Final Results

Caledonia Mining Corporation 03 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 fourth quarter and 2005 annual operating and financial results. The financial results are reported in Canadian dollars, except where otherwise stated. Financial Highlights (in thousands of Canadian Dollars except per share amounts) Q4 '05 Q4 '04 2005 2004 Revenue $453 $469 $2,642 $841 Operating costs 1,724 1,686 7,917 6,451 Gross Profit (loss) (1,271) (1,217) (5,275) (5,610) Cost and Expenses 783 3,352 4,405 4,382 Cash 1,076 6,470 1,076 6,470 Net (loss) for the period (2,205) (4,569) (9,680) (9,979) Net (loss) per share (basic & fully diluted) (0.006) (0.015) (0.031) (0.034) For the year ended December 31, 2005, Caledonia recorded a net loss of $9.68 million or $0.031 per share (2004: net loss of $9.98 million or $0.034 per share), which included an operating loss of $5.3 million (2004: $5.6 million) as extensive surface and underground maintenance work associated with Barbrook's increasing production levels resulted in significant increased one-time cost. In 2005, general and administrative expenses included a charge of $0.3 million for stock option grant expense (2004: $0.2 million). During 2005, $6.6 million from private placements and the exercise of warrants was raised. Capital assets and mineral properties received an investment of $5.3 million, mainly in South Africa. Cash available at year end totalled $879,000. Commenting on the Company's activities during 2005 Stefan Hayden, President and CEO, said '2005 was another busy year for Caledonia, as we continued to progress the Barbrook mine towards economic gold production and advanced our exploration projects 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 still experienced operational challenges. However, work continued to focus on optimizing the metallurgical circuits, with a plant expansion to treat 15,000 tonnes per month approved mid-year and commissioned in January 2006. Underground the work of proving up additional reserves and resources to establish a sustainable and profitable production base and a more flexible mining area will continue into 2006. Caledonia anticipates returning Barbrook to economic gold production during 2006 following these enhancements, despite the benefits of a strong gold price being partially offset by a strong rand. In 2006, Caledonia will continue with its endeavours to finalise an acceptable Black Economic Empowerment transaction during the year which will contribute value to the South African assets. At Nama, although significant progress was made during 2005 with the signing of a Memorandum of Understanding, negotiations have been impeded by unrealistic testwork requirements by this particular end-user. Discussions were also held with a number of other interested parties regarding a potential cobalt off-take agreement. These discussions will continue during 2006 and the Company hopes to progress to a final agreement and will start development once an acceptable off-take agreement has been concluded, hopefully later this year. The Rooipoort PGE/Ni/Cu Exploration Project has made good progress with a drilling program during the year leading to an independent 43-101 compliant resource 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 for this resource estimate is Dr. Julian Verbeek of RSG Global. Further exploration will continue in 2006 to follow up on additional targets. The rights to adjacent properties have been acquired from Falconbridge (see news release March 13, 2006). This acquisition virtually doubles our exploration area and greatly enhances 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. During 2006, drilling is planned on identified extensions to the known ore zones on the Eersteling and Zandrivier Mining Licence areas. On the corporate side, the listing on AIM in June 2005 has offered Caledonia greater market exposure to the London and European based institutional investors, providing analyst research, and further broadening of the shareholder base, ultimately benefiting all shareholders. During the forthcoming year, we will continue to focus on our primary operating asset, Barbrook and seeking to return it to economic gold production, whilst maintaining the momentum on our key exploration assets, Nama, Rooipoort and Eersteling, with a view to ultimately developing them and thus delivering shareholder value.' The Annual Information Form for 2005 is now available on SEDAR and on the Caledonia website at www.caledoniamining.com Mr. Mike Tombs will leave the employ of the company on March 31st at the end of his contract. He will be replaced as Chief Financial Officer by Mr. Steve Curtis. Mr Curtis has extensive experience as Financial Director in the South African manufacturing industry. He is a member of the South African Institute of Chartered Accountants. For further information please contact: Caledonia Mining BuckBias Stefan Hayden, President and CEO Alex Buck / Nick Bias Tel: +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'. Management cautions that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements. Important factors that could cause the actual results of operations, exploration or development programs, or the financial condition of the Company, to differ include, but are not necessarily limited to, the risks and uncertainties discussed in documents filed by the Company with the various regulatory authorities having jurisdiction. 2005 OBJECTIVES AND ACHIEVEMENTS 2005 Objectives Achievements Return Barbrook Gold Mine in Almost 200% increase in gold production South Africa to economic gold compared to 2004, from 1,693 ounces to 4,951 production. 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 on reserves and resources at opening up the ore bodies for mining and on Barbrook 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 metres Rooipoort Platinum Exploration drilled during the year on Grasvally. Project. Complete the feasibility studies Biox(R) testwork was completed. Updated Biox of installing a Biox(R) bacterial (R) operating costs have been determined. The leach and/or ultra-fine milling test results will enable a final Biox(R) plant and/or Dense Media Separation design to be completed. The design will be circuit 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 was the Rooipoort and Grasvally calculated and incorporated into a NI 43-101 properties which form the report by RSG Global of Australia. The results Rooipoort 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-soil information and the recently results together with compilation of previous completed high resolution work has highlighted the near surface gold airborne Geophysics and Soil potential along 12km