Final Results

Caledonia Mining Corporation 03 April 2007 Caledonia Mining Announces its Fourth Quarter and 2006 Annual Results Toronto, Ontario - April 2 2007: Caledonia Mining Corporation ('Caledonia') (TSX: CAL, NASDAQ-OTCBB: CALVF, AIM: CMCL) is pleased to announce its fourth quarter and 2006 annual operating and financial results. The financial results below are reported in thousands of Canadian dollars, except where otherwise stated. Financial Highlights Q4 '06 Q4 '05 2006 2005 Total Revenue 9,200 453 16,559 2,642 Revenue - continuing operations 9,045 4 13,586 6 Operating costs - continuing operations 5,951 587 8,661 757 Gross Income(loss) - continuing operations 3,094 (583) 4,925 (751) Net Income(loss) - continuing operations 3,840 (313) 2,315 (3,748) (Loss) - discontinued operations (1,282) (1,741) (7,990) (5,932) Net Income(loss) for the period 2,558 (2,054) (5,675) (9,680) Net Income(loss) per share (basic & fully diluted) - continuing operations $0.008 ($0.001) $0.005 ($0.012) Net Income (loss) per share (basic & fully diluted) $0.006 ($0.006) ($0.013) ($0.031) Cash in continuing operations 1,252 2,004 1,252 2,004 Total Assets 31,456 22,338 31,456 22,338 For the year ended December 31, 2006, Caledonia recorded a gross income from continuing operations of $4.9 million, revenues of $13.6 million, and a net income after tax of $2,3 million. Included in the income is a foreign exchange gain of $0.1 million. The basic net income per fully diluted share for the continuing operations is $0.005. Cash available at year end totaled $1.252 million (from continuing operations) During 2006, $7.55 million was raised from private placements and the exercise of warrants, of which $3.5million was invested in Capital assets and mineral properties, mainly in South Africa. Commenting on the results, Stefan Hayden, President and CEO, said 'I am pleased to report a significant increase in our net income, after tax. Our fourth quarter was particularly strong, with net income of $3.8 million, or $0.008 per basic and fully diluted share, from revenues of $9.2 million, demonstrating a healthy 41% profit margin. The stronger financial performance this year is due to the acquisition of the Blanket Mine in June 2006. Blanket produced 12,437 ounces of gold for the period of July to December 2006. We are busy with the expansion project to No.4 shaft and the mill, which we anticipate will be completed during the fourth quarter 2007, which has been designed to increase Blanket's gold production from 25,000 to 40,000 ounces a year. As we have mentioned before, our other gold assets, the Barbrook and Eersteling mines are on care and maintenance, and the short listed purchasers are now proceeding with their respective due diligence exercises. Our focus during 2007 will be the completion of the Blanket expansion, and rapidly progressing our Nama Cobalt/Copper project after the completion of the metallurgical test work currently underway.'. The Annual Report including the MD&A for 2006 will be available on SEDAR and on the Caledonia website at www.caledoniamining.com on April 2, 2007 The conference call is scheduled for Wednesday April 4, 2007 at 10:30 hours (EST) Conference ID: 9535356 Dial-in number: 416-343-4294 (local) Toll-free Dial-in number: 800-9011-2810 (International) Toll-free Dial-in number: 1-866-862-7809 (Canada/US) For more information, please contact: Stefan Hayden Alex Buck/Nick Bias President & CEO, Caledonia Mining buck-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. 2006 Objectives Achievements Optimize gold production at While production increased steadily after the Barbrook Mine in South Africa to plant upgrade, tramming and drilling problems treat at least 15,000 tpm. limited the volume to 13,000 tpm. As reported more fully in the MD&A the Board Continue developing additional agreed to place Barbrook under care & reserves/resources at Barbrook maintenance and intends to dispose of Barbrook Mine. during the current financial year 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 PGE, Ni, Cu Application for Conversion of Rooipoort resource on the farms Rooipoort property in terms of MPRDA was submitted in and Grasvally which form the April 2006 and granted in November 2006 for a Rooipoort PGE/Ni/Cu Exploration period of 5 years. No further drilling was Project in South Africa conducted pending this granting. Soil geochemical sampling was commenced on west side of Rooipoort and adjoining areas of Moordrift property acquired in 2005 from Falconbridge. This work is ongoing at year end. Increase the land holdings around Application to transfer prospecting rights the Rooipoort Exploration Area. acquired from Falconbridge to Eersteling was submitted in April 2006 and further information submitted in August 2006, as well as January 2007. Approval is expected by April 2007. Drill identified extensions to Identified extensions to known mineralized the known ore zones on the zones were prepared for drilling in 2006. Eersteling and Zandrivier Mining Granting of New Order Prospecting Rights in Licence Areas. respect of 3002 hectares surrounding the Eersteling and Zandrivier Old Order Mining Rights was granted in November 2006 for a period of 5 years. As reported more fully in the MD&A the Board intends to dispose of Eersteling during the current financial year Continue with efforts to conclude Final agreements will be negotiated once the an agreement with a cobalt end metallurgical test work to produce cobalt producer to purchase cobalt hydroxide has been completed. concentrate produced at Nama and/ or form strategic alliances to achieve this objective. Seek a joint-venture partner to Final drafts of a JV currently under review commence an exploration program with completion expected shortly. at the Kadola copper/cobalt and the Eureka copper/gold properties in Zambia. Pursue possible acquisitions and/ Purchased the Blanket Mine, an operating gold or strategic partnerships to mine, in Zimbabwe. expand Caledonia's portfolio of properties in Southern Africa. Expand the Board of Directors to A new independent director has been appointed address ongoing Corporate to the main Board and Audit committees Governance requirements Conclude necessary agreements to Suitable partners have been identified but satisfy the South Africa Black finalization has been held in abeyance until Economic Empowerment ('BEE') the possible disposal of Barbrook and requirements. Eersteling has been determined. Arrange necessary financing to Caledonia reported a positive cash flow in support the activities required both the third and fourth quarters and expects to meet these objectives. this trend to continue for at least the first quarter 2007. 2007 Objectives Arrange necessary financing to support the activities required to meet these objectives. Conclude the sale of Barbrook and Eersteling Gold Mines. Complete the No. 4 shaft expansion project at Blanket Mine, expand the milling rate from 600tonnes per day to 1,000 tonnes per day, and increase gold production from 25,000 ounce per annum to approximately 40,000 ounces per annum. Further explore the PGE, Ni, Cu resource on the Rooipoort and Grasvally properties which form the Rooipoort PGE/Ni/Cu Exploration Project in South Africa. Complete the planned metallurgical test work on Nama mineralization, and conclude the long term cobalt purchase agreements. Finalise agreement with joint-venture partner to carry out additional exploration programs at the Kadola copper/cobalt and the Eureka copper/gold properties in Zambia. Conclude necessary agreements to satisfy the South Africa Black Economic Empowerment ('BEE') requirements. Pursue possible acquisitions and/or strategic partnerships to expand Caledonia's portfolio of properties in Southern Africa. Performance Highlights -------------------------------------------- -------- -------- -------- -------- -------- 2006 2005(2) 2004(2) 2003(1) 2002(1) -------------------- -------- -------- -------- (2) (2) -------- -------- Financial - C$ 000's ------------------------------ -------------------- -------- -------- -------- -------- Revenue from Sales 13,586 6 3 58 1 -------------------- -------- -------- -------- -------- -------- Gross Profit (Loss) 4,925 (751) (466) (94) (20) -------------------- -------- -------- -------- -------- -------- (Expenses)/Income (General and Administration, Interest , (1,958) (2,997) (2,304) (14,476) (4,335) Amortization and -------- -------- -------- -------- -------- foreign exchange) -------------------- Net Income (Loss) - before Write-Downs, tax and 2.967 (3,748) (2,770) (4,811) (1,765) discontinued -------- -------- -------- -------- -------- operations -------------------- Discontinued (7,990) (5,932) (7,222) (36) (91) Operations -------- -------- -------- -------- -------- -------------------- Income (Loss) - after Write-Downs and (5,675) (9,680) (9,979) (14,496) (4,446) discontinued -------- -------- -------- -------- -------- operations. -------------------- Cash 1,252 1,076 6,470 4,179 1,864 -------------------- -------- -------- -------- -------- -------- Current Assets 8,773 2,264 7,481 4,573 2,094 -------------------- -------- -------- -------- -------- -------- Assets 31,456 22,338 23,666 19,530 24,969 -------------------- -------- -------- -------- -------- -------- Current Liabilities 5,899 2,589 1,062 790 1,336 -------------------- -------- -------- -------- -------- -------- Long Term 1,221 377 423 1,089 1,073 Liabilities -------- -------- -------- -------- -------- -------------------- Working Capital surplus/(Deficiency) 2,874 (325) 6,419 3,783 758 -------------------- -------- -------- -------- -------- -------- Shareholders' Equity 24,336 19,372 22,181 17,651 22,560 -------------------- -------- -------- -------- -------- -------- Total Capital Expenditures 3,579 5,284 3,813 2,279 613 including Mineral -------- -------- -------- -------- -------- Properties -------------------- Expenditures on Mineral 659 2,583 2,298 2,042 624 Properties -------- -------- -------- -------- -------- -------------------- Financing Raised 7,559 6,588 14,314 9,511 5,174 -------------------- -------- -------- -------- -------- -------- Share Information -------------------- ------------------------------ -------- -------- -------- -------- Market Capitalization ($ 45,798 42,632 39,145 105,955 86,836 Thousands) -------- -------- -------- -------- -------- -------------------- Shares Outstanding (Thousands) 457,981 370,715 301,112 252,274 211,795 -------------------- -------- -------- -------- -------- -------- Warrants & Options (Thousands) 102,354 34,748 52,342 27,348 28,055 -------------------- -------- -------- -------- -------- -------- Basic and diluted eps from 0.005 (0.012) (0.010) (0.06) ( 0.02) continuing -------- -------- -------- -------- -------- operations -------------------- Basic and diluted eps from (0.018) (0.019) (0.024) (0.00) (0.00) discontinued -------- -------- -------- -------- -------- operations -------------------- Basic and diluted eps for (0.013) (0.031) (0.034) (0.06) (0.02) the year -------- -------- -------- -------- -------- -------------------- TSE Share Price High 0.23 0.18 0.465 0.610 0.44 -------------------- -------- -------- -------- -------- -------- TSE Share Price Low 0.095 0.10 0.12 0.215 0.060 -------------------- -------- -------- -------- -------- -------- TSE Share Volume 132,323 61,214 56,934 99,233 81,234 (Thousands) -------- -------- -------- -------- -------- -------------------- NASDAQ Share Price High 0.204 0.15 0.37 0.39 0.281 (US$) -------- -------- -------- -------- -------- -------------------- NASDAQ Share Price 0.082 0.08 0.10 0.16 0.040 Low (US$) -------- -------- -------- -------- -------- -------------------- NASDAQ Share Volume (Thousands) 212,028 105,151 210,251 440,811 271,404 -------------------- -------- -------- -------- -------- -------- AIM Share Price High 13.0 6.25 - - - (pence) -------- -------- -------- -------- -------- -------------------- AIM Share Price Low 4.9 4.50 - - - (pence) -------- -------- -------- -------- -------- -------------------- AIM Share Volume 12,162 856 - - - (Thousands) -------- -------- -------- -------- -------- -------------------- Operating Results (1) (3) ------------------------------ -------------------- -------- -------- -------- -------- Gold Production 12,437 4,951 1,693 1,187 52 (Ounces) -------- -------- -------- -------- -------- -------------------- Silver Production 1,038 264 66 42 4 (Ounces) -------- -------- -------- -------- -------- -------------------- Year End Gold Resource (Thousand Ounces) - 500 - - - - Blanket -------- -------- -------- -------- -------- Mine -------------------- (1) Restated for the adoption of the Asset Retirement Obligations change in accounting policy (2) Restated to reflect the discontinued operations nature of Barbrook and Eersteling Mines (3) 2006 reflects Blanket Mine only, 2005 and before are historical numbers reflecting