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UPDATE - Caledonia Mining battles lower grades and gold price

Published: 07:55 12 Aug 2014 EDT

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Lower grades and a weaker gold price took a toll on Caledonia Mining’s (LON:CMCL) Blanket Mine in Zimbabwe despite another sharp reduction in operating costs.

All-in sustaining costs fell to an impressive US$881 per ounce from US$924 per ounce in the previous quarter, but even with this improved efficiency net profit fell to US$1.8mln (US$3.1mln) in the three months to June.

Stefan Hayden, president and chief executive said: "The quarter and first half year of 2014 presented significant challenges as a result of the continued low grades, which adversely affected gold production.

"New production areas have and are being developed to replace those areas where production has been suspended due to the lower grade. I am confident that the 2014 production target of 45,000 ounces will be achieved."

Hayden added that while grades improved slightly in the second quarter compared to the previous three months, the grade will be lower in future.

As a result, and factoring in a lower gold price, slightly lower than anticipated production and an increased taxation burden, the miner is reassessing its medium-term plans for Blanket and also stepping up the search for an acquisition both in and outside of Zimbabwe.

Exploration at Blanket had identified additional gold mineralisation at the 750 metre level and at the Mascot and GG satellite properties, while recent drilling had added 500,000 tonnes at 3.9 grams per tonne (g/t) to inferred resources, with Hayden confident of further additions.

"The nature of the ore bodies at Blanket and the satellites dictates that exploration is best done from underground drill cubbys rather than surface drilling.

"It takes a significant amount of time to complete the underground development and cross-cuts out to the required drilling points. This work has been in progress for several quarters and I expect that it will result in further increases in resources."

Shares eased 1p to 59p.

Sanlam analyst Charlie Long told investors: "Caledonia continues to generate cash, has a strong balance sheet and despite recent share price strength, still has a relatively low market cap."

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