of known gold bearing Chemical Programs, identify and structures in the Eersteling area. Similar drill possible extensions to the compilation in the Zandrivier area has known ore zones on the Eersteling identified a number of potential target and 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 geophysical concentrate from the Nama data was commenced and completed during the property in Zambia. Construct a year. A number of as yet untested areas have pilot 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 and cobalt end producer to purchase they have commenced preliminary testwork. An cobalt concentrate produced at amendment to the existing Environmental Brief Nama or possibly form a strategic to allow pilot plant operations has been alliance to achieve this approved by the Environmental Council of objective. Zambia. Seek a joint-venture partner to Discussion ongoing with various interested commence an exploration program parties. at the Kadola copper/cobalt and the Eureka copper/gold properties in Zambia. Expand the Board of Directors to Rupert Pardoe joined the Board as address ongoing Corporate non-executive Chairman and the various Board Governance requirements. Committees were restructured accordingly. Implement succession plans for senior executive Succession plan developed and and operational staff. being considered. Strengthen the Investor Relations and Public Appointed BuckBias as Relations functions. Caledonia's IR and PR consultants for all markets. List Caledonia on the London Stock Exchange Caledonia successfully listed Alternative Investment Market with an issue of on AIM on June 27 with an issue new 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 in accounting policy LETTER TO SHAREHOLDERS 2005 has been another challenging and exciting year for Caledonia as we work towards increasing the mining and milling rates at Barbrook Gold Mine and returning the mine to profitable gold production and consolidate work on our exciting Nama Cobalt/Copper Deposit in Zambia. While the macro-economic environment in South Africa continues to be favourable, the overall outlook for commodity prices is positive but a stronger South African Rand has had a negative impact on the profitability of the South African mining industry as a whole. Work at Barbrook Gold Mine in South Africa continued to focus on optimizing the metallurgical circuits. By mid year, after considering the development of the additional mining resources and the extended mining areas, it was decided that the mineral resources would support a larger plant on a sustainable basis. The metallurgical plant expansion to treat 15,000 tonnes per month was designed and constructed during the second half of the year. The plant expansion was commissioned in January 2006 as soon as the holiday season was over. This plant expansion incorporates the re-commissioning of the existing 1300kw Allis Chalmers mill, the installation of an expanded flash flotation, carbon cleaning circuits, ultra-fine grinding circuit and RIL circuits. Underground the work of proving up additional reserves and resources to establish a sustainable and profitable production base and a more flexible mining area is continuing. Following these enhancements, we remain confident that we will be able to return Barbrook to economic gold production during 2006 despite the benefits of a strong gold price being offset by a strong rand. Exploration work continued throughout the year at the Rooipoort and Grasvally properties of the Rooipoort PGE/Ni/Cu Exploration Project, south of Mokopane and 54 holes totalling 18,450 meters were drilled. RSG Global completed an independent NI 43-101 compliant resource calculation and declared an inferred resource of 18 million tonnes, containing an estimated 428,586 oz Pd, 274,193 oz Pt, 33,313 tonnes Ni, 20,114 tonnes Cu. Additional exploration is planned to follow 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 South Africa, and is actively seeking suitable BEE partners for its South African operations in the strong conviction that, in the long term, this approach will add significant value for Caledonia shareholders. Significant progress was made during 2005, however no agreements were concluded. We hope to update shareholders 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 to enter into long term supply contracts during 2006. At the Mulonga Plain Diamond Project in Zambia and the Kikerk Lake Diamond Venture in Northern Canada, our joint venture partners have continued their obligations to fund the exploration programs. Both projects were drilled during the 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 in the near term. The US$ gold price has continued to rise, reaching in excess of US$530 per ounce in December 2005. Caledonia management believes that gold bullion and gold shares remain in a long-term bull market. To maximise the benefit of the current strong price, Caledonia has decided to remain unhedged. It should be noted that the South African Rand gold price has increased compared to 2004. As Barbrook's operating costs are in Rand this increase enhances the project economics. Turning to the financial performance of the company, Caledonia continues to be debt-free having raised $6.6 million from private placements and exercise of warrants. During 2005, the company suffered a loss of $9.9 million which included an operating loss of $5.3 million. $5.3 million was invested in capital assets and mineral properties, mainly in South Africa. Net cash available at year end totalled $879,000. In June 2005, Caledonia listed the company's shares on the Alternative Investment Market in London, England with the symbol 'CMCL' in conjunction with a financing. The Board believes this listing will introduce Caledonia to the London and European based institutional investors, offer Caledonia greater market exposure and analyst research coverage, and further broaden the shareholder base, ultimately benefiting all shareholders. This year, the company will continue to focus on implementing succession plans for senior executive and operational staff, as well as expand the Board of Directors to address ongoing Corporate Governance requirements. The future for Caledonia shareholders is promising as the company is uniquely positioned during 2006 to expand and develop its gold production, its cobalt/ copper project, its nickel/platinum exploration project and its diamond projects. The further strengthening of its Board of Directors should also show benefits in ensuring that the company meets its Corporate Governance and Strategic objectives. At the end of 2005 Chris Harvey retired from Caledonia. He has however agreed to continue to make himself available to serve