Barbrook and Eersteling Mines Letter to Shareholders I am pleased to report a satisfactory financial performance for 2006 by Caledonia with a gross operating profit of $4.925 million, from revenues of $13.586 million, over $1.252 million cash in the bank and a diluted loss of $0.013 per share. This turn-around in the company's financial performance was due to our operating gold mine in Zimbabwe, Blanket, which we acquired in June 2006. Blanket's results were consolidated into Caledonia from July 1, 2006. Blanket performed well for the second half of the year, producing a total of 12,437 ounces of gold (24,874 ounces of gold on an annualised basis). We are currently undertaking an expansion project at the mine to increase gold production from 25,000 ounces a year to 40,000 ounces a year. We expect the expansion to be fully commissioned by the fourth quarter 2007. We are also undertaking exploration close to the Blanket Mine, with a view to proving up additional economic gold resources. We have had a disappointing year at our South African gold mine Barbrook, which is currently on care and maintenance. Barbrook started out the year as an operating gold mine, which had just undergone an expansion to increase gold production. Despite operational issues which were impacting on economic gold production, the illegal industrial action in October 2006 severely damaged some mine infrastructure. This prompted the Board of Directors to review the operation as a whole and the conclusion is to sell the asset, along with the Eersteling gold mine, also on care and maintenance. Expressions of interest have been received from a number of parties and we expect to conclude a sale during the current financial year. In Zambia, we continue to make good progress at the Nama cobalt project. We have signed a number of letters of intent with third party refiners confirming their interest. However, we have been frustrated by delays in finalising the necessary metallurgical test work which has prevented Caledonia from developing the project further. We recently published a NI 43-101 Technical Report which confirms the potential economic viability of Anomaly 'A', the first deposit earmarked for development. Once we have finalized the test work and product specifications the long term purchase agreements for cobalt can be finalised and work commenced on the pilot plant. Looking ahead to 2007, our focus will be on the Blanket Mine expansion, the Nama project and the Rooipoort Exploration Project, with a view to strengthening our financial performance further. On behalf of the Board of Directors, S. E. Hayden 31 March, 2007 President and Chief Executive Officer CALEDONIA MINING CORPORATION March 31, 2007 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, 2006, December 31, 2005 and December 31, 2004 should be read in conjunction with the Consolidated Financial Statements 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'). Note that all currency references in this document are to Canadian dollars. Overall Performance 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'. 1. VISION AND STRATEGY Caledonia is an exploration, development and mining company with a producing gold operation in Zimbabwe and two non-producing gold mines in South Africa and a diversified exploration portfolio of projects in Canada, South Africa, Zambia and Zimbabwe, some of which are joint ventures with other unrelated companies. Caledonia's objective is to develop its 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 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 high levels of 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. In view of the disappointing operational results at the Barbrook Mine together with significant property damage incurred during illegal industrial action in the fourth quarter of 2006, the Barbrook Mine was placed under care-and-maintenance late in the year. Subsequently the Board of Directors mandated management to seek purchasers for the Barbrook Mine, the Eersteling Gold Mine and the gold explorations properties at Eersteling and Roodepoort. 2. OPERATIONS Blanket Mine (1983) Private Limited - Gold The Blanket Mine owned by Caledonia's 100% owned subsidiary Caledonia Holdings Zimbabwe is located 560 km south of Harare the capital city of Zimbabwe and 150 km south of Bulawayo, the country's second largest city. The town of Gwanda, the provincial capital of Matabeleland South, is located is 16 km from the mine. The mine is situated in the prolific Gwanda greenstone belt which first experienced gold production in 1800's and which owns extensive claims throughout this belt. First pegged in 1904 with operations starting in 1906, the mine has produced over a million ounces of gold and currently has 910,500 ounce of mineral resources. Geological Setting Like most of the gold mines in Zimbabwe, a typical greenstone terrain, the 70km long by 15km wide Gwanda Greenstone belt, hosts Blanket Mine. This terrain comprises supra crustal metavolcanics similar to those found in the Barberton area of South Africa and the Abitibi area of Canada. The Blanket property is one of three remaining large, gold producers, from a belt that had no less than 268 operating mines at one time. The other two producers are the neighbouring Vubachikwe mine owned and operated by Forbes and Thompson and the Jessie mine on the south eastern end of the belt and owned by F. A. Stewart Pvt. Ltd. Property Geology Blanket mine is part of the group that makes up the North Western Mining camp otherwise also called the Sabiwa group of mines extending from Jethro to the south, through Blanket itself, the currently defunct Feudal, AR South, AR Main, Sheet, Eroica and Lima mines. In addition dormant old gold showings, such as the Sabiwa from the south, Jean, Provost, Redwick, Old Lima and Smiler, form northern continuation of the Vubachikwe property hosting banded iron formations. The geology consists of a basal felsic unit of no known mineralisation presence. It is generally on this lithology type that the various tailings disposal sites are located. Above this unit is the ultramafics that include the banded iron formations hosting the eastern dormant cluster and the ore bodies of the nearby Vubachikwe complex. The active Blanket ore bodies are found on the next unit, the mafics. An andesitic unit caps this whole stratigraphy. A regional dolerite sill cuts the entire sequence from Vubachikwe through Blanket to Smiler. Ore bodies at Blanket are epigenetic. They are associated with a later, regionally developed deformation zone characterized by areas of high strain, wrapping around relatively undeformed remnants of the original basaltic flows. It is within the higher strain regime that the wider of the ore bodies are located. Summary of Reserves and Resources at Blanket Mine at December 31, 2006 RESERVES AND RESOURCES MINERAL RESERVES (@Au price US$500/oz) ----------------------------- ---------- -------- -------- Classification Tonnes Grade Content ---------- -------- Au g/t (oz) --------------------- ---------- ---------- -------- PROVEN ORE --------------------- ---------- ---------- -------- Operating Areas 837,000 3.95 106,200 --------------------- ---------- ---------- -------- Pillars (discounted by 50%) 247,600 4.59 36,600 --------------------- ---------- ---------- -------- Total Proven Ore including Pillars 1,084,600 4.09 142,800 --------------------- ---------- ---------- -------- PROBABLE ORE --------------------- ---------- ---------- -------- Operating and Development Areas 2,326,000 4.10 306,700 --------------------- ---------- ---------- -------- Total Proven +Probable Ore 3,410,600 4.10 449,500 --------------------- ---------- ---------- -------- --------------------- ---------- ---------- -------- MINERAL RESOURCES (@Au price US$500/oz) ----------------------------- ---------- -------- -------- Classification Tonnes Grade Content ---------- ---------- -------- Au g/t (oz) --------------------- ---------- ---------- -------- --------------------- ---------- ---------- -------- Indicated 377,200 4.12 50,000 --------------------- ---------- ---------- -------- --------------------- ---------- ---------- -------- Inferred 2,375,100 5.91 ** --------------------- ---------- ---------- -------- --------------------- ---------- ---------- -------- Tonnages and ounces are rounded to the nearest 100 ----------------------------- ---------- -------- Note** In keeping with the requirements of NI 43-101, Inferred Resources are reported without estimates of metal quantities. --------------------- ---------- ---------- -------- (i) 1 tonne = 1,000 kilograms = 2,204.6 pounds (ii) 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 Blanket's reserves and resources as required by National Instrument 43-101 of the Canadian Securities Administrators. Metallurgical Process Run of mine ore is crushed to - 12mm in the 3 stage crushing plant. This material is then fed into two 1.8m by 3.6m rod mills where it is milled down to approximately 70% passing 75 microns, before being passed through two 30 inch Knelson Concentrators where approximately 49% of total gold production is recovered. The Knelson Concentrator tails are pumped through cyclones and into a 3.66 meter by 4.9 meter, 1000 HP regrind ball mill. The product from the regrind mill is pumped into a carbon in leach ('CIL') plant consisting of eight, 600 cubic meter leach tanks equipped with 45kw agitators where leaching at 50% solids and simultaneous solubilised-gold adsorption onto activated carbon takes place. Elution of the gold from the loaded carbon and its electro winning is done on site. Gold is deposited on wire wool cathodes, the loaded cathodes are acid- digested and the resultant gold solids are smelted after which the bullion is delivered to the Government-operated Fidelity Printers and Refiners. The CIL plant has a design capacity of 3,800 tonnes of milled ore per day, from its previous use for reclaimed tailings processing. The present crushing and milling circuit is being expanded from 600 tonnes per day to 1,000 tonnes per day ore throughput capacity to balance the increase in mining tonnage. Production Operations The underground workings produce 600 tonnes of ore per day using a long-hole open stoping method. Ore is trammed to a number of shafts and hoisted to surface. The current capital program at the No. 4 shaft will streamline the hoisting process and increase the overall hoisting capacity at the mine. Blanket employs approximately 800 people. 3. DISCONTINUED OPERATIONS 3.1 Barbrook Mines Limited - Gold The Barbrook Mine owned by Caledonia's 100% owned subsidiary Barbrook Mines Limited ('Barbrook') is located near the historic gold-mining town of Barberton, in Mpumalanga Province, 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. Following industrial action which resulted in substantial damage to mine property the Board of Directors has decided to dispose of the mine during the current financial year. 3.2 Eersteling Gold Mining Company Limited The Eersteling Mine is owned by Caledonia's 100% owned subsidiary 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, approximately 300 km north of Johannesburg. The Board of Directors has decided to dispose of the mine during the current financial year in order to focus management and financial resources on the Nama project in Zambia and the Blanket gold mine in Zimbabwe. 4. MARKETING All gold bullion produced in South Africa was delivered to Rand Refinery in Germiston and sold at spot price at the discretion of the company. The company nominated the currency of settlement for each individual sale. All gold bullion produced in Zimbabwe is delivered to Fidelity Printers and Refiners in Harare and sold under various methods of election, more fully described under page 12 of this MD&A. 5. 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. The Rand price of gold plays a large part in determining the profitability of South African gold mines and similarly the Zimbabwean dollar price of gold plays a large part in determining the profitability of Zimbabwean gold mines. During 2006, the South African Rand weakened by 11.35% against the United States dollar and this, coupled with an 22.1% increase in the US$ gold price, resulted in a 35.9% increase in the market Rand gold price per ounce. Despite this fact, Barbrook Mine continued to be cash flow negative. Blanket Mine has been consolidated into the results of Caledonia Mining Corporation from July, 1, 2006. During the six months ending December 31, 2006 the Zimbabwe economy continued to falter. The Zimbabwe dollar was officially devalued against the US dollar in early August from Z$101:USD1 to Z$250: USD1 and remained at that fixed rate to year end and into 2007. Zimbabwe had an inflation rate of approximately 1200% at December 2006, which increase to approximately 1800% in March 2007. The effect of the high inflation, fixed exchange rates and gold sales options (more fully described under section 6) leads to certain distortions in the presented annual financial statements. This distortion relates mainly to average revenue and cost per ounce of gold sold. Caledonia Mining Corporation believes it is appropriate to consolidate Blanket Mine into its annual financial statements as it exercises control over the operations, is able to sell a major proportion of gold in US dollars, retain these US dollars in a foreign currency account, and has government approval to make loan repayments from its available foreign currency funds. 