Rand gold price per ounce. Due to thetiming of Caledonia's production, the company recorded an increase of 5.2% inthe average Rands per ounce received over Caledonia's 2004 financial year. The successful operation of mining and exploration depends on the presence ofeconomic in-situ resources, the availability of experienced and skilledmanagement and employees and financial resources to be able to carry out thework, and the support of the holding company. - Caledonia initiated a human resources program focused onstrengthening senior management. This program commenced in late 2003 and isdetailed in the 2003 and 2004 Annual Reports. Mr. Patrick Smith was appointedmine manager of Barbrook Mine on August 1, 2005. Additional appointments will berequired during 2006 as Mr. Harvey retired in December 2005 and Mr. Johnstonehas indicated his intention to retire in September 2006. - Additional Board appointments are now being contemplated to maintainan adequate total number of independent Board directors. The financings of 2005 and of January/February 2006 enabled Caledonia to carryout the planned development of its projects into 2006. Caledonia remainscompletely debt-free. CONSOLIDATED FINANCIAL RESULTS For the year ended December 31, 2005, the Company recorded a net loss, afterwrite downs, of $9.7 million ($0.031 per share) compared to a net loss of $10.0million in 2004 ($0.034 per share) and a net loss of $14.5 million ($0.062 pershare) in 2003. The loss in 2005 included losses from operations of $5.3million. There was a mineral property write down of $0.152 million in 2005, $1.1million in 2004 and $9.8 million in 2003. The loss from operating activities of$5.3 million has decreased from the $5.6 million in 2004 as Barbrook'sproduction levels have increased, although extensive maintenance work alsoresulted in significant increased cost. In 2003, an operating loss of $3.0million was recorded. In 2005, general and administrative expense includes acharge of $0.3 million for stock option grant expense as compared to $0.2million for 2004 and $0.1 million in 2003. OPERATIONAL REVIEW Barbrook Mine There were two fatal accidents in the underground mine at Barbrook during 2005.In one a miner fell to his death when he slipped while working at an orepass; inthe other a train guard was struck by a moving train and died of his injuries. Operations at Barbrook during 2005 focused mainly on expanding the metallurgicalcircuit and developing mining areas to cater for the planned increase in millthroughput and to improving the plant gold recovery. The carbon removal circuitdeveloped by Barbrook in 2004 was incorporated into the plant circuit during thefirst part of the year. Gold recoveries improved during the 2nd quarter -averaging 61% compared to 48% in the first quarter. This gold recoveryimprovement was not maintained and was probably caused by an overloading of thecarbon-removal and the resin-in-leach circuits. The result was that goldrecoveries fell to 48% in the 3rd quarter and to 40% in the 4th quarter. Despitethe more consistent milling operations in the last half of the year leading tosteadier tonnage throughput, gold recoveries still did not reach the targeted 60to 65%. Metallurgical tests on the French Bob's orebody showed that gold recoveriescould be slightly increased and made more consistent by ultra fine milling ofthe flotation concentrate. A review of the mine economics in mid 2005 showedthat with newly identified ore zones it would be possible to increase productionlevels. It was therefore determined that an expansion of the existingmetallurgical plant, allowing an increased throughput, would enhance the mineeconomics. In the second half of 2005, it was decided to expand themetallurgical plant to process at a design rate of 15,000 tonnes per month. On the mining side, the following changes have been made. Long hole drills wereintroduced on the stope benches to improve operating efficiencies and to providea safer mining method. Mining has been concentrated in the French Bob's ore zonebetween 10 and 7 Levels. Geological sampling and evaluation on the Twala andTaylors zones, adjacent to, and along strike from, the French Bob's zone isongoing. Production from these areas, and up-dip extensions above 7 Level, willsupplement the present production allowing the mill throughput to be