as a director. In addition, he will continue to provide technical consulting services to the Company as required, so his vast expertise and knowledge will not be lost to the Group. I'm sure my fellow directors will join me in thanking Chris sincerely for his enormous contribution to Caledonia over the past decade, and wishing him and Eileen every happiness for the future. Finally, my thanks go to Caledonia's management, directors, staff, joint venture partners, and particularly to our shareholders for supporting Caledonia during the challenges and opportunities of another year. The management and directors look forward to your continued confidence as we work diligently towards the objective of building Caledonia into a significant diversified international mining company. On behalf of the Board of Directors, (Signed) S. E. Hayden President and Chief Executive Officer CALEDONIA MINING CORPORATION Management's Discussion and Analysis This discussion and analysis of the consolidated operating results and financial condition of Caledonia Mining Corporation (the 'Company', 'Caledonia') for the fiscal years ended December 31, 2005, December 31, 2004 and December 31, 2003 should be read in conjunction with the Consolidated Financial Statements and the Annual Information Form and Press Releases issued by the company, all of which are available from the System for Electronic Data Analysis and Retrieval at www.sedar.com or from the Company website at www.caledoniamining.com. The Consolidated Financial Statements and related notes have been prepared in accordance with Canadian Generally Accepted Accounting Principles ('GAAP'). Caledonia was formed in February 1992 and is listed on the Toronto Stock Exchange 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 producing gold operation in South Africa and a diversified exploration portfolio of projects in Canada, South Africa and Zambia, some of which are joint ventures. Caledonia's objective is to develop the asset base into a significant diversified international mining company through profitable gold production and successful exploration activity, focused primarily on Southern Africa. Caledonia's business model is to identify and acquire properties or projects early in the development cycle, which have the potential to become low cost operations, and then add value by developing the asset, either as an operator or through a joint venture agreement. The possibility of divestiture in whole or part will be considered at different points in time on the valuation curve and will be governed by the benefit to shareholders. Where appropriate, Caledonia will seek strategic alliances with well-managed exploration or operating companies through existing or new joint ventures. The Company has a strong management team and Board of Directors with diverse expertise in gold production, mineral exploration, mine development, finance and marketing. With the expectation of continuing improvements in commodity prices over the long term, Caledonia is following the strategy of diversification through its current exploration activities for diamonds, gold, platinum group metals and base metals. With the potential of improved political conditions in many Southern African countries, Caledonia is reviewing mining opportunities in these countries. CORE BUSINESSES GOLD MINING Barbrook Mines Limited The 100% owned Barbrook Mines Limited ('Barbrook') is located near the historic gold-mining town of Barberton in the Mpumalanga province of the Republic of South Africa, approximately 375 km east of Pretoria and Johannesburg. Barberton has a history of gold mining dating back more than 100 years. The Barbrook property, which covers an area of 10,625 acres and extends for a distance of about 28 km along strike, represents a consolidation of approximately twenty previously worked gold mines. The Barbrook gold deposits occur in the Barberton Greenstone belt, the host for the other gold deposits in the area. The belt is of Archean age and includes some of the oldest volcanic and sedimentary rocks in the World. The belt trends southwest to the northeast and has been intruded and deformed by various granite plutons along the margins. The Barbrook property covers two steeply-dipping, banded iron formation units trending in an east-west direction. These two shear zones, called the Zwartkoppie and Barbrook lines, are the host to the Barbrook gold deposits. The gold mineralization at Barbrook is complex, the gold is generally extremely fine-grained, associated with refractory minerals such as pyrite, pyrrhotite and arsenopyrite, and contains significant concentrations of 'preg-robbing' amorphous carbon. Mining at Barbrook is from underground using an open-stope, sub-level benching method. Broken ore is trammed to the surface crushing area along the main 10 Level haulage way. At present all workings are on or between 6 Level and the main 10 Level haulage. A vertical shaft is currently planned on the French Bob's ore zone to access the ore blocks below 10 Level. The hoist room and associated accesses on 10 Level have been developed and sinking is expected to commence during 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 48,100 Probable 53,000 6.11 10,400 Total 308,000 5.92 58,500 RESOURCES Measured 495,000 2.96 47,100 Indicated 1,254,000 5.35 216,000 Total 1,745,000 4.67 263,100 Inferred 8,781,000 5.76 1,627,000 * 1 Tonne=1,000 kilograms=2,204.6 pounds **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 required by National Instrument 43-101 of the Canadian Securities Administrators. In the metallurgical processing plant, the broken ore is de-slimed, crushed to minus 13mm size and stored in a coarse ore storage bin. From this bin, ore is conveyed to the 1300 kW Allis Chalmers primary ball mill, with its associated flash flotation cell. This flash flotation cell recovers and produces a concentrate containing up to 70% of the gold from the mill discharge. The milled ore then passes to the flotation plant, which includes scavenger and cleaner circuits. The combined flotation concentrates with a gold grade of between 30 to 40 g/t is processed through a carbon removal circuit consisting of Diester Tables and cyclones to remove most of the amorphous carbon that is a gold preg-robber and previously caused metallurgical problems in gold recovery. The amorphous carbon is discarded with the main flotation tailings. The plus 140 micron oversize 'carbon-free' concentrate is batch separated from the slurry in the Sala 90 kW regrind mill, and then fed into the 95% -25 microns ore stream feed to the Deswik ultra-fine-grinding mill. This fine-milled concentrate is pumped to the 3-stage, newly developed Aachen pre-oxidation circuit