6. SELECTED ANNUAL INFORMATION-(in thousands of Canadian dollars - except per share amounts.) The following information is given for the last three fiscal year-ends of the Company: December 31, December 31, 2005 December 31, 2004 2006 (1) (1) Net sales or total revenues 13,586 6 3 Net income or (loss) before discontinued items or extraordinary items: 2,315 (3,748) (2,770) - per share undiluted $0.005 ($0.012) ($0.010) - per share diluted $0.005 ($0.012) ($0.010) Discontinued operations (7,990) (5,932) (7,222) Net income or (loss) (5,675) (9,680) (9,979) - per share undiluted ($0.013) ($0.031) ($0.034) - per share diluted ($0.013) ($0.031) ($0.034) Total assets 31,456 22,338 23,666 Total long-term financial liabilities 1,221 377 423 Cash dividends declared per Nil Nil Nil share (1) The prior year figures have been reclassified to reflect Barbrook and Eersteling Mines as discontinued operations. The above data was prepared in accordance with Canadian Generally Accepted Accounting Principles. The results for 2006 and prior years have been presented on the basis that Barbrook and Eersteling Mines are discontinued operations. Subsequent to the illegal industrial action at Barbrook Mine during October 2006, the Board of Directors resolved to place Barbrook Mine on care and maintenance and subsequently mandated management to put both Barbrook Mine and Eersteling Gold Mine up for sale. Neither sale transaction was concluded by December 31, 2006, or at March 31, 2007, the date of this Report. However, there have been several serious offers to purchase these mines and management believes that a sale will be concluded during this financial year. The above results for 2006 include Blanket Mine's results for the 6 months commencing July 1, 2006. For the year ended December 31, 2006, the Company recorded a net profit after tax, before discontinued operations, of $2,315, (compared to a $3,748 loss in 2005 and a $2,757 loss in 2004), of which Blanket Mine contributed a profit of $4,803. Included in the 2006 profit is a foreign exchange gain of $143 (compared to a $50 loss in 2005 and a $513 loss in 2004). Blanket Mine reported a gain on foreign exchange of $291 during the reporting 6 months of 2006. During 2006 the gross profit from operations (before discontinued operations) was $4,925, (compared to a $751 loss in 2005 and a $466 loss in 2004). There were no mineral property write downs in 2006, (compared to $152 in 2005 and $1,062 in 2004). The income tax expense charge of $652 relates to Blanket Mine. The operating profit of $4,925 includes an amortization charge of $40, (compared to a $27 profit in 2005 and a $20 profit in 2004) with the amortization charge attributable to Blanket Mine being $20 for the 6 month period. Blanket Mine recorded revenue for the 6 months of $13,575 from the 11,287 ounces of gold sold. During the 6 month reporting period of Blanket Mine, the Reserve Bank of Zimbabwe (RBZ) stipulated various possible payment methods for gold sales. The methods varied from '40% of revenue in USD and 60% of revenue in Zimbabwean dollars ('Z$')'; which changed to '75% in USD and 25% in Z$' and it is currently set at '67.5% in USD and 32.5% in Z$'. All of the Z$ revenues are translated from USD to Z$ at the then official exchange rate. During the same period, the official exchange rate in Zimbabwe changed from Z$101 per US$1 to Z$250 per US$1. The latter rate was applicable for the last 5 months of 2006. An alternative payment method for gold payment results in the full Z$ proceeds of the sale calculated at a rate of Z$16,000 (sixteen thousand Zimbabwe dollars) per gram of gold sold. This would result in the mine achieving an approximate exchange rate of Z$800 per US$1 on these sales. At the year end, the results of Blanket Mine have been translated into C$ using the official Z$:C$ exchange rate which is based on the Z$250:USD1. The result of this is that Z$ revenues received appear to be at a rate higher than the official rate. This will result in C$ revenues appearing to be overstated, leading a reader to assume that Blanket Mine received more than the USD market price per ounce of gold sold. This however is a distortion. Correspondingly, expenses incurred by Blanket in the local Zimbabwe market will also appear to be overstated, as the official Z$ exchange rate may not always be the applicable rate used to arrive at a selling price by a supplier. The net result is that certain statistics may appear overstated in $ terms but this is a factor of the Z$ being a managed currency and not a free floating currency. During 2006, Caledonia invested $3,579 in capital assets and mineral properties as compared to $5,284 in 2005 and $3,813 in 2004. Of the amount invested in 2006, Blanket Mine spent $1,998, Barbrook Mine spent $922 ,Nama spent $277 and Rooipoort spent $336.During the year $7,559 was raised from private placements, and the exercise of warrants and options, as compared to $6,588 in 2005 and $14,314 in 2004 (all net of issue costs). The purchase of Blanket Mine was settled by issuing 20,000,000 shares in Caledonia Mining Corporation and the payment of USD1 million in cash; the purchase price amounted to $4,129. The basic net profit/(loss) per share, for continuing operations, of $0.005 (compared to a ($0.012) in 2005 and a ($0.010) in 2004) has been calculated using a weighted average number of shares of 423,838,628 (compared to 313,565,142 for 2005 and 289,843,080 for 2004). The diluted net profit/(loss) per share, for continuing operations, of $0.005 has only been calculated for 2006 as the prior years were anti- dilutive. The fully diluted number of shares was 425,984,395 The funds raised were used to finance capital projects at Barbrook Mine, to finance exploration at Nama, Rooipoort and Eersteling, to fund operating losses incurred at Barbrook Mine and to provide working capital for Greenstone Management Services. Capital projects at Blanket Mine were funded from internally generated funds. The Company had related party transactions with several of the Company's Directors or members of the President's family in fiscal years 2006, 2005 and 2004. They are detailed in Note 11 to the Company's December 31, 2006 audited financial statements. It is expected that related party transactions of a similar nature will continue during the current fiscal year of the Company. 7. OPERATIONAL REVIEW AND RESULTS OF OPERATIONS Blanket is the company's revenue generator. The Barbrook mine did not achieve positive cash-flow generation prior to its shutdown late in 2006. Shareholder funds were applied to the metallurgical plant expansion project and to exploration projects as resources allowed. The plans for the non-revenue generating projects continue to be determined by the availability of funds and are more fully described below. 7.1 Gold Production Blanket Mine - Zimbabwe Safety, Health and Environment â€¢ The mine recorded three lost time injuries, including one fatality, and one restricted work activity case during the period. This is compared to the same period in 2005 which recorded three lost time and 13 restricted work activity cases. With the exception of the single fatality , the reduction in incidents in restricted work activity cases was attributable to the intensive safety training undertaken under the NOSSA program which was implemented on the entire mine during 2006. â€¢ An occupational health centre was established and all employees were screened for occupational ailments. A total of 800 employees were checked and 10% are currently under surveillance. HIV/AIDS continues to be an area of concern and management has put in place awareness programs to educate workers. â€¢ The Mine has drilled monitoring and ground-water pumping wells downstream of the tailings impoundment to facilitate ground water testing. The tailings impoundment was also professionally managed by a licensed, specialized contractor, audited and found to be stable. Capital Projects Number 4 Shaft Expansion Project: Projects at Blanket focused mainly on the expansion program which involved the upgrading of the No. 4 shaft and the crushing/milling section of the plant, whilst maintaining production levels. The surface works at the No. 4 shaft were completed; being the construction of the winder house and installation of a 650kw winder therein. Other works undertaken included the fabrication and installation of a 40 meter high headgear complete with bins, 120 meters of overland conveyor system and primary crushers. The entire surface works were commissioned and operational minus the headgear and winder due to the underground section not yet being functional. The below-ground works were commenced with the shaft being concrete lined from its surface collar down to the 90 meter level. Equipping also commenced and is still in progress at the year end. A total of 180 meters had been completed by the year-end. In the metallurgical plant a surplus mill was refurbished and was almost ready to install at the year-end. This expansion project is designed to increase underground production from the current 600 tonnes per day ('tpd') to 1000 tpd whilst it is planned that the total gold ounces recovered will increase from 25,000 to 40,000 per annum. The complete expansion project is expected to be completed and commissioned during the 4th Quarter of 2007. Operations: Underground operations ran smoothly throughout the period with emphasis being put on haulage development designed to open up more mineable resources required to support the expansion initiatives. As a result of this initiative, all surplus cash generated from the mine was re-invested in development. A total of 270 meters of capital development and 1,371 meters of operating, run-of-mine development were achieved. Average plant availability was highly satisfactory at 95 %. Metallurgical test work was completed on the CIL process. The test results indicated that the same or slightly improved gold leach recovery could be attained with savings in reagent costs. The production results for the 6 months July - December, 2006 were as outlined below:- Ore mined Tonnes 100,700 Development advance (ROM) Meters 1,371 Development advance (Capital) Meters 270 Ore milled Tonnes 103,200 Ore Gold Grade milled Grams/tonne 4.15 Gold sold Ounces 11,287 Gold produced Ounces 12,437 Outlook The aims and objectives for 2007 are: â€¢ To complete the No. 4 shaft project in order to realize an increase in production by first quarter of 2008. â€¢ To intensify underground development initiatives in order to generate sufficient reserves to sustain the increased production. â€¢ To explore ways of controlling input costs in a hyperinflationary environment (such as off-shore purchasing). â€¢ To focus employee, including management attention and effort to issues of safety, health and environment. Barbrook Mine - South Africa Summary Barbrook's plant expansion was completed during the 1st quarter of 2006. The anticipated rapid build-up in mine production did not materialize owing to both the effects of an earth tremor and equipment difficulties. This delay placed undue pressure on the metallurgical plant where management was having difficulty maintaining steady state operation due to the lack of ore. The shortfall in mine production relative to the mill capacity resulted in the plant being operated on a spasmodic basis, which affected gold recoveries which remained below planned levels. Consequently gold production and hence revenue was well below planned levels, while the additional costs related to staffing for increased production levels exceeded target. One of the Mine's Labour contractors was unable to conclude wage negotiations which resulted in a strike which lasted for 6 weeks and culminated in a violent protest which endangered the lives of non-striking mine employees and resulted in the administration building and a security office being burned down. The administration building is critical to the operation of the mine and housed all the critical geological and administrative equipment for information and communication systems. It was therefore decided to place Barbrook Mine on 'care and maintenance' pending an assessment of the opportunities for re-starting operations. Following a review of all available options, the company's management recommended to the Board that Barbrook and Eersteling be sold. The Board of Directors decided in December 2006 to put the mines up for sale. Operational Overview Barbrook Mine - 2006 Production Results Ore mined tonnes 86,730 Development advance meters 1,910 Ore milled tonnes 80,582 Grade milled grams/tonne 3.62 Gold sold ounces 4,288 An analysis of the operations indicated that the mine's overall performance functioned below planned target levels. The Board of Directors, having reviewed all possibilities and opportunities mandated management to seek buyers for the mine. 7.2 Exploration and Project Development Rooipoort PGE/Ni/Cu Project (including Grasvally) - South Africa Property In 2002, Eersteling acquired the Rooipoort platinum group elements (PGE), nickel (Ni) and copper (Cu) Project from Rustenburg Platinum, owned by Anglo Platinum Limited. The property is located approximately 30 km southwest of the Eersteling Gold Mine property in an area that is presently undergoing a surge in platinum group metal exploration along a well-mineralized feature known as the 'Platreef'. An additional 342 hectares on the farm Grasvally, immediately adjacent to and south of the Rooipoort property was optioned in 2004, was granted a New Order Prospecting Right in May 2005 (3 year period) and a further 43 hectares portion was granted in April 2006 (5 year period) . Application for conversion of the Rooipoort property into a new order right in terms of the Mineral and Petroleum Development Act ('MPRDA') was granted in November 2006. 