increasedto the 15,000 tonnes per month planned range for 2006. To ensure the continuity of the ore supply from the French Bob's and adjacentore zones, development has started on a vertical shaft, which will provideaccess to the French Bob's, Twala and Taylors zones below the 10 Levelelevation. The mine plan is focused on converting the Resources to Reserves bymeans of underground development and drilling and has now embarked on anaggressive development program to access the Taylors West, Crescent and Brownsnew zones between 10 Level and 6 Level. Circuit changes and necessary mechanical repairs to the Barbrook metallurgicalplant resulted in sporadic operation during much of 2005. The results achievedare as follows: Barbrook Mine - 2005 Production ResultsOre mined Tonnes 75,411Development advance Meters 2,459Ore milled Tonnes 66,365Grade milled g/t 4.58Gold sold Ounces 4,951 In the metallurgical plant, the following changes were made: The crushing plant was reconfigured to wet washing and screening operation - allof the screens were refurbished and three stage washing and screening employed.The original Allis Chalmers ("AC"), 12ft by 14ft, 1300 kW drive ball mill andits associated feed conveyor and slurry pumping circuits were rehabilitated anda new Outokumpu 20m3 flash flotation cell installed to treat the whole of the ACmill discharge. The secondary flotation section was upgraded and a cleanerflotation section included. The flotation concentrate product is now processedthrough an expanded carbon-removal circuit consisting of three Diester '999'tables and multiple double-cyclone stages to remove the preg-robbing amorphouscarbon and retain the floated gold-bearing sulphide minerals. The flotationtails thickener has been rehabilitated and included in the new circuit. Thisthickener will re-use most of the water from the flotation and carbon cleaningcircuits and thus provides far more efficient pumping and deposition of tailingsonto the tailings dam. The relatively carbon-free flotation concentrate, designed to be about 12 to 15%of the original AC mill feed throughput, is screened to remove trash, thickenedand then ultra-fine milled. In February 2006, the Sala mill was reintroduced asa secondary mill to ensure that no oversize material is fed to the Deswik mill.The 250 litre Deswik turbo-mill developed and produced locally in South Africa,is designed to reduce the size of the flotation concentrate to a D80 of 12microns. The finely-milled concentrate is processed through the Aachen oxidationsections where the high oxygen demand of the fine concentrate is satisfied bypassing it through three Aachen circuits where high pressure oxygen gas isintroduced and to the recirculating slurry flow over a specific time period. Asmall amount of paraffin is added after the final Aachen treatment. The paraffin'blinds' small amounts of residual amorphous carbon that maystill be presentfrom liberation of carbon in the ultra-fine milling section. Lime slurry isadded in this circuit to maintain the slurry pH between 10 and 11. The 'oxidised' concentrate is pumped through a very fine trash screen sitedahead of a new eight-stage resin-in-leach (RIL) section that originallycomprised the CIL section of the old metallurgical plant. The RIL tanks arefitted with Kemix inter-stage resin screens and have been designed to operate asa 'carousel-type' operation with sufficient retention time to cater for futuretonnage extensions. An entirely new resin washing, elution and electrowinningsection has been designed and constructed to handle the larger resin processingrequirement. It is estimated that the above changes will allow for a consistent plantthroughput of up to 18,000 tonnes per month and a gold recovery of at least 65%on the Barbrook line ore bodies. In the Zwartkoppies section of the mine, the higher grade ore zones aregenerally associated with arsenopyrite. The gold is disseminated within thearsenopyrite as extremely fine particles and poses metallurgical problems inconventional gold recovery methods. Some very preliminary tests based onultra-fine grinding have shown significant leaching improvements. However, thistest work needs to be repeated and optimized on plant scale in order todetermine whether such a fine grind and resultant processing can be economicallyattained. It may be possible to separate an "arsenopyrite" fraction during thecarbon-removal process that could be processed separately by ultra-fine milling.Testing of these Daylight/Victory ores will continue in 2006 with the aim ofproviding the plant with an additional higher grade source than that of theBarbrook line ore zones. The construction of the new milling plant was largely completed and commissionedin January 2006 and is now fully operational. Outlook The forecast production and sale of Caledonia's gold for 2006 is difficult toestimate at this stage. It will depend on the rate and timing of the improvedgold production expected at Barbrook, which will be better established duringMarch 2006, and the Rand-US Dollar exchange rate and US Dollar gold price thatwill prevail during 2006. Looking to the future, should the ultra-fine grinding process tests provepositive, the Daylight/Victory ore zones could provide the Barbrook plant with areadily accessible, additional source of higher than average grade ore. Ashighlighted, development is currently in progress on 7 and 10 Levels to provideaccess to other known ore shoots, such as Crescent and Browns, which extendthrough both levels. In order to ensure continuity of the ore supply from theFrench Bob's ore zone, development has already started on a vertical shaft,which will provide access to the French Bob's zone below the 10 Level elevation.Further, the mine has also embarked on an aggressive development program toaccess the lower portions of the French Bob's, Twala Crescent and Browns orezones, all part of the Barbrook's existing underground infrastructure. Caledonia intends to re-commence commercial production at Eersteling, subject tothe Rand gold price maintaining an economic level and favourable Eersteling/Roodeport exploration results. EXPLORATION AND PROJECT DEVELOPMENT Rooipoort PGE/Ni/Cu Project (Including Grasvally) In 2002, Eersteling acquired the Rooipoort PGE/Ni/Cu Prospect from RustenburgPlatinum, owned by Anglo Platinum Limited. The property is located approximately30 km southwest of the Eersteling Gold Mine property and is located in an areathat is presently undergoing a surge in platinum group metal exploration along awell mineralised feature known as the "Platreef". In 2004, Caledonia purchasedand acquired prospecting rights over an additional 342 hectares on the farmGrasvally, immediately adjacent to and south of the Rooipoort property. To dateCaledonia has drilled a total of 18,450 meters in 54 holes on the Rooipoort PGE/Ni/Cu Exploration Project. This drilling covers the full 6km strike length thatmakes up the project area. At the end of 2004, flotation amenability test work was performed at the SGSLakefield laboratories in Johannesburg, South Africa on mineralized compositesamples from 5 lithological units prepared from the diamond drill-hole cores toverify the flotation amenability of the ore. The tests included milling andbasic flotation to produce a flotation concentrate. The tests indicated thatfrom each of the 5 mineralized zones, a re-cleaner flotation concentrate of lowmass recovery can be produced that contains medium to high recovery of platinum,palladium, gold, copper and nickel . This initial test work indicates that asimple metallurgical process route could process a flotation concentrate from ahigh-tonnage low-grade feed ore from an open-pit ore source. In September 2005, an independent resource estimate was calculated andincorporated into a NI 43-101 report by RSG Global of Australia. The results ofthis estimate are: Inferred Resource: At 0.5g/t 2PGE+Au and 200m below surface (900m base) --------- --------- -------- ------- ------- ------- ------- -------Zone Average Tonnes 2PGE+Au Pt Pd Au Ni Cu True Width (m) (g/t) (g/t) (g/t) (g/t) % %-------- --------- --------- -------- ------- ------- ------- ------- ------- M2 1.8 12,791,200 1.34 0.42 0.83 0.10 0.20 0.12-------- --------- --------- -------- ------- ------- ------- ------- -------L3 1.3 5,337,154 1.15 0.59 0.51 0.05 0.15 0.10-------- --------- --------- -------- ------- ------- ------- ------- ------- The resource estimate is the work of Dr. Julian Verbeek supported by Mr. KenLomberg, both of RSG Global. Maps and drill logs for the Rooipoort PGE/Ni/Cu Exploration Project shown onCaledonia's website provide an appreciation of the exploration activity that hasbeen carried out