where oxygen gas 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 to increase 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 and electrowinning circuits. The high-grade gold bullion bars produced are sent to a South African refinery for further processing and sale of gold. The present metallurgical circuit has a design capacity +/- 20% of 15,000 tonnes per month. Mining production is planned to reach 15,000 tonnes per month as the underground and stope development progresses and provides greater mining flexibility. As additional ore resources are developed increased production may be possible. Tailings are pumped to the tailings deposition area located about 3km from the mine site. Tailings deposition operations are managed by a licensed contractor and are fully compliant with all requisite legislation and codes of practice. Barbrook owns a full mine infrastructure including administration areas, change-house, lamp room, security barracks, training and first aid rooms, mine stores, 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 located 36 km south of the city of Polokwane in Limpopo Province of the Republic of South Africa, 300 km north of Johannesburg. The Eersteling Mine and nearby Zandrivier property covers an area of 47,000 acres (19,020 hectares), extending for a distance of about 25 km east-west. They are located in the Pietersburg Greenstone Belt which is of Archean age consisting of an upper and lower sequence. The upper sequence is a sedimentary unit consisting mainly of conglomerate, grit and sandstone while the lower sequence is undifferentiated mafic and ultramafic volcanic rocks and intrusives, with banded iron formation and chert. The Willemse shear feature is the locus of gold mineralization in the Eersteling area. The Eersteling mine has been on care and maintenance since early 1997 when production was suspended due to the then prevailing low gold price. In 2002, Eersteling applied for its required Section 9 permanent mining licence which was granted during April 2003. Caledonia intends, subject to a sustainable economic rand gold price and favourable Eersteling exploration results, to re-commence commercial production at Eersteling in the future. The Eersteling Mine gold resource estimate based on the 1997 data before the mine 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 Ounces Measured 60,500 7.43 14,500 Indicated 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 this estimate to be a defined resource in terms of National Instrument 43-101. The Company has not completed the work necessary to verify the classification of the resource in terms of National Instrument 43-101 and as such the historic estimate 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/Cu Exploration Project. These are detailed in the Exploration section of this report. 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 licensed tailings deposition area. In the event that mining operations resume at Eersteling, these facilities will require some refurbishing prior to being returned to use. MARKETING All gold bullion produced is delivered to Rand Refinery in Germiston, South Africa and sold at spot at the discretion of the company. The company nominates the 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 a cost per ounce that is low enough to pay all obligations and generate an acceptable return to shareholders. The price of gold is established in an international market and is considered a commodity. The Rand price of gold plays a large part in determining the profitability of South African gold mines. During 2005, the South African Rand strengthened by 1.2% against the United States 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 the timing of Caledonia's production, the company recorded an increase of 5.2% in the average Rands per ounce received over Caledonia's 2004 financial year. The successful operation of mining and exploration depends on the presence of economic in-situ resources, the availability of experienced and skilled management and employees and financial resources to be able to carry out the work, and the support of the holding company. - Caledonia initiated a human resources program focused on strengthening senior management. This program commenced in late 2003 and is detailed in the 2003 and 2004 Annual Reports. Mr. Patrick Smith was appointed mine manager of Barbrook Mine on August 1, 2005. Additional appointments will be required during 2006 as Mr. Harvey retired in December 2005 and Mr. Johnstone has indicated his intention to retire in September 2006. - Additional Board appointments are now being contemplated to maintain an adequate total number of independent Board directors. The financings of 2005 and of January/February 2006 enabled Caledonia to carry out the planned development of its projects into 2006. Caledonia remains completely debt-free. CONSOLIDATED FINANCIAL RESULTS For the year ended December 31, 2005, the Company recorded a net loss, after write downs, of $9.7 million ($0.031 per share) compared to a net loss of $10.0 million in 2004 ($0.034 per share) and a net loss of $14.5 million ($0.062 per share) in 2003. The loss in 2005 included losses from operations of $5.3 million. There was a mineral property write down of $0.152 million in 2005, $1.1 million 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's production levels have increased, although extensive maintenance work also resulted in significant increased cost. In 2003, an operating loss of $3.0 million was recorded. In 2005, general and administrative expense includes a charge of $0.3 million for stock option grant expense as compared to $0.2 million 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; in the 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 metallurgical circuit and developing mining areas to cater for the planned increase in mill throughput and to improving the plant gold recovery. The carbon removal circuit developed by Barbrook in 2004 was incorporated into the plant circuit during the first part of the year. Gold recoveries improved during the 2nd quarter - averaging 61% compared to 48% in the first quarter. This gold recovery improvement was not maintained and was probably caused by an overloading of the carbon-removal and the resin-in-leach circuits. The result was that gold recoveries fell to 48% in the 3rd quarter and to 40% in the 4th quarter. Despite the more consistent milling operations in the last half of the year leading to steadier tonnage throughput, gold recoveries still did not reach the targeted 60 to 65%. Metallurgical tests on the French Bob's orebody showed that gold recoveries could be slightly increased and made more consistent by ultra fine