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 contiguous with the Company's Rooipoort property and effectively doubles the area of Caledonia's Rooipoort Project property underlain by Bushveld Complex rocks with PGE potential. The Falconbridge properties were granted New Order Prospecting Rights in April 2006 (3,099 hectares, for a period of 5 years) and September 2006 (1,217 hectares, for a period of 5 years). The total area of Caledonia's New Order Prospecting Rights in the Rooipoort PGE/Ni/Cu properties is now 8473.39 hectares. Exploration: To date, the Company has diamond-drilled a total of 18,450 meters in 54 holes on the Rooipoort PGE/Ni/Cu Exploration Project. This drilling covers the full 6 km strike length that makes up the project area. Falconbridge has drilled a total of 7,393 meters in 22 holes on the portions of Grasvally and the farms Jaagbaan and Moordrift that comprise most of the property purchased from Falconbridge. 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 five 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 relatively simple metallurgical process route could possibly produce a flotation concentrate from high-tonnage, low-grade feed material. In September 2005, an independent resource estimate was calculated and incorporated into a NI 43-101 - compliant 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 True Tonnes 2PGE+Au Pt (g/ Pd (g/ Au (g/ Ni % Cu % Width (m) (g/t) t) t) 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. During 2006, work was limited to the land acquired from Falconbridge and was delayed until the New Prospecting Rights were issued. Field work consisting of geochemical sampling was conducted in these areas. Maps and drill logs for the Rooipoort PGE/Ni/Cu Exploration Project shown on Caledonia's website provide an overview of the exploration activity that has been carried out on the Rooipoort property. The Project Status Report and the full RSG NI 43-101 report are available on the Caledonia website. As a result of the work to date, additional target areas have been identified on the west and north-west of the property, these are identified in the Project Status Report on the website. GOLD Eersteling Gold Mine - South Africa Property: The area of interest comprises the two Old Order Mining Licences that cover the Eersteling and Zandrivier Mines and surroundings (5,472hectares) as well as the Marabastad Project Area where New Order Prospecting Rights were granted in November 2006 (3,902 hectares) Exploration Work Completed: A full geological review of the Eersteling property, including the mine plans and other technical data, was commenced in October 2004 and continued throughout 2005/6. The resources at Eersteling were evaluated and a development program prioritized. Field work in 2005/6 focused on mapping of known mineralised reef structures around the Doreen Shaft and the Pienaar and Girlie Reefs. Compilation of previous information was integrated with the results of the high resolution aeromagnetic survey flown in January 2005 as well as of gold-in-soil sampling completed in 2005. As noted previously, these gold exploration properties at Eersteling are included in the assets for sale at the Eersteling mine. Roodepoort - South Africa The Roodepoort Gold Property is located 22km north-east of the Eersteling Mine. Roodepoort is situated in an area of historical gold mining associated with a near surface unusual gold-bearing albite intrusive. In 2005, Caledonia concluded that the potential for an open-pit operation, based on gold mineralization in the al body, as previously reported, requires further exploration. This was not confirmed by surface work and the drilling of three boreholes. However, potential was demonstrated from this work as well as evident from previous mining operations (1920's) for narrow high grade vein mineralization on this property. This requires further evaluation. Drill sections and drill logs from this program are listed under the Roodepoort Project in the 'Operations & Projects' section of the Caledonia website. Note that the Roodepoort gold property in included in the Eersteling assets that are for sale. Zimbabwe Exploration - Gold Caledonia's exploration activities in Zimbabwe are conducted by the Blanket Mine's exploration department. Blanket's current exploration title holdings in the form of registered mining claims in the Gwanda greenstone belt total 78 claims, including a small number under option, covering a total area of 2,500 ha. Of these, 47 claims are registered as precious metal (gold) blocks covering 415 ha while 31 claims were pegged and are registered as base metal (Cu, Ni, As) blocks covering a total area of 2,085ha. During 2006 Blanket's efforts were focused in certain key areas in the Gwanda greenstone belt (that are within trucking distance of the Blanket plant) such as GG and Mbudzane where it is believed there is the greatest chance of success. The main exploration activities involved detailed grid-controlled mapping, ground magnetics and induced polarization (IP) surveys and diamond core drilling. Blanket also conducted limited preliminary preparatory fieldwork (grid-line cutting) in the Sandy Claims within the Bubi greenstone belt. The Bubi greenstone belt ground holding portfolio comprises a total of 27 base metal claims covering a combined total area of 2 820 ha. Basic reconnaissance exploration work (soil, sampling a geological mapping) was completed in all the claims area. In 2007 the focus will mainly be directed to conduct additional follow-up work to define drill targets on potentially prospective metal-in-soil anomalies so far generated in the area. The work in the Sandy claims constitutes part of this detailed follow-up exploration work. Geological mapping followed by geophysical surveys were conducted on the GG, Mbudzane and K-Pits areas. Mapping was carried out in the Sandy claims area. A drilling program initiated in late 2005 to probe for suspected down-dip and strike extension mineralisation associated with the GG prospect was continued throughout 2006. In all 4,187 metres were drilled in 2006 with 2,263 samples assayed. The assay results establish the presence of two zones of potentially economic gold mineralisation. During the first quarter of 2007 Blanket's exploration focus is mainly centered on the Gwanda greenstone belt with the main emphasis being delineation of a potentially economic ore resource definition at the GG prospect and Mbudzane. At GG, this will be achieved through continued core drilling from the surface to establish the strike extent of established economic mineralization below the GG pit as well as to achieve close-spaced drilling in order to generate enough data for estimation of an ore resource for the area. At Mbudzane, a second phase core-drilling program has been planned and will commence in the early 2nd quarter period of 2007, to follow up on several highly prospective deep seated ip-anomalies generated in 2006. In addition, Blanket is conducting basic reconnaissance exploration work in the Bunny's Luck claims, the target being to determine the potential strike length of a 1m-1.5m wide shear zone hosted quartz vein so far mapped over a strike length of 300m. A total of 160 soil samples over a grid cell spacing of 100m x 100m have already been collected and sieved and are ready for shipment to a commercial laboratory for analysis. 7.2.3 DIAMONDS Kikerk Lake - Canada The Kikerk Lake property consists of 5 mineral leases currently pending approval by the Nunavut Mining Recorder. These leases cover 12,912.5 acres (5,225.5 hectares). In 2001 and 2002, Caledonia announced the discovery 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'), a wholly owned subsidiary of Stornoway Diamond Corporation ('Stornoway'). 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 were sent to Ashton's laboratory and results were received in the first quarter of 2007. Ashton reported that approximately 24 line-kilometers of ground magnetic survey were conducted over a structural trend line, but there were no new magnetic features noted that would be indicative of kimberlite emplacement. Four diamond drill holes, totaling 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. Recently Stornoway has amalgamated with Ashton. Mulonga Plain - Zambia Work Completed: Caledonia has a joint venture agreement with Motapa Diamonds Inc. ('Motapa'), on the Mulonga Plain and Kashiji Plain Licences in Western Zambia. Motapa is the project operator on behalf of the joint venture. Motapa is now vested with a 60% participating interest, with Caledonia holding a 40% interest. In terms of the joint venture, Motapa must 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 Motapa 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. Commenting on the (2005) 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.' No further work was carried out in 2006. Kashiji Plain - Zambia This licence area is located in northwest Zambia, adjacent to the Angolan border. Prior work by Motapa has recovered 22 micro diamonds 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 further field work was carried out on the Kashiji or Lukulu licences in 2006. Goedgevonden - South Africa Caledonia holds prospecting rights over the Goedgevonden diamond bearing kimberlite pipe and surrounding area. 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. In April 2005 and application for conversion of these rights was submitted in terms of the MPRDA and the rights were granted in December 2006. An additional application for New Order Prospecting rights was submitted over an adjoining farm, Eleazar in June 2005. It expected that this application will be granted shortly. 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. It should be noted that the Company has not completed the work necessary to estimate a resource in terms of National Instrument 43-101 for the Goedgevonden property, 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. 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 as well as detailed ground gravity and magnetometer surveys were completed during 2003 but there was no further exploration activity on this property as corporate resources were concentrated on Caledonia's other projects which were considered to be of higher priority in adding shareholder value, as well as tenure issues during the change over from old to new minerals legislation as embodied in the MPRDA. Granting of the New Order Prospecting Rights now gives the Company security of tenure and discussions are in progress with other parties with a view to realizing value by joint venture or disposal of the properties in the Goedgevonden Diamond Project. 