on the Rooipoort property. Also on the website is a ProjectSummary Report and the full RSG NI 43-101 report. As a result of the work to date, additional target areas have been identified onthe west and north-west of the property (refer to Project Status Report on thewebsite). In March 2006, the Company concluded an agreement, with Falconbridge Ventures ofAfrica (Pty) Ltd("Falconbridge") to acquire a 100% interest in Falconbridge's prospecting rightscovering a total area of 4,315.81 hectares adjoining the Company's Rooipoortproject and effectively doubles the area of Caledonia's Rooipoort Projectunderlain by Bushveld Complex rocks with proven PGE potential. Further detailsof this agreement are available in Note 14 of the attached financial statements. GOLD Eersteling Gold Mine A full geological review of the Eersteling property, including the mine plansand other technical data, was commenced in October 2004 and continued throughout2005. The resources at Eersteling were evaluated and a development programprioritized. Field work in 2005 focussed on mapping of known mineralised reef structuresaround the Doreen Shaft and the Pienaar and Girlie Reef. Compilation of previousinformation is being integrated with the results of the high resolutionaeromagnetic survey flown in January as well as the gold-in-soil samplingcompleted in the first quarter. The near surface gold potential of at least 8 km of gold bearing structuresalong the Doreen, Pienaar and Girlie structures was highlighted. Only Girlie hasbeen systematically drilled (by Anglo American in the 1980's) and has aninclined shaft to 60m depth with limited development. Pienaar was excavated onsurface to 10m depth by Eersteling's previous owners, Severin MiningDevelopment, in early 1990's. Doreen has a shaft to 60m and 100m of strikedevelopment as well as a number of old winzes in the oxide zone which has beensystematically trenched. Twenty-three trenches and old workings have beencleared, logged and resampled along the strike of the Doreen reef. A total of223 channel and grab samples have been collected for analysis. Similar workalong the Pienaar strike is planned for 2006. Apart from the vertical Frankashaft, which was sunk to a depth of 220 meters to access the Maltz reef, allother reefs are essentially "virgin" even though they limited access fromvarious shafts. Diamond drilling is planned in 2006 to systematically test the structures to100m depth initially. Roodepoort The Roodepoort Gold Property is located 22km north-east of the Eersteling Mineand 8km east of the Zandrivier mine. Roodepoort is situated in an area ofhistorical gold mining associated with a near surface unusual gold-bearingalbitite intrusive. Grab samples have returned values of up to 2g/t gold frompyritic portions of this unit and values greater than 16g/t gold from youngershear zones. In 2005, Caledonia concluded that the potential for an open-pit operation, basedon gold mineralization in the albitite body, as previously reported, requiresfurther exploration. However, potential exists for narrow high grade veinmineralization on this property. This requires further evaluation and couldprovide a source of ore for the Eersteling metallurgical plant. Compilation ofprevious data and assessment of the intersections made commenced in 2005 andwill continue in 2006. Drill sections and drill logs from this program arelisted under the Roodepoort Project in the "Maps and Reports" section of theCaledonia website. DIAMONDS Kikerk Lake The Kikerk Lake property consists of 15 mineral leases currently pendingapproval by the Nunavut Mining Recorder. These leases cover 38,738 acres (15,677hectares). It is likely that some of this ground will be relinquished during2006. In 2001 and 2002, Caledonia announced the discoveries of twodiamondiferous kimberlites, "Potentilla" and "Stellaria", on the Kikerk Lakeproperty in Nunavut Canada, by its joint venture partner and operator of theproperty, Ashton Mining of Canada Inc. ("Ashton"). The two kimberlite pipes areapproximately 700 meters apart. In 2005, Ashton collected 108 heavy mineralsamples to follow-up on previous anomalous results. These samples have been sentto Ashton's laboratory, results are expected in the second quarter of 2006. Approximately 24 line-kilometers of ground magnetic survey were conducted over astructural trend