milling of the flotation concentrate. A review of the mine economics in mid 2005 showed that with newly identified ore zones it would be possible to increase production levels. It was therefore determined that an expansion of the existing metallurgical plant, allowing an increased throughput, would enhance the mine economics. In the second half of 2005, it was decided to expand the metallurgical 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 were introduced on the stope benches to improve operating efficiencies and to provide a safer mining method. Mining has been concentrated in the French Bob's ore zone between 10 and 7 Levels. Geological sampling and evaluation on the Twala and Taylors zones, adjacent to, and along strike from, the French Bob's zone is ongoing. Production from these areas, and up-dip extensions above 7 Level, will supplement the present production allowing the mill throughput to be increased to the 15,000 tonnes per month planned range for 2006. To ensure the continuity of the ore supply from the French Bob's and adjacent ore zones, development has started on a vertical shaft, which will provide access to the French Bob's, Twala and Taylors zones below the 10 Level elevation. The mine plan is focused on converting the Resources to Reserves by means of underground development and drilling and has now embarked on an aggressive development program to access the Taylors West, Crescent and Browns new zones between 10 Level and 6 Level. Circuit changes and necessary mechanical repairs to the Barbrook metallurgical plant resulted in sporadic operation during much of 2005. The results achieved are as follows: Barbrook Mine - 2005 Production Results Ore mined Tonnes 75,411 Development advance Meters 2,459 Ore milled Tonnes 66,365 Grade milled g/t 4.58 Gold sold Ounces 4,951 In the metallurgical plant, the following changes were made: The crushing plant was reconfigured to wet washing and screening operation - all of the screens were refurbished and three stage washing and screening employed. The original Allis Chalmers ('AC'), 12ft by 14ft, 1300 kW drive ball mill and its associated feed conveyor and slurry pumping circuits were rehabilitated and a new Outokumpu 20m3 flash flotation cell installed to treat the whole of the AC mill discharge. The secondary flotation section was upgraded and a cleaner flotation section included. The flotation concentrate product is now processed through an expanded carbon-removal circuit consisting of three Diester '999' tables and multiple double-cyclone stages to remove the preg-robbing amorphous carbon and retain the floated gold-bearing sulphide minerals. The flotation tails thickener has been rehabilitated and included in the new circuit. This thickener will re-use most of the water from the flotation and carbon cleaning circuits and thus provides far more efficient pumping and deposition of tailings onto 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, thickened and then ultra-fine milled. In February 2006, the Sala mill was reintroduced as a 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 12 microns. The finely-milled concentrate is processed through the Aachen oxidation sections where the high oxygen demand of the fine concentrate is satisfied by passing it through three Aachen circuits where high pressure oxygen gas is introduced and to the recirculating slurry flow over a specific time period. A small amount of paraffin is added after the final Aachen treatment. The paraffin 'blinds' small amounts of residual amorphous carbon that maystill be present from liberation of carbon in the ultra-fine milling section. Lime slurry is added in this circuit to maintain the slurry pH between 10 and 11. The 'oxidised' concentrate is pumped through a very fine trash screen sited ahead of a new eight-stage resin-in-leach (RIL) section that originally comprised the CIL section of the old metallurgical plant. The RIL tanks are fitted with Kemix inter-stage resin screens and have been designed to operate as a 'carousel-type' operation with sufficient retention time to cater for future tonnage extensions. An entirely new resin washing, elution and electrowinning section has been designed and constructed to handle the larger resin processing requirement. It is estimated that the above changes will allow for a consistent plant throughput 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 are generally associated with arsenopyrite. The gold is disseminated within the arsenopyrite as extremely fine particles and poses metallurgical problems in conventional gold recovery methods. Some very preliminary tests based on ultra-fine grinding have shown significant leaching improvements. However, this test work needs to be repeated and optimized on plant scale in order to determine whether such a fine grind and resultant processing can be economically attained. It may be possible to separate an 'arsenopyrite' fraction during the carbon-removal process that could be processed separately by ultra-fine milling. Testing of these Daylight/Victory ores will continue in 2006 with the aim of providing the plant with an additional higher grade source than that of the Barbrook line ore zones. The construction of the new milling plant was largely completed and commissioned in January 2006 and is now fully operational. Outlook The forecast production and sale of Caledonia's gold for 2006 is difficult to estimate at this stage. It will depend on the rate and timing of the improved gold production expected at Barbrook, which will be better established during March 2006, and the Rand-US Dollar exchange rate and US Dollar gold price that will prevail during 2006. Looking to the future, should the ultra-fine grinding process tests prove positive, the Daylight/Victory ore zones could provide the Barbrook plant with a readily accessible, additional source of higher than average grade ore. As highlighted, development is currently in progress on 7 and 10 Levels to provide access to other known ore shoots, such as Crescent and Browns, which extend through both levels. In order to ensure continuity of the ore supply from the French 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 to access the lower portions of the French Bob's, Twala Crescent and Browns ore zones, all part of the Barbrook's existing underground infrastructure. Caledonia intends to re-commence commercial production at Eersteling, subject to the 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 Rustenburg Platinum, owned by Anglo Platinum Limited. The property is located approximately 30 km southwest of the Eersteling Gold Mine property and is located in an area that is presently undergoing a surge in platinum group metal