7.2.4 BASE METALS Nama - Zambia Property: Caledonia Nama Limited, a wholly owned subsidiary of Caledonia, holds five contiguous exploration licences in northern Zambia which host near-surface cobalt/copper mineralization. This area lies immediately north west of the operating Konkola Copper mine and adjoins the extensive holdings of Teal Mining and Exploration Limited. In November 2006 the Zambian authorities agreed to grant a Retention Licence to Caledonia Nama Limited in order to enable the Company to conclude the detailed evaluation of mineral resources outlined by earlier work. This Retention Licence covers an area of 80,625 hectares and is valid for two years. Work Completed: The 2001/2002 soil sampling program carried out jointly by Caledonia and BHP Billiton was completed over the majority of the original licence areas. This program identified a number of high priority anomalous targets (anomalies A,C and D) within the required geological setting. These targets have been followed up in the search for copper/cobalt oxide and sulphide bodies. In the second quarter of 2004, a mini bulk sample of 30 tonnes was excavated at Nama A (Discovery) site and underwent successful screening tests and heavy media /gravity separation tests in South Africa. Following encouraging results, further one-tonne samples were sent for additional test work to fine tune the extraction process for the cobalt oxide. During 2006 metallurgical test work has provided a proposed metallurgical flow-sheet. Two further bulk samples were taken from Anomaly A to enhance and refine the metallurgical processes and cost parameters for producing a marketable and economically viable cobalt product. On the basis of this test work, it is anticipated that the design of a pilot plant will be finalized, enabling Caledonia to conclude long term product purchase agreements based on the signed letters of intent. Also in 2006/2007 a Technical Report, compliant with NI 43-101 was prepared for Anomaly A at Nama by Mr. David Grant, C.Geol., FGS, Pr.Sci.Nat., an independent consultant who is the 'Independent Qualified Person' for Nama's resources as required by National Instrument 43-101 of the Canadian Securities Administrators. In his report, which has been filed on SEDAR and which is available on the Company website, Mr. Grant estimates the Indicated Resources at Anomaly A as 43,656,000 tonnes grading 0.055% Co, 0.099% Cu and 0.011%Ni. Mr. Grant recommends that the results at Anomaly C should be re-evaluated with the objective of declaring a resource. He also states that Anomalies F through Q inclusive are worthy of further investigation. With the recent substantial increase in the price of copper, Caledonia is in negotiation with potential joint venture partners for the further exploration of the established oxide resources and potential underlying sulphide zones. Kadola - Zambia Property: This large exploration property lies in central Zambia to the west of Kapiri Mposhi and consists of three contiguous licence areas held by Caledonia Kadola Limited, a wholly owned subsidiary of Caledonia and are prospective for copper, cobalt and gold. All the licence areas (301,464 hectares) are in the process of renewal for a further two years and granting is expected shortly. Work Completed: After substantial initial work done by Caledonia including aeromagnetic survey, soil geochemical sampling, and drilling during the period 1995/6. This work included outlining of the Kadola West Cu/Co deposit and the discovery of the Eureka Cu/Au prospect as well as a number of other soil geochemical targets. The licences were previously joint ventured with Cyprus Amax (2000/02) but terminated prematurely by them as result of take over by Phelps Dodge and corporate prioritization. With the recent substantial increase in the price of copper and gold, Caledonia is negotiating an agreement with a potential joint venture partner for the further exploration of the copper, cobalt and gold potential of the Kadola Licences. 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. 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 present and previous strategic alliances with joint venture partners have been discussed above. Caledonia currently has two joint venture interests in place in Zambia and Canada. Caledonia intends to continue to focus its exploration activities of prospective properties by developing the properties through strategic alliances with senior producers. In terms of the South Africa 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 prospecting and mining rights (immediately preceding May 1, 2004) were required to apply for conversion by April 30, 2005. Active prospecting rights conversion applications closed on April 30, 2006 and active mining rights conversion close on April 30, 2009. Apart from various technical requirements for conversion the new legislation requires that companies give attention to the requirements of the MPRDA as defined in Section 2(d) as well the Mining Charter as '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. The Mining Charter was formulated in negotiations between government, the mining industry as largely represented by the Chamber of Mines of South Africa, and organized 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. However, there has recently been an apparent relaxing of the attitude of the South African authorities in respect of New Order Prospecting Rights and many companies, including Caledonia have received these new rights in recent months. The Zimbabwe economy continues to be depressed and inflation is rampant. The survival of the mining industry is a high priority of the Government as its ability to generate foreign currency is of paramount importance. Managements focus is to complete the No 4 shaft expansion and to bring production up to the 1000 tpd level. Cash flow management is critical to ensure the mining operations are protected, as much as possible, from the effects of local inflation by the utilization of foreign currency proceeds to fund operations. Management is also continuing with exploration around the Blanket mine to enable Blanket to expand its operation should economic improvements in Zimbabwe occur. 8. ENVIRONMENTAL POLICY Caledonia is committed to maintain the highest environmental standards such that its operations and/or its products do not present an unacceptable risk to its employees, its customers, the public or the environment. Caledonia and its subsidiaries operate under Caledonia's Environmental Policy that encompasses the following: - Caledonia directs its employees and its subsidiary companies to conduct their exploration and operations activities in a professional, environmentally responsible manner, in compliance with all applicable legislation and policies in the jurisdictions in which they undertake business. - Caledonia liaises closely with the applicable government regulatory bodies and the public to optimize communication and an understanding of Caledonia's activities in relation to environmental protection. - Caledonia is committed to the diligent application of technically proven, economically feasible, environmental protection measures throughout its exploration, development, mining, processing and decommissioning activities. - Caledonia on a regular ongoing basis monitors its environmental protection management programs to ensure their compliance with the applicable regulatory requirements. It is the responsibility of all the employees of Caledonia and its subsidiaries to carry out their employment activities in accordance with this code of practice. Operational line management has the direct responsibility for regular environmental protection management. 9. SUMMARY OF QUARTERLY RESULTS - (in thousands of Canadian dollars - except per share amounts.) The following information is provided for each of the 8 most recently completed quarters of the Company - ending on the dates specified - in thousands of Canadian dollars. The figures are extracted from underlying financial statements that have been prepared according to Canadian GAAP. Dec Sept. June Mar. Dec. Sept. June Mar. 31/06 30/06 30/06 30/06 31/05 30/05 30/05 31/05 Sales before discontinued operations $9,045 $4,539 $1 $1 $2 $0 $3 $1 Income/ (loss) before discontinued 3,840 (455) (683) (388) (318) (1,177) (1,756) (497) operations -- per share $0.008 ($0.001) ($0.002) ($0.001) ($0.001) ($0.003) ($0.006) ($0.002) undiluted - per share $0.008 ($0.001) ($0.002) ($0.001) ($0.001) ($0.003) ($0.006) ($0.002) diluted Discontinued operations (loss) (1,282) (2,619) (2,210) (1,878) (1,736) (1,387) (1,520) (1,289) Net Income/ (loss) after discontinued operations 2,558 (3,074) (2,893) (2,266) (2,054) (2,564) (3,276) (1,786) - per share $0.006 ($0.007) ($0.007) ($0.006) ($0.006) ($0.008) ($0.011) ($0.006) undiluted - per share $0.006 ($0.007) ($0.007) ($0.006) ($0.006) ($0.008) ($0.011) ($0.006) diluted No of shares basic '000 457,981 455,209 398,142 380,714 349,801 336,028 302,262 301,112 No of shares diluted '000 458,087 455,951 403,055 381,663 349,801 336,028 302,262 301,112 The discontinued operation relates to Barbrook and Eersteling Mines and fluctuations in the quarterly results are affected by the level of activity. Barbrook Mine was operational during all of the last eight quarters except for the last quarter in 2006. All foreign exchange gains or losses are reported in the results before discontinued operations. The increase in sales revenue and income before discontinued operations in the third and fourth quarters of 2006 are attributable to Blanket Mine. The gold sales at Blanket Mine were 6,474 ounces in the third quarter and 4,813 ounces in the fourth quarter. Included in the loss before discontinued operations in the third quarter is the unrealized foreign exchange loss of $1,662, and the foreign exchange gain of $1,576 in the fourth quarter. Amortization charges for Blanket Mine in the third quarter were $16 and $4 in the fourth quarter. Amortization charges will increase when the No 4 shaft expansion project is completed in the fourth quarter of 2007, the costs are currently not being amortized. The expected capital completion cost is approximately $4,000 Note: The effect of the dilution on the earnings per share has been calculated for each quarter of 2006 as a profit was earned before discontinued operations for the year. No calculation for 2005 was made as the result for the year was a loss and the diluted earning per share would be anti-dilutive. 10. INVESTING - (in thousands of Canadian dollars) During 2006 Caledonia invested $3,579 in capital assets and mineral properties as compared to $5,284 in 2005 and $3,813 in 2004. Of the amount invested in 2006 Blanket Mine spent $1,998, Barbrook Mine $922, Nama $277 and Rooipoort $336 11. FINANCING - (in thousands of Canadian dollars) During the year $7,559 was raised from private placements, and the exercise of warrants and options, as compared to $6,588 in 2005 and $14,314 in 2004 (all net of issue costs). In all 87,265,885 common shares were issued, this includes the 20,000,000 shares issued as part of the acquisition price of Blanket Mine (2005- 52,738,888 common shares and 16,863,962 common share purchase warrants) The funds were used to finance the expansion of the metallurgical plant at Barbrook, exploration activity on the Company's most prospective projects and other working capital requirements. Barbrook continued to be cash negative during 2006. Working capital and capital expenditure at Blanket Mine was funded from internally generated funds. 12. LIQUIDITY AND CAPITAL RESOURCES -(in thousands of Canadian dollars) As of December 31, 2006, the Company had a working capital surplus of $2,874 as compared to a deficit of $325 at December 31, 2005 and a surplus of $6,419 at December 31, 2004. Current assets of $8,773 ($2,264 - 2005) increased mainly due to increased inventory levels at Blanket Mine and debtors for gold sales being the Reserve Bank of Zimbabwe. During the first quarter of 2007 all old and current gold debtors were collected in full. Details of financing activities are presented in note 5 (b) of the notes to the consolidated financial statements. During 2007, it is expected that the cash requirements of Caledonia will be met from the proceeds of the sale of Barbrook Mine and Eersteling Gold Mine and gold sales from Blanket Mine. The following table summarizes cash flows and cash on hand : ----------------------- --------- --------- 2006 2005 2004 ----------------------- --------- --------- --------- Cash $1,252 $1,076 $6,470 ----------------------- --------- --------- --------- Working capital 2,874 (325) 6,419 ----------------------- --------- --------- --------- For continuing operations ----------------------- --------- --------- --------- Cash provided (used) by operating activities 1,858 (2,831) (2,530) ----------------------- --------- --------- --------- Cash provided (used) by investing activities (3,516) (2,040) (406) ----------------------- --------- --------- --------- Cash provided (used) by financing activities 7,362 6,785 14,314 ----------------------- --------- --------- --------- For discontinued operations ----------------------- --------- --------- --------- Cash provided (used) by operating activities (4,560) (4,064) (5,680) ----------------------- --------- --------- --------- Cash provided (used) by investing activities (922) (3,244) (3,407) ----------------------- --------- --------- --------- The funds raised in 2006 together with anticipated cash inflows in 2007 will be used mainly by Caledonia on its exploration, development and production activities such as: - at Blanket Mine for the completion of the No 4 shaft expansion - at an