line, there were no new magnetic features noted that would beindicative of kimberlite emplacement. Four diamond drill holes, totalling 382 meters were drilled to test theStellaria kimberlite and a possible source of kimberlite indicator minerals eastof Stellaria. Results confirm that the Stellaria body has a steep dip to thenorth-west and limited width. Caledonia's 17.5% share of this program is funded by Ashton. Ashton holds a52.5% interest, having incurred in excess of $750,000 in explorationexpenditures on the property. This interest can be increased to 59.5% if Ashtonfunds Caledonia's share of the costs through to a completed feasibility study.The remaining 30% interest is held by Stornoway Diamond Corporation. Mulonga Plain Caledonia has a joint venture agreement with BHP World Exploration Inc. and itsaffiliate Motapa Diamonds Inc. ("Motapa"), collectively known as "the BHPEntity", on the Mulonga Plain, Kashiji Plain and Lukulu licences in WesternZambia. Motapa is the project operator on behalf of the joint venture. The BHPEntity is now vested with a 60% participating interest, with Caledonia holding a40% interest. In terms of the joint venture, the BHP Entity will continue tofund operations through the completion of a feasibility study at which pointtheir interest will increase to 75%. Caledonia will then have various optionsincluding that of the BHP Entity funding the project through to commercialproduction. The Mulonga Plain licence area is located in Western Zambia, between the ZambeziRiver and the Angolan border identified discrete areas within the licence area.An airborne gravity survey was completed on the easternmost of these in late2004. Ten, out of an original eleven, airborne gravity and magnetic targets were drilltested during 2005 and one hole was abandoned due to poor drilling conditions.Basalt basement was intersected in each of the holes at depths ranging from 87meters to 173 meters with no kimberlite intercepts reported from any of theholes. Motapa has defined four prospective regions within the extensive MulongaPlain anomaly through prior heavy mineral sampling, airborne magnetics andreconnaissance drilling. The 2005 drill program was designed to test theeasternmost of these prospective regions and followed on from completion andinterpretation of an airborne gravity survey in late 2004. Core samples from this drill program have been sent to Cape Town for kimberliteindicator mineral recovery and analysis. These results are anticipated duringthe first quarter 2006 and will be used to formulate plans for ongoing work onthe easternmost prospective region of the Mulonga Plain anomaly. Commenting on the results, Motapa's CEO Dr. Larry Ott noted: "The extensiveMulonga Plain diamond and kimberlite indicator mineral anomaly remains highlyprospective for discovery. This program has provided an initial drill test ofone of four well defined indicator mineral dispersions. The remaining threeareas, in the central and western portions of the Mulonga Plain remainessentially untested and results of this program should add considerably to ourunderstanding of kimberlite indicator mineral dispersion within the MulongaPlain and better constrain likely source kimberlite areas." Kashiji Plain This licence area is located in northwest Zambia, adjacent to the Angolanborder. Prior work by Motapa has recovered 22 microdiamonds in association withnumerous kimberlitic ilmenites. Work in 2005 focused on interpretation ofresults from the field work of 2004 in two discrete areas of anomalouskimberlite indicator mineral and diamond recoveries. No field work was carriedout on the Kashiji or Lukulu licences in 2005. Goedgevonden Caledonia holds prospecting rights over the Goedgevonden diamond bearingkimberlite pipe. This property is located approximately 20km north of theStilfontein gold mine in the Klerksdorp district of the North West Province inSouth Africa and 200km south west of Johannesburg. Previous prospecting activities carried out in the mid 1970's on Goedgevondenindicate that the pipe is oval in shape and covers a surface area ofapproximately 0.27 hectares. This work also confirms that the pipe was drillintersected at a depth of 425 meters, and that further down, dip extensionsremain undefined. Previous drilling reported an average diamond content of 35 to45 cpht, with one