exploration along a well mineralised feature known as the 'Platreef'. In 2004, Caledonia purchased and acquired prospecting rights over an additional 342 hectares on the farm Grasvally, immediately adjacent to and south of the Rooipoort property. To date Caledonia 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 that makes up the project area. At the end of 2004, flotation amenability test work was performed at the SGS Lakefield laboratories in Johannesburg, South Africa on mineralized composite samples from 5 lithological units prepared from the diamond drill-hole cores to verify the flotation amenability of the ore. The tests included milling and basic flotation to produce a flotation concentrate. The tests indicated that from each of the 5 mineralized zones, a re-cleaner flotation concentrate of low mass recovery can be produced that contains medium to high recovery of platinum, palladium, gold, copper and nickel . This initial test work indicates that a simple metallurgical process route could process a flotation concentrate from a high-tonnage low-grade feed ore from an open-pit ore source. In September 2005, an independent resource estimate was calculated and incorporated into a NI 43-101 report by RSG Global of Australia. The results of this 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. Ken Lomberg, both of RSG Global. Maps and drill logs for the Rooipoort PGE/Ni/Cu Exploration Project shown on Caledonia's website provide an appreciation of the exploration activity that has been carried out on the Rooipoort property. Also on the website is a Project Summary Report and the full RSG NI 43-101 report. As a result of the work to date, additional target areas have been identified on the west and north-west of the property (refer to Project Status Report on the website). In March 2006, the Company concluded an agreement, with Falconbridge Ventures of Africa (Pty) Ltd ('Falconbridge') to acquire a 100% interest in Falconbridge's prospecting rights covering a total area of 4,315.81 hectares adjoining the Company's Rooipoort project and effectively doubles the area of Caledonia's Rooipoort Project underlain by Bushveld Complex rocks with proven PGE potential. Further details of 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 plans and other technical data, was commenced in October 2004 and continued throughout 2005. The resources at Eersteling were evaluated and a development program prioritized. Field work in 2005 focussed on mapping of known mineralised reef structures around the Doreen Shaft and the Pienaar and Girlie Reef. Compilation of previous information is being integrated with the results of the high resolution aeromagnetic survey flown in January as well as the gold-in-soil sampling completed in the first quarter. The near surface gold potential of at least 8 km of gold bearing structures along the Doreen, Pienaar and Girlie structures was highlighted. Only Girlie has been systematically drilled (by Anglo American in the 1980's) and has an inclined shaft to 60m depth with limited development. Pienaar was excavated on surface to 10m depth by Eersteling's previous owners, Severin Mining Development, in early 1990's. Doreen has a shaft to 60m and 100m of strike development as well as a number of old winzes in the oxide zone which has been systematically trenched. Twenty-three trenches and old workings have been cleared, logged and resampled along the strike of the Doreen reef. A total of 223 channel and grab samples have been collected for analysis. Similar work along the Pienaar strike is planned for 2006. Apart from the vertical Franka shaft, which was sunk to a depth of 220 meters to access the Maltz reef, all other reefs are essentially 'virgin' even though they limited access from various shafts. Diamond drilling is planned in 2006 to systematically test the structures to 100m depth initially. Roodepoort The Roodepoort Gold Property is located 22km north-east of the Eersteling Mine and 8km east of the Zandrivier mine. Roodepoort is situated in an area of historical gold mining associated with a near surface unusual gold-bearing albitite intrusive. Grab samples have returned values of up to 2g/t gold from pyritic portions of this unit and values greater than 16g/t gold from younger shear zones. In 2005, Caledonia concluded that the potential for an open-pit operation, based on gold mineralization in the albitite body, as previously reported, requires further exploration. However, potential exists for narrow high grade vein mineralization on this property. This requires further evaluation and could provide a source of ore for the Eersteling metallurgical plant. Compilation of previous data and assessment of the intersections made commenced in 2005 and will continue in 2006. Drill sections and drill logs from this program are listed under the Roodepoort Project in the 'Maps and Reports' section of the Caledonia website. DIAMONDS Kikerk Lake The Kikerk Lake property consists of 15 mineral leases currently pending approval by the Nunavut Mining Recorder. These leases cover 38,738 acres (15,677 hectares). It is likely that some of this ground will be relinquished during 2006. In 2001 and 2002, Caledonia announced the discoveries of two diamondiferous kimberlites, 'Potentilla' and 'Stellaria', on the Kikerk Lake property in Nunavut Canada, by its joint venture partner and operator of the property, Ashton Mining of Canada Inc. ('Ashton'). The two kimberlite pipes are approximately 700 meters apart. In 2005, Ashton collected 108 heavy mineral samples to follow-up on previous anomalous results. These samples have been sent to Ashton's laboratory, results are expected in the second quarter of 2006. Approximately 24 line-kilometers of ground magnetic survey were conducted over a structural trend line, there were no new magnetic features noted that would be indicative of kimberlite emplacement. Four diamond drill holes, totalling 382 meters were drilled to test the Stellaria kimberlite and a possible source of kimberlite indicator minerals east of Stellaria. Results confirm that the Stellaria body has a steep dip to the north-west and limited width. Caledonia's 17.5% share of this program is funded by Ashton. Ashton holds a 52.5% interest, having incurred in excess of $750,000 in exploration expenditures on the property. This interest can be increased to 59.5% if Ashton funds 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 its affiliate Motapa Diamonds Inc. ('Motapa'), collectively known as 'the BHP Entity', on the Mulonga Plain, Kashiji Plain and Lukulu licences in Western Zambia. Motapa is the project operator on behalf of the joint venture. The BHP Entity is now vested with a 60% participating