estimated cost of $4,000 - by further bulk sampling and concentration test work on Caledonia's Nama Cobalt/Copper Project - at an estimated cost of $ 2,600 - corporate working capital The funds raised will be sufficient to move forward with the direct development of the above assets if the projects are proven to be economically and technically justified. Notwithstanding the estimated expenditure amounts for each of the programs described above, the Company cannot predict the actual amounts that will be spent on those programs. It can be stated that the projects with top priority are the No. 4 shaft at Blanket Mine and the pilot plant project work at Nama. Decisions will be made to go ahead on the programs from time to time by Management as they, at that time, determine appropriate based on results received in previous programs and funding available. The Mulonga Plain joint venture with Motapa Diamonds Inc. is subject to joint venture agreements and is entirely funded by the joint venture partner through to commercial production. Similarly, the Kikerk Lake joint venture with Ashton Mining is fully funded by Ashton. Caledonia continues to actively review the benefits, to Caledonia and its shareholders, of seeking new joint venture partners for most, if not all of its exploration properties. The Company does not have any significant long-term contractual obligations or commercial commitments other than the payment of its current liabilities. It has two joint venture agreements with Ashton Mining of Canada Inc. and Motapa Diamonds Inc., in each case these partners are responsible for all property expenditures until a feasibility study has been completed. The Company has minor obligations in respect of licence fees for its exploration and mining properties some of which are paid in full by Caledonia's joint venture partners. As of December 31, 2006 the Company had potential/contingent liabilities to do rehabilitation work on the Blanket, Barbrook and Eersteling Mines - if and when those Mines are permanently closed - at an estimated cost of $1,175. 13. OFF-BALANCE SHEET ARRANGEMENTS There are no off balance sheet arrangements. 14. RELATED PARTY TRANSACTIONS The related party transactions are fully disclosed in note 11 of the Notes to Consolidated Financial Statements. 15. FOURTH QUARTER - (in thousands of Canadian dollars) The operating results for the fourth quarter reflect the mining activity at Blanket Mine who sold 4,813 ounces of gold. Approximately 76 ounces of gold was recovered from the metallurgical circuit of Barbrook Mine during a cleanup operation in the first quarter of 2007. All the Barbrook staff were laid off during the fourth quarter and holding costs at Barbrook are now made up of minimum charges for electricity, limited managerial employment costs and ongoing security costs to safeguard the property. As the mine was on care and maintenance no amortization charge for Barbrook assets was charged in the fourth quarter, $2,742 third quarter, $1,096 second quarter and $129 first quarter. The Reserve Bank of Zimbabwe held the official exchange rate at Z$250:USD1 for the whole quarter and did not alter the exchange rate during the monetary policy announcement during the first quarter of 2007. 16. CRITICAL ACCOUNTING POLICIES There are two major areas where accounting estimates are made, asset impairment and asset retirement obligation. As significant impairment provisions have already been made against the assets and there is a reasonable level of certainty around the estimate it is considered unlikely that any change in estimate would result in a material impact on the results of the company. Based on indicative purchase offers made for Barbrook and Eersteling Mines no further asset impairment has been made against these assets. The asset retirement obligation is also considered to be estimated with a reasonable degree of certainty, although the original estimation was calculated some years ago. The estimation is accreted annually at 5% and thus any change in circumstances is considered unlikely to have a material impact on the results of the company or its operations. In 2005 the Company adopted the accounting guideline issued by the Canadian Institute of Chartered Accountants in respect of consolidation of variable interest entities effective for years after November 1, 2004. The Company has reviewed its interests and determined that the new guideline has not had a material effect on the results of operations or the financial condition of the Company. 17. SECURITIES OUTSTANDING As at March 29, 2007 the following securities were outstanding: (1) 457,981,021 common shares; (2) Options and warrants as follows: Number Description Exercise Validity Price 17,238,000 Common share purchase Average Various until May 11, options $0.21 2016 17,850,000 Common share purchase $0.20 Until December 28, warrants 2007 10,000,000 Common share purchase $0.20 Until January 31, 2008 warrants 2,715,476 Common share purchase $0.20 Until February 2, 2008 warrants 2,722,150 Common share purchase $0.20 Until February 3, 2008 warrants 22,890,000 Common share purchase $0.15 Until April 28, 2007 warrants 9,748,259 Common share purchase $0.15 Until May 12, 2007 warrants 2,190,000 Common share purchase $0.18 Until May 12, 2007 warrants 17,000,000 Common share purchase $0.16 Until July 27, 2007 warrants 18. CONTROLS The CEO and CFO have evaluated the effectiveness of the Company's disclosure controls and procedures and assessed the design of the Company's internal control over financial reporting as of December 31, 2006, pursuant to the certification requirements of Multilateral Instrument 52-109. Management has concluded that, as of December 31, 2006, a weakness existed in the Company's disclosure controls and procedures. However, based on their evaluation, the CEO and CFO concluded that all required disclosures for the year ended December 31, 2006 were ultimately made in accordance with the regulations, despite the weakness in the disclosure controls and procedures. The Company has a Disclosure Committee consisting of four Directors and one Officer, and has disclosure controls and procedures which it follows in an attempt to ensure that it complies with all required disclosures on an adequate and timely basis. The Company's Directors and Management, and the Disclosure Committee, are making all reasonable efforts to ensure that the Company's disclosures are made in full compliance with the applicable rules and requirements. All reasonable efforts are also being made to ensure that the Company's disclosure controls and procedures provide reasonable assurance that material information relating to the Company, including its consolidated subsidiaries, is made known to the Company's Certifying Officers by others within those entities. As a result of the move of more of the Company's administration and financial record-keeping to its Johannesburg office from its Ontario office, control over financial reporting is more in the hands of the Company's Johannesburg-based Directors and Officers than was previously the case. 19. FORWARD LOOKING STATEMENTS This Management Discussion and Analysis 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. 20. QUALIFIED PERSON James Johnstone, P.Eng., is a qualified person as defined by NI 43-101. Mr Johnstone is responsible for the technical information provided on this MD&A. He was assisted by employees of Caledonia who are qualified persons for the individual projects and, where appropriate, outside consultants and/or qualified persons for joint-ventured projects. 21. BOARD AND SENIOR MANAGEMENT CHANGES Mr. Steven Curtis was appointed VP Finance and Chief Financial Officer on April 3, 2006.Mr. Johnstone, the company's Chief Operating Officer, retired in October 2006. Efforts to replace the senior technical executives who retired in 2006 have continued, but without success. At the present time there is a worldwide shortage of senior mining industry professionals and Caledonia is one of many companies looking for suitable staff. With the anticipated sale of the South African gold mines and the planned expansion of the Zambian exploration and metallurgical pilot plant programs the company is re-evaluating its requirements for replacement senior staff. To the Shareholders of Caledonia Mining Corporation: Management has prepared the information and representations in this annual report. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles applied in Canada and, where appropriate, reflect management's best estimates and judgement. The financial information presented throughout this report is consistent with the data presented in the consolidated financial statements. Caledonia maintains adequate systems of internal accounting and administrative controls, consistent with reasonable cost. Such systems are designed to provide reasonable assurance that relevant and reliable financial information is produced. Our independent auditors have the responsibility of auditing the consolidated financial statements and expressing an opinion on them. The Board of Directors, through its Audit Committee, is responsible for ensuring that management fulfils its responsibilities for financial reporting and internal control. The Audit Committee is composed of three unrelated directors. This Committee meets periodically with management and the external auditors to review accounting, auditing, internal control and financial reporting matters. The consolidated financial statements have been audited on behalf of the shareholders by the Company's independent auditors, BDO Dunwoody LLP, in accordance with generally accepted auditing standards in Canada and the standards of the Public Accounting Oversight Board (United States). The auditors' report outlines the scope of their examination and their opinion on the consolidated financial statements. S. E. Hayden S R Curtis President and Chief Executive Officer Vice-President, Finance and Chief Financial Officer Auditors' Report To the Shareholders of Caledonia Mining Corporation We have audited the consolidated balance sheets of Caledonia Mining Corporation as at December 31, 2006 and 2005 and the consolidated statements of deficit, operations and cash flows for each of the years in the three year period ended December 31, 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2006 and 2005 and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2006 in accordance with Canadian generally accepted accounting principles. (Signed) BDO Dunwoody LLP Chartered Accountants Toronto, Ontario March 23, 2007 Comments by Auditors for U.S. Readers on Canada - U.S. Reporting Conflict In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when the financial statements are affected by conditions and events that cast substantial doubt on the Company's ability to continue as a going concern, such as those described in the summary of significant accounting policies. Our report to the shareholders dated March 23, 2007 is expressed in accordance with Canadian reporting standards which do not require a reference to such events and conditions in the auditors' report when these are adequately disclosed in the financial statements. (Signed) BDO Dunwoody LLP Chartered Accountants Toronto, Ontario March 23, 2007 Caledonia Mining Corporation Consolidated Balance Sheets (in thousands of Canadian dollars) December 31 2006 2005 Assets Current Cash and cash equivalents $1,252 $1,076 Accounts receivable 1,407 768 Inventories 5,738 90 Prepaid expenses 61 330 Assets held for sale (Note 12) 315 - --------- --------- 8,773 2,264 --------- --------- Capital Assets and Mineral properties held for sale (Note12)11,449 - Investment at cost (Note 1) 79 79 Capital assets (Note 2) 212 9,156 Mineral properties (Note 3) 10,943 10,839 --------- --------- 22,683 20,074 --------- --------- $31,456 $22,338 --------- --------- Liabilities and Shareholders' Equity Current Bank overdraft $- $197 Accounts payable 5,899 2,392 --------- --------- 5,899 2,589 Long term liability (Note 15) 46 - Asset retirement obligation (Note 4) 811 377 Asset retirement obligation - held for sale (Note 4) 364 - --------- --------- 7,120 2,966 --------- --------- Shareholders' Equity Share capital (Note 5 (b)) 190,626 180,053 Contributed surplus (Note 5 (c)) 989 923 Deficit (167,279) (161,604) ---------- --------- 24,336 19,372 ---------- --------- $31,456 $22,338 ---------- --------- On behalf of the Board: ' J Johnstone' Director 'F C Harvey' Director The accompanying summary of significant accounting policies and notes are an integral part of these financial statements. Caledonia Mining Corporation Consolidated Statements of Deficit (in thousands of Canadian dollars) For the years ended December 31 2006 2005 2004 Deficit, beginning of year ($161,604) ($151,924) ($141,945) Net (loss) for the year (5,675) (9,680) (9,979) ---------- ---------- ---------- Deficit, end of year ($167,279) ($161,604) ($151,924) ---------- ---------- ---------- Consolidated Statements of Operations (in thousands of Canadian dollars except share and per share amounts) For the years ended December 31 2006 2005 2004 Revenue and operating costs Revenue from sales $13,586 $6 $3 Operating costs 8,661 757 469 --------- --------- --------- Gross profit (loss) 4,925 (751) (466) Costs and expenses General and administrative 2,007 3,001 1,984 Interest 54 1 16 Amortization 40 27 20 Other expense (income) (Note 8) (143) (32) 284 --------- --------- --------- 1,958 2,997 2,304 Income (loss) before discontinued operations 2,967 (3,748) (2,770) --------- --------- --------- Taxation (652) - - --------- --------- --------- Income(loss) before discontinued operations 2,315 (3,748) (2,770) --------- --------- --------- Discontinued operations (loss) (7,990) (5,932) (7,222) --------- --------- --------- Net (loss) ($5,675) ($9,680) ($9,992) --------- --------- --------- Non-controlling interest (Note 13) - - 13 --------- --------- --------- Net (loss) after discontinued operations and non-controlling interest ($5,675) ($9,680) ($9,979) --------- --------- --------- Net income(loss) per share (Note 7) Basic and diluted from continuing operations $0.005 ($0.012) ($0.010) Basic and diluted from discontinued operations ($0.018) ($0.019) ($0.024) Basic and diluted for the year ($0.013) ($0.031) ($0.034) The accompanying summary of significant accounting policies and notes are an integral part of these financial statements. Caledonia Mining Corporation Consolidated Statements of Cash Flows (in thousands of Canadian dollars) For the years ended December 31 2006 2005 2004 Cash provided by (used in) Operating activities Income(loss) before discontinued operations $2,315 ($3,748) ($2,770) Adjustments to reconcile net cash from operations (Note 9) 187 264 284 Changes in non-cash working capital balances (Note 9) (644) 653 (44) -------- --------- 1,858 (2,831) (2,530) -------- --------- --------- Investing activities Expenditures on capital assets and mineral properties (2,657) (2,040) (406) Investment in Blanket Mine net of cash received on acquisition (859) - - -------- --------- --------- (3,516) (2,040) (406) -------- --------- --------- Financing activities Bank overdraft (197) 197 - Issue of share capital net of issue costs 7,559 6,588 14,314 -------- --------- --------- 7,362 6,785 14,314 -------- --------- --------- Cash flow from discontinued operations Operating activities (4,560) (4,064) (5,680) Investing activities (922) (3,244) (3,407) -------- --------- --------- (5,482) (7,308) (9,087) -------- --------- --------- Increase (decrease) in cash for the year 222 (5,394) 2,291 Cash and cash equivalents, beginning of year 1,076 6,470 4,179 -------- --------- --------- Cash and cash equivalents, end of year $1,298 $1,076 $6,470 -------- --------- --------- Cash and cash equivalents at end of year relate to: Continuing operations 1,252 2,004 6,470 Discontinued operations 46 (928) - -------- --------- --------- $1,298 $1,076 $6,470 -------- --------- --------- The accompanying summary of significant accounting policies and notes are an integral part of these financial statements. Caledonia Mining Corporation Summary of Significant Accounting Policies ( in thousands of Canadian Dollars) December 31, 2006, 2005 and 2004 Nature of Business The Company is engaged in the acquisition, exploration and development of mineral properties for the exploitation of base and precious metals. The ability of the Company to recover the amounts shown for its capital assets and mineral properties is dependent upon the existence of economically recoverable reserves; the ability of the Company to obtain the necessary financing to complete exploration and development; and future profitable production or proceeds from the disposition of such capital assets and mineral properties. Basis of Presentation These financial statements have been prepared on the basis of a going concern, which contemplates that the Company will be able to realize assets and discharge liabilities in the normal course of business. The Company's ability to continue as a going concern is dependent upon attaining profitable operations, realising proceeds from the disposal of mineral properties and obtaining sufficient financing to meet its liabilities, its obligations with respect to operating expenditures and expenditures required on its mineral properties. Measurement Uncertainties Preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. The more significant areas requiring estimates relate to mineral resources, future cash flows associated with capital assets and mineral properties. Management's calculation of reserves and resources and cash flows are based upon engineering and geological estimates and financial estimates including gold prices and operating costs. The amount ultimately recovered could be materially different than the estimated values. Principles of Consolidation The consolidated financial statements include the accounts of the Company together with all its subsidiaries. All significant inter-company balances and transactions have been eliminated on consolidation. The Company's consolidated subsidiaries (all 100% owned) are Barbrook Mines Limited ('Barbrook'), Blanket (Barbados) Holdings Limited ('Barbados'), Blanket Mine (1983) (Private) Limited ('Blanket'), Caledonia Holdings (Africa) Limited ('CHA'), Caledonia Holdings Zimbabwe Limited ('CHZ'), Caledonia Kadola Limited ('Kadola'), Caledonia Mining Services Limited ('CMS'), Caledonia Mining (Zambia) Limited ('CMZ'), Caledonia Nama Limited ('Nama'), Caledonia Western Limited ('Western'),Eersteling Gold Mining Company Limited (100% owned since June 2004) ('Eersteling'), Fintona Investments (Proprietary) Limited ('Fintona'), Greenstone Management Services (Proprietary) Limited ('Greenstone'), and Maid O' Mist (Proprietary) Limited ('MOM'). Caledonia Mining Corporation Summary of Significant Accounting Policies (continued) ( in thousands of Canadian Dollars) December 31, 2006, 2005 and 2004 Cash and Cash Equivalents Cash and cash equivalents represent cash on hand in operating bank accounts, cash in transit at year end between Blanket Mine in Zimbabwe and Greenstone Management Services in South Africa and money market funds maturing in less than three months. Inventories These include gold in circuit (WIP) and bulk consumable stores. WIP is valued at the lower of the cost of production, on an average basis, at the various stages of production or net realisable value if the cost of production exceeds the current gold price. Bulk consumable stores are valued at the lower of cost or net realisable value on an average basis. Investments The market securities are recorded at cost, a declining value of market securities that is other than temporary would be recognised by writing down the investment. Revenue Recognition Revenue from the sale of precious metals is recognized when the metal is delivered to the respective refineries, benefits of ownership are transferred and the receipt of proceeds is substantially assured. Capital Assets Producing Assets Producing assets are recorded at cost less grants, accumulated amortization and write-downs. Producing plant and equipment assets are amortized using the unit-of-production method on the ratio of tonnes of ore mined or processed to the estimated proven and probable mineral reserves as defined by the Canadian Institute of Mining, Metallurgy and Petroleum. Other producing assets are amortized using the straight line method basis on the estimated useful lives of the assets. The estimated life of the producing assets ranges up to 10 years. Repairs and maintenance expenditures are charged to operations; major improvements and replacements which extend the useful life of an asset are capitalized and amortized over the remaining useful life of that asset. Barbrook Mine and Eersteling Gold Mine have been put up for sale and are thus presented as assets for sale in these financial statements. Non-Producing Assets Non-producing assets are recorded at cost less write downs. At the time of commercial production, the assets are reclassified as producing. During non-producing periods, no amortization is recorded. Mineral Properties Producing Properties When and if properties are placed in production, the applicable capitalized costs are amortized using the unit-of-production method as described above. Blanket Mine was acquired during 2006 and has been consolidated into these results from July 1, 2006 and, as such, has been presented as a producing asset in these financial statements. Non-Producing Properties Costs relating to the acquisition, exploration and development of non-producing resource properties which are held by the Company or through its participation in joint ventures are capitalized until such time as either economically recoverable reserves are established or the properties are sold or abandoned. Caledonia Mining Corporation Summary of Significant Accounting Policies (continued) ( in thousands of Canadian Dollars) December 31, 2006, 2005 and 2004 A decision to abandon, reduce or expand activity on a specific project is based upon many factors including general and specific assessments of mineral reserves, anticipated future mineral prices, anticipated costs of developing and operating a producing mine, the expiration date of mineral property leases, and the general likelihood that the Company will continue exploration on the project. However, based on the results at the conclusion of each phase of an exploration program, properties that are not suitable as prospects are re-evaluated to determine if future exploration is warranted and that carrying values are appropriate. The ultimate recovery of these costs depends on the discovery and development of economic ore reserves or the sale of the properties or the mineral rights. The amounts shown for non-producing resource properties do not necessarily reflect present or future values. Discontinued Operations During the fourth quarter of 2006 Barbrook Mine was subjected to illegal industrial action by employees of a labour broker. Due to the damage caused during and after the industrial action the mine was placed on care and maintenance. At a subsequent meeting of the board of Directors it was resolved that Barbrook Mine and Eersteling Gold Mine would be put up for sale. As a consequence of this decision Barbrook and Eersteling Mine's results for 2006 and preceding years have been disclosed under discontinued operations. Revenue from discontinued operations is $2,973 ($2,636 in 2005 and $838 in 2004) there is no tax applicable to discontinued operations. Asset Impairment Long-lived assets are reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If changes in circumstances indicate that the carrying amount of an asset that an entity expects to hold and use may not be recoverable, future cash flows expected to result from the use of the asset and its disposition must be estimated. If the undiscounted value of the future cash flows is less than the carrying amount of the asset, impairment is recognised based on the fair value of the assets. Strategic Alliances The Company has entered into various agreements under which the participants earn a right to participate in the mineral property by incurring exploration expenditures in accordance with the conditions of the agreements. Upon satisfaction of the conditions of the agreement a joint venture may be formed with customary joint venture terms and provisions and then accounted for on a proportionate consolidation basis. Until a joint venture is formed only the expenditures on the properties incurred by the Company are reflected in these financial statements. Foreign Currency Translation Balances of the Company denominated in foreign currencies and the accounts of its foreign subsidiaries are translated into Canadian dollars as follows: (i) monetary assets and liabilities at period end rates; (ii) all other assets and liabilities at historical rates, and (iii) revenue and expense transactions at the average rate of exchange prevailing during the period. Caledonia Mining Corporation Summary of Significant Accounting Policies (continued) (in thousands of Canadian Dollars) December 31, 2006, 2005 and 2004 Exchange gains or losses arising on these translations are reflected in income in the year incurred. Blanket is a self-sustaining operation and operates in Zimbabwe in a hyper inflationary economy. Accordingly the results of these operations have been translated into Canadian Dollars using the temporal method as described above. Included in the statement of operations is an exchange gain of $291 relating to the translation of Blanket Mine. Income Taxes The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply when the asset is realized or the liability settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that substantive enactment or enactment occurs. Change in Accounting Policies There have been no changes in accounting policy during the current or preceding years. 