hole yielding 65 cpht. A preliminary drilling program conducted in 2002 consisted of 7", 8" and 12"diameter reverse circulation drill holes, followed by the collection of thedrill samples and diamond recovery. Four holes were drilled in the centre of thepipe, three to a depth of 150 meters, and the other to 120 meters. The threeremaining holes were drilled to delineate the pipe in more detail. All of theseven holes drilled entered the kimberlite at a depth of about 6 meters, and thefour centrally-located holes were stopped whilst still in the kimberlite. Atotal of about 56 tonnes of drilling sample was collected and processed througha Van Eck and Lurie dense-media separation ("DMS") plant and wet Sortex machine.A fair portion of the diamonds recovered from the drilling were gem quality witha notable tendency toward pink coloured diamonds. From the diamond recoveries itwas confirmed that the Goedgevonden pipe was diamondiferous, and sufficientgem-quality diamonds were recovered to warrant a larger bulk sample. Geologicalinterpretive work was completed during 2003 but there was no explorationactivity on this property during 2004 or 2005 as corporate resources wereconcentrated on Caledonia's other projects which were considered to be of higherpriority in adding shareholder value. BASE METALS Nama Caledonia Nama Limited, a wholly owned subsidiary of Caledonia, holds fivecontiguous exploration licences in northern Zambia which host open-pittablenear-surface cobalt/copper mineralization. The 2001/2002 soil sampling programcarried out jointly by Caledonia and BHP Billiton was completed over themajority of the remaining licence area. This program identified a number of highpriority anomalous targets within the required geological setting. These targetsshould be followed up in the search for larger, deeper, sulphide ore bodies.With the recent substantial increase in the price of copper, Caledonia willsearch for joint venture partners for the exploration of the potential deepersulphide-ore zones. In the second quarter of 2004, a mini bulk sample was excavated at Nama andunderwent successful screening tests and heavy media/gravity separation tests inSouth Africa. Following encouraging results, it is now planned to excavate alarger sample, in conjunction with a cobalt end-user, which will be screened andprocessed on site to produce a suitable cobalt concentrate for further testing.If the test is successful and satisfactory economic terms are obtained, it isexpected that a long-term supply contract for the Nama cobalt/copper concentratewill be negotiated with a smelter or other end users. However, these tests andinitial discussions have been more extensive than first expected and continuewith a number of potential end-users and possible joint venture partners. Kadola This large exploration property consisting of three contiguous licence areas waspreviously joint ventured with Cyprus Amex and is prospective for copper andcobalt. With the recent substantial increase in the price of copper, Caledoniais holding discussions with potential joint venture partners for the explorationof the copper/cobalt potential of Kadola. The Kadola properties also include the Eureka gold/copper/pyrite anomaly. Withthe significant increase in the price of gold and copper, this project area willbe re-evaluated for either joint-venture or for further work by Caledonia. OUTLOOK The outlook for the aforementioned exploration properties is difficult toquantify. Exploration by its nature is speculative with a high degree of riskaccompanied by the potential for high returns. Caledonia manages this risk byusing well-qualified exploration professionals, senior mining company jointventure partners and by exploring in areas which are considered as having abetter than average potential for discovery. The recent increases in the pricesof precious and base metals should improve exploration expenditures of the majormining companies and could improve the likelihood of Caledonia negotiating jointventure agreements for its remaining wholly-owned exploration properties. STRATEGIC ALLIANCES Exploration is a high-risk, high-cost but potentially high-reward business.Caledonia's strategy in this area is to position itself to participate in asignificant part of the "reward" through joint venture interests in order tominimize early