interest, with Caledonia holding a 40% interest. In terms of the joint venture, the BHP Entity will continue to fund operations through the completion of a feasibility study at which point their interest will increase to 75%. Caledonia will then have various options including that of the BHP Entity funding the project through to commercial production. The Mulonga Plain licence area is located in Western Zambia, between the Zambezi River and the Angolan border identified discrete areas within the licence area. An airborne gravity survey was completed on the easternmost of these in late 2004. Ten, out of an original eleven, airborne gravity and magnetic targets were drill tested 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 87 meters to 173 meters with no kimberlite intercepts reported from any of the holes. Motapa has defined four prospective regions within the extensive Mulonga Plain anomaly through prior heavy mineral sampling, airborne magnetics and reconnaissance drilling. The 2005 drill program was designed to test the easternmost of these prospective regions and followed on from completion and interpretation of an airborne gravity survey in late 2004. Core samples from this drill program have been sent to Cape Town for kimberlite indicator mineral recovery and analysis. These results are anticipated during the first quarter 2006 and will be used to formulate plans for ongoing work on the easternmost prospective region of the Mulonga Plain anomaly. Commenting on the results, Motapa's CEO Dr. Larry Ott noted: 'The extensive Mulonga Plain diamond and kimberlite indicator mineral anomaly remains highly prospective for discovery. This program has provided an initial drill test of one of four well defined indicator mineral dispersions. The remaining three areas, in the central and western portions of the Mulonga Plain remain essentially untested and results of this program should add considerably to our understanding of kimberlite indicator mineral dispersion within the Mulonga Plain and better constrain likely source kimberlite areas.' Kashiji Plain This licence area is located in northwest Zambia, adjacent to the Angolan border. Prior work by Motapa has recovered 22 microdiamonds in association with numerous kimberlitic ilmenites. Work in 2005 focused on interpretation of results from the field work of 2004 in two discrete areas of anomalous kimberlite indicator mineral and diamond recoveries. No field work was carried out on the Kashiji or Lukulu licences in 2005. Goedgevonden Caledonia holds prospecting rights over the Goedgevonden diamond bearing kimberlite pipe. This property is located approximately 20km north of the Stilfontein gold mine in the Klerksdorp district of the North West Province in South Africa and 200km south west of Johannesburg. Previous prospecting activities carried out in the mid 1970's on Goedgevonden indicate that the pipe is oval in shape and covers a surface area of approximately 0.27 hectares. This work also confirms that the pipe was drill intersected at a depth of 425 meters, and that further down, dip extensions remain undefined. Previous drilling reported an average diamond content of 35 to 45 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 the drill samples and diamond recovery. Four holes were drilled in the centre of the pipe, three to a depth of 150 meters, and the other to 120 meters. The three remaining holes were drilled to delineate the pipe in more detail. All of the seven holes drilled entered the kimberlite at a depth of about 6 meters, and the four centrally-located holes were stopped whilst still in the kimberlite. A total of about 56 tonnes of drilling sample was collected and processed through a 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 with a notable tendency toward pink coloured diamonds. From the diamond recoveries it was confirmed that the Goedgevonden pipe was diamondiferous, and sufficient gem-quality diamonds were recovered to warrant a larger bulk sample. Geological interpretive work was completed during 2003 but there was no exploration activity on this property during 2004 or 2005 as corporate resources were concentrated on Caledonia's other projects which were considered to be of higher priority in adding shareholder value. BASE METALS Nama Caledonia Nama Limited, a wholly owned subsidiary of Caledonia, holds five contiguous exploration licences in northern Zambia which host open-pittable near-surface cobalt/copper mineralization. The 2001/2002 soil sampling program carried out jointly by Caledonia and BHP Billiton was completed over the majority of the remaining licence area. This program identified a number of high priority anomalous targets within the required geological setting. These targets should be followed up in the search for larger, deeper, sulphide ore bodies. With the recent substantial increase in the price of copper, Caledonia will search for joint venture partners for the exploration of the potential deeper sulphide-ore zones. In the second quarter of 2004, a mini bulk sample was excavated at Nama and underwent successful screening tests and heavy media/gravity separation tests in South Africa. Following encouraging results, it is now planned to excavate a larger sample, in conjunction with a cobalt end-user, which will be screened and processed on site to produce a suitable cobalt concentrate for further testing. If the test is successful and satisfactory economic terms are obtained, it is expected that a long-term supply contract for the Nama cobalt/copper concentrate will be negotiated with a smelter or other end users. However, these tests and initial discussions have been more extensive than first expected and continue with a number of potential end-users and possible joint venture partners. Kadola This large exploration property consisting of three contiguous licence areas was previously joint ventured with Cyprus Amex and is prospective for copper and cobalt. With the recent substantial increase in the price of copper, Caledonia is holding discussions with potential joint venture partners for the exploration of the copper/cobalt potential of Kadola. The Kadola properties also include the Eureka gold/copper/pyrite anomaly. With the significant increase in the price of gold and copper, this project area will be re-evaluated for either joint-venture or for further work by Caledonia. OUTLOOK The outlook for the aforementioned exploration properties is difficult to quantify. Exploration by its nature is speculative with a high degree of risk accompanied by the potential for high returns. Caledonia manages this risk by using well-qualified exploration professionals, senior mining company joint venture partners and by exploring in areas which are considered as having a better than average potential for discovery. The recent increases in the prices of precious and base metals should improve exploration expenditures of the major mining companies and could improve the likelihood of Caledonia negotiating joint venture 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 a significant part of the 'reward' through joint venture interests in order to minimize early exploration costs. Details of the strategic alliances with joint venture partners have been discussed above. Caledonia currently has two joint venture interests in place, each of which is presently conducting aggressive diamond exploration programmes. Caledonia intends to continue to focus its exploration activities of prospective properties by developing the properties through strategic alliances with senior producers. 