exploration costs. Details of the strategic alliances with jointventure partners have been discussed above. Caledonia currently has two joint venture interests in place, each of which ispresently conducting aggressive diamond exploration programmes. Caledoniaintends to continue to focus its exploration activities of prospectiveproperties by developing the properties through strategic alliances with seniorproducers. SOUTH AFRICAN MINERALS LEGISLATION In terms of the Minerals and Petroleum Resources Development Act (No 28 of 2002)('MPRDA") and implemented May 1, 2004, all "old order" mineral rights in SouthAfrica are required to be converted to "new order" rights, by a process ofre-applying for these rights. All inactive (immediately preceding May 1, 2004)prospecting and mining rights were required to apply for conversion by April 30,2004. Active prospecting rights conversion applications close on April 30, 2006and active mining rights conversion on April 30, 2009. The status of Caledonia's South African rights is as follows: PROPERTY ACTIVE/ APPLICATION STATUS AT INACTIVE LODGED 31 DEC 2005Barbrook Mining Licence Active Due By April Not applicable 30, 2009Eersteling/Zandrivier Mining Active Due By April Not applicableLicence 30, 2009Marabastad Mineral Rights Inactive March 10, Awaited(Eersteling) 2005Rooipoort Prospecting Permit Active Due April Application in 30, 2006 prep.Grasvally Mineral Rights Ptn 9, Active New Order rights11, 13, 14, 16 (Rooipoort) granted May 4, 2005.Grasvally Mineral Rights Ptn 8, Inactive April 1, Awaited29 (Rooipoort) 2005Grasvally Ptn 17, 20 (Rooipoort) New order May 11, Awaited application 2005Goedgevonden/Syferfontein Inactive April 14, AwaitedProspecting Permit 2005Eleazar New order May 3, Awaited application 2005 Apart from various technical requirements for conversion the new legislationrequires that companies give attention to: "MPRDA" Section 2(d): substantially and meaningfully expand opportunities forhistorically disadvantaged persons, including women, to enter the mineral andpetroleum industries and to benefit from the exploitation of the nation'smineral and petroleum resources;" Mining Charter This document was formulated in negotiation between government and the miningindustry as largely represented by the Chamber of Mines of South Africa andorganised labour. The Mining Charter seeks to address the implementation of section 2(d) inpractical and measurable terms. Lack of clarity as to the status of prospectingunder the Mining Charter has led to considerable debate and confusion in termsof the ability of companies involved in early stage prospecting work to meet oreven indicate their commitment to meeting the terms of the Mining Charter, evenbefore any sort of mineral resource has been established. This in part has beenthe cause of considerable delays in processing of the thousands of applicationssubmitted as part of this process. FORWARD LOOKING STATEMENTS This annual report contains certain forward-looking statements relating but notlimited to the Company's expectations, intentions, plans and beliefs.Forward-looking information can often be identified by forward-looking wordssuch as "anticipate", "believe", "expect", "goal", "plan", "intend", "estimate","could", "should", "may" and "will" or similar words suggesting future outcomes,or other expectations, beliefs, plans, objectives, assumptions, intentions orstatements about future events or performance. Forward-looking information mayinclude reserve and resource estimates, estimates of future production, unitcosts, costs of capital projects and timing of commencement of operations, andis based on current expectations that involve a number of business risks anduncertainties. Factors that could cause actual results to differ materially fromany forward-looking statement include, but are not limited to, failure toestablish estimated resources and reserves, the grade and recovery of ore whichis mined varying from estimates, capital and operating costs varyingsignificantly from estimates, delays in obtaining or failures to obtain requiredgovernmental, environmental or other project approvals, inflation, changes inexchange rates, fluctuations in commodity prices, delays in the development ofprojects and other factors. Forward-looking statements are subject to risks,uncertainties and other factors that could cause actual results to differmaterially from expected results. Potential shareholders and prospective investors should be aware that thesestatements are subject to known and unknown risks, uncertainties and otherfactors that could cause actual results to differ materially from thosesuggested by the forward-looking statements. Shareholders are cautioned not toplace undue reliance on forward-looking information. By its nature,forward-looking information involves numerous assumptions, inherent risks anduncertainties, both general and specific, that contribute to the possibilitythat the predictions, forecasts, projections and various future events will notoccur. Caledonia undertakes no obligation to update publicly or otherwise reviseany forward-looking information whether as a result of new information, futureevents or other such factors which affect this information, except as requiredby law. Caledonia Mining Corporation Consolidated Balance Sheets (in thousands of Canadian dollars) December 31 2005 2004AssetsCurrentCash and cash equivalents $1,076 $6,470Accounts receivable 768 316Inventories 90 508Prepaid expenses 330 187 --------- --------- 2,264 7,481Investment at cost (Note 1) 79 79Capital assets (Note 2) 9,156 7,158Mineral properties (Note 3) 10,839 8,948 --------- --------- $22,338 $23,666 --------- --------- Liabilities and Shareholders' EquityCurrentBank overdraft $197 $ -Accounts payable 2,392 1,062 --------- --------- 2,589 1,062Asset retirement obligation (Note 4) 377 423 --------- --------- 2,966 1,485 --------- --------- Shareholders' EquityShare capital (Note 5 (b)) 180,053 173,304Contributed surplus (Note 5 (c)) 923 480Broker Warrants (Note 5 (d)) - 321Deficit (161,604) (151,924) ---------- --------- 19,372 22,181 ---------- --------- $22,338 $23,666 ---------- --------- Caledonia Mining Corporation Consolidated Statements of Deficit (in thousands of Canadian dollars) For the years ended December 31 2005 2004 2003 Deficit, beginning of year ($151,924) ($141,945) ($127,449)Net (loss) for the year (9,680) (9,979) (14,496) ---------- ---------- ----------Deficit, end of year ($161,604) ($151,924) ($141,945) ---------- ---------- ---------- Consolidated Statements of Operations (in thousands of Canadian dollars except share and per share amounts) For the years ended December 31 2005 2004 2003 Revenue and operating costsRevenue from sales $2,642 $841 $646Operating costs 7,917 6,451 3,630 --------- --------- ---------Gross profit (loss) (5,275) (5,610) (2,984) --------- --------- --------- Costs and expensesGeneral and administrative 3,001 1,984 1,276Interest 13 175 127Amortization 1,243 800 438Other expense (income) (Note 8) (4) 361 (50)Write down of mineral properties and capital 152 1,062 9,759assets --------- --------- --------- 4,405 4,382 11,550 --------- --------- --------- (Loss) before non-controlling interest (9,680) (9,992) (14,534)Non-controlling interest (Note 13) - (13) (38) --------- --------- ---------Net (loss) for the year ($9,680) ($9,979) ($14,496) --------- --------- --------- Net (loss) per share (Note 7)Basic and fully diluted ($0.031) ($0.034) ($0.062) --------- --------- --------- Caledonia Mining Corporation Consolidated Statements of Cash Flows (in thousands of Canadian dollars) For the years ended December 31 2005 2004 2003 Cash provided by (used in) Operating activitiesNet (loss) for the year ($9,680) ($9,979) ($14,496) Adjustments to reconcile net cash from operations(Note 9) 1,632 2,114 10,289 Changes in non-cash working capital balances (Note 9) 1,153 (345) (641) --------- (6,895) (8,210) (4,848) -------- --------- --------- Investing activitiesExpenditures on capital assets and mineralproperties (5,284) (3,813) (2,279) -------- --------- --------- (5,284) (3,813) (2,279) -------- --------- --------- Financing activitiesLoan payable - - (69)Bank overdraft 197 - -Issue of share capital net of issue costs 6,588 14,314 9,511 -------- --------- --------- 6,785 14,314 9,442 -------- --------- --------- Increase (decrease) in cash for the year (5,394) 2,291 2,315Cash and cash equivalents, beginning of year 6,470 4,179 1,864 -------- --------- ---------Cash and cash equivalents, end of year $1,076 $6,470 $4,179 -------- --------- --------- This information is provided by RNS The company news service from the London Stock Exchange