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 South Africa are required to be converted to 'new order' rights, by a process of re-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, 2006 and 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 2005 Barbrook Mining Licence Active Due By April Not applicable 30, 2009 Eersteling/Zandrivier Mining Active Due By April Not applicable Licence 30, 2009 Marabastad Mineral Rights Inactive March 10, Awaited (Eersteling) 2005 Rooipoort Prospecting Permit Active Due April Application in 30, 2006 prep. Grasvally Mineral Rights Ptn 9, Active New Order rights 11, 13, 14, 16 (Rooipoort) granted May 4, 2005. Grasvally Mineral Rights Ptn 8, Inactive April 1, Awaited 29 (Rooipoort) 2005 Grasvally Ptn 17, 20 (Rooipoort) New order May 11, Awaited application 2005 Goedgevonden/Syferfontein Inactive April 14, Awaited Prospecting Permit 2005 Eleazar New order May 3, Awaited application 2005 Apart from various technical requirements for conversion the new legislation requires that companies give attention to: 'MPRDA' Section 2(d): substantially and meaningfully expand opportunities for historically disadvantaged persons, including women, to enter the mineral and petroleum industries and to benefit from the exploitation of the nation's mineral and petroleum resources;' Mining Charter This document was formulated in negotiation between government and the mining industry as largely represented by the Chamber of Mines of South Africa and organised labour. The Mining Charter seeks to address the implementation of section 2(d) in practical and measurable terms. Lack of clarity as to the status of prospecting under the Mining Charter has led to considerable debate and confusion in terms of the ability of companies involved in early stage prospecting work to meet or even indicate their commitment to meeting the terms of the Mining Charter, even before any sort of mineral resource has been established. This in part has been the cause of considerable delays in processing of the thousands of applications submitted as part of this process. FORWARD LOOKING STATEMENTS This annual report contains certain forward-looking statements relating but not limited to the Company's expectations, intentions, plans and beliefs. Forward-looking information can often be identified by forward-looking words such 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 or statements about future events or performance. Forward-looking information may include reserve and resource estimates, estimates of future production, unit costs, costs of capital projects and timing of commencement of operations, and is based on current expectations that involve a number of business risks and uncertainties. Factors that could cause actual results to differ materially from any forward-looking statement include, but are not limited to, failure to establish estimated resources and reserves, the grade and recovery of ore which is mined varying from estimates, capital and operating costs varying significantly from estimates, delays in obtaining or failures to obtain required governmental, environmental or other project approvals, inflation, changes in exchange rates, fluctuations in commodity prices, delays in the development of projects and other factors. Forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from expected results. Potential shareholders and prospective investors should be aware that these statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those suggested by the forward-looking statements. Shareholders are cautioned not to place undue reliance on forward-looking information. By its nature, forward-looking information involves numerous assumptions, inherent risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts, projections and various future events will not occur. Caledonia undertakes no obligation to update publicly or otherwise revise any forward-looking information whether as a result of new information, future events or other such factors which affect this information, except as required by law. Caledonia Mining Corporation Consolidated Balance Sheets (in thousands of Canadian dollars) December 31 2005 2004 Assets Current Cash and cash equivalents $1,076 $6,470 Accounts receivable 768 316 Inventories 90 508 Prepaid expenses 330 187 --------- --------- 2,264 7,481 Investment at cost (Note 1) 79 79 Capital assets (Note 2) 9,156 7,158 Mineral properties (Note 3) 10,839 8,948 --------- --------- $22,338 $23,666 --------- --------- Liabilities and Shareholders' Equity Current Bank overdraft $197 $ - Accounts payable 2,392 1,062 --------- --------- 2,589 1,062 Asset retirement obligation (Note 4) 377 423 --------- --------- 2,966 1,485 --------- --------- Shareholders' Equity Share capital (Note 5 (b)) 180,053 173,304 Contributed surplus (Note 5 (c)) 923 480 Broker Warrants (Note 5 (d)) - 321 Deficit (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 costs Revenue from sales $2,642 $841 $646 Operating costs 7,917 6,451 3,630 --------- --------- --------- Gross profit (loss) (5,275) (5,610) (2,984) --------- --------- --------- Costs and expenses General and administrative 3,001 1,984 1,276 Interest 13 175 127 Amortization 1,243 800 438 Other expense (income) (Note 8) (4) 361 (50) Write down of mineral properties and capital 152 1,062 9,759 assets --------- --------- --------- 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 activities Net (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 activities Expenditures on capital assets and mineral properties (5,284) (3,813) (2,279) -------- --------- --------- (5,284) (3,813) (2,279) -------- --------- --------- Financing activities Loan 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 2,315 Cash 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

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