1. Investment at Cost On May 9, 2002, the Company participated in a private placement of the purchase of shares of Motapa Diamonds Inc. ('Motapa') in an amount of $79. The shares of Motapa are listed on the TSX Venture Exchange in Canada. Motapa Diamonds Inc. is participating in a strategic alliance with the Company on the Mulonga Plain diamond exploration project in Zambia. The market value of the shares as at December 31, 2006 is $26 ($25 in 2005) . Motapa Diamonds has a portfolio of diamond exploration projects in Africa. Blanket Mine is the owner of Old Mutual shares acquired via the emutualization. They were issued and are reflected at Nil cost. The market value at December 31, 2006 is $84. 2. Capital Assets 2006 Cost (1) Accumulated Net Amortization Book Value Land - plant sites $12 $- $12 Plant and equipment - producing (2) 25 1 24 - non-producing (3) 299 299 - Office equipment 868 823 45 Vehicles 386 255 131 --------- --------- --------- $1,520 $1,308 $212 --------- --------- --------- 2005 Cost (1) Accumulated Net Amortization Book Value Land - plant sites $1,541 $ - $1,541 Plant and equipment - producing (2) 7,591 957 6,634 - non-producing (3) 747 - 747 Office equipment 934 831 103 Vehicles 451 320 131 --------- --------- --------- $11,264 $2,108 $9,156 --------- --------- --------- Caledonia Mining Corporation Notes to the Consolidated Financial Statements (in thousands of Canadian Dollars unless otherwise indicated and except for share and per share amounts) December 31, 2006, 2005 and 2004 (1) Cost is comprised of the original cost of the asset, less write-downs, removal of cost for disposals and government grants. (2) The producing plant and equipment in 2006 relates to Blanket Mine and in 2005 relates to the Barbrook operation. (3) The net book value of non-producing plant and equipment at December 31, 2005 represents Eersteling. The recoverability of the carrying amount of the Barbrook and Eersteling capital assets is dependent upon the company receiving binding offers of purchase that exceed the carrying value. As a result of these uncertainties, the actual amount recovered may vary significantly from the carrying amount. 3. Mineral Properties 2006 Cost (1) Accumulated Net Book Value Amortization Producing: Blanket, Zimbabwe - gold property $4,317 $2 $4,315 Non-producing - exploration: Rooipoort , South Africa 4,131 - 4,131 Nunavut, Canada 750 - 750 Goedgevonden, South Africa 79 - 79 Nama, Zambia 624 - 624 Mulonga, Zambia 1,044 - 1,044 ------- --------- --------- $10,945 $2 $10,943 ------- --------- --------- 2005 Cost (1) Accumulated Net Book Amortization Value Producing: Barbrook, South Africa - gold property $6,675 $1,338 $5,337 Non-producing - care and maintenance: Eersteling, South Africa - gold - - - property Non-producing - exploration: Rooipoort and Roodepoort, South Africa 3,324 - 3,324 Nunavut, Canada 750 - 750 Goedgevonden, South Africa 37 - 37 Zambia 1,391 - 1,391 ------- --------- --------- $12,177 $1,338 $10,839 ------- --------- --------- (1) Cost is comprised of the original cost of the asset, less write-downs, removal of cost for disposals and government grants, and includes the capitalized value of the estimated asset retirement obligations Caledonia Mining Corporation Notes to the Consolidated Financial Statements (in thousands of Canadian Dollars unless otherwise indicated and except for share and per share amounts) December 31, 2006, 2005 and 2004 The Company has entered into strategic alliances with third parties on a Canadian property and a Zambian property valued at $750 and $1,044 respectively. The third parties may earn varying percentage interests in these properties by carrying out exploration work on the properties. The recoverability of the carrying amount of the Canadian, South African and Zambian mineral properties is dependent upon the availability of sufficient funding to bring the properties into commercial production, the price of the products to be recovered, the exchange rate of the local currency relative to the US dollar and the undertaking of profitable mining operations. As a result of these uncertainties, the actual amount recovered may vary significantly from the carrying amount. 4. Asset Retirement Obligation 2006 2005 Opening balance $377 $- Accretion expense 20 - Foreign exchange loss (gain) (33) - ---------- ----------- Closing balance - held for sale 364 - ---------- ----------- Continuing operation assumed 750 423 Accretion expense 61 22 Foreign exchange loss (gain) - (68) ---------- ----------- Closing balance - continuing operations $811 $377 ---------- ----------- The asset retirement obligations relate to Blanket Mine, Barbrook Gold Mine and Eersteling Gold Mine and are estimates of costs of rehabilitation at the end of the mine life, adjusted annually for accretion expense at a rate of 5%. 5. Share Capital (a) Authorized An unlimited number of common shares. An unlimited number of preference shares. (b) Issued Number of Shares Amount Common shares Balance, December 31, 2003 252,274,997 $159,151 Issued pursuant to private placements 45,388,175 13,392 Warrants exercised 3,449,114 761 ------------ ----------- Balance, December 31, 2004 301,112,286 $173,304 Issued pursuant to private placements 52,738,888 4,733 Warrants exercised 16,863,962 2,016 ------------ ----------- Balance, December 31, 2005 370,715,136 $180,053 Issued pursuant to private placement 15,437,626 1,475 Issued pursuant to a private placement 34,828,259 3,924 Issued pursuant to acquisition 20,000,000 3,014 Issued pursuant to a private placement 17,000,000 2,160 ------------ ----------- Balance,December 31 , 2006 457,981,021 $190,626 ------------ ----------- Caledonia Mining Corporation Notes to the Consolidated Financial Statements (in thousands of Canadian Dollars unless otherwise indicated and except for share and per share amounts) December 31, 2006, 2005 and 2004 (1) During the first half of 2004, Caledonia raised a gross amount $14,978 from a private placement by the issuance of 45,388,175 units consisting of one common share and one-half common share purchase warrant. Each unit is priced at $0.33 per unit and the common share purchase warrants are exercisable for one common share at $0.55 per whole warrant for a period of eighteen months from the date of issuance. The private placement agents were paid a commission of 9% of the gross proceeds raised and whole common share purchase warrants equal to 10% of the total units sold. The agent compensation warrants are exercisable for one common share at $0.55 per warrant for a period of eighteen months from the date of issuance. A total of 4,538,818 agent compensation warrants were issued at an assigned value of $161. Cash commissions and expenses paid amounted to $1,425.. (2) In June 2005, Caledonia successfully listed on the London Stock Exchange's Alternative Investment Market ('AIM') and placed a small float of shares into the AIM market in conjunction with a financing. The financing on AIM raised a gross amount $3,534 from the issuance of 34,888,888 units consisting of one common share priced at $0.10. Commissions and expenses paid amounted to $508 and have been charged to share capital in 2005. (3) In September 2005, the warrants previously issued in 2004 were re-priced to $0.11 with the date of expiry extended to October 31, 2005. As at that date, 16,863,962 warrants were exercised for gross proceeds of $1,855 while the remaining expired (see 5 (d) below). (4) During December 2005, the Company commenced a private placement to raise $3,496. As at December 31, 2005, the first closing raised gross proceeds of $1,875 comprising 17,850,000 units. The balance of the offering was received by February 2006 upon completion of the second to fourth closings (see Note 14 below). A total of 33,287,626 units priced at $0.105 were subscribed for all closings. Each unit consisted of one common share and one common share purchase warrant. The common share purchase warrants are exercisable for one common share at $0.20 per whole warrant for a period of 24 months from the date of issuance. The private placement agents were paid a commission of 9% of the gross proceeds raised. Cash commissions paid on the first closing amounted to $168 and has been charged to share capital in 2005. (5) In April 2006 the company commenced a private placement to raise additional funds. This placement raised $3,924 after expenses from the sale of 34,828,259 units. Each unit consists of one common share and one share purchase warrant. As part of the settlement of the purchase price for the acquisition of Blanket Mine 20,000,000 common shares were issued to Kinross Gold Corporation. In July 2006 the company completed a private placement to raise additional funds. This placement of 17,000,000 units, each consisting of one common share and one share purchase warrant, was completed in July 2006 and raised $2,160 after expenses. (6) The fair value of the broker warrants noted above was estimated using the Black-Scholes Option Pricing Model with the following assumptions for the periods ended December 31, 2006, 2005 and 2004: 2006 2005 2004 Risk-free interest rate - - 2.25% Expected dividend yield - - nil Expected stock price volatility - - 64-65% Expected option life in years - - 1 Caledonia Mining Corporation Notes to the Consolidated Financial Statements (in thousands of Canadian Dollars unless otherwise indicated and except for share and per share amounts) December 31, 2006, 2005 and 2004 (c) Stock Option Plans and Stock-Based Compensation The Company has established incentive stock option plans (the 'Plans') for employees, officers, directors, consultants and other service providers. Under the Plans, as at December 31, 2006, the Company has the following options outstanding: Number of Options Exercise Price Expiry Date 803,000 $ 0.330 February 9, 2008 9,950,000 $ 0.235 April 24, 2012 225,000 $ 0.345 June 2, 2012 610,000 $ 0.260 April 29, 2014 200,000 $ 0.260 August 15, 2014 4,000,000 $ 0.110 February 15, 2015 1,000,000 $ 0.140 July 10, 2010 450,000 $0.125 May,11,2016 ------------ 17,238,000 ------------ The continuity of the options granted, exercised, cancelled and expired under the Plans during 2006, 2005 and 2004 are as follows: Number of Options Weighted Avg. Exercise Price Options outstanding at December 31, 2003 11,898,700 $0.26 Granted 1,210,000 $0.26 ----------- --------------- Options outstanding at December 31, 2004 13,108,700 $0.26 Granted 5,000,000 $0.12 Cancelled or expired (1,210,700) ($0.43) ----------- --------------- Options outstanding at December 31, 2005 16,898,000 $0.21 Granted 450,000 $0.13 Cancelled or expired (110,000) ($0.27) ----------- --------------- Options outstanding at December 31, 2006 17,238,000 $0.21 Options exercisable at December 31, 2006 17,238,000 $0.21 --------------------- ----------- --------------- The options to purchase common shares noted above, have been granted to directors, officers, employees and service providers at exercise prices determined by reference to the market value of the common shares on the date of grant. The vesting of options is made at the discretion of the board of directors at the time the options are granted. As of December 31, 2006 there are 8,091,325 stock options available to grant. Effective January 1, 2003, the Company commenced recording compensation expense on a prospective basis in the Consolidated Statements of Operations for stock options granted to directors, officers, employees, consultants and service providers using the fair value method. During 2006, stock option expense of $81 for the grant of 450,000 options was charged to expense and credited to contributed surplus (2005 - $283 for 5,000,000; 2004 - $195 for 1,210,000;). Caledonia Mining Corporation Notes to the Consolidated Financial Statements (in thousands of Canadian Dollars unless otherwise indicated and except for share and per share amounts) December 31, 2006, 2005 and 2004 The continuity of contributed surplus is as follows: Amount Closing balance December 31,2003 $285 Stock options granted 195 --------- Closing balance December 31, 2004 480 Stock options granted 283 Compensation warrants expired 160 --------- Closing balance December 31, 2005 923 Stock options granted and vesting 81 Options cancelled (15) --------- Closing balance December 31, 2006 $989 --------- The fair value of compensation expenses noted above was estimated using the Black-Scholes Option Pricing Model with the following assumptions for the periods ended December 31, 2006, 2005 and 2004. 2006 2005 2004 Risk-free interest rate 3 - 4% 2.25% 2.25% Expected dividend yield nil nil nil Expected stock price volatility 70-78% 73-100% 100-113% Expected option life in years 3-5 2-3 3 Option pricing models require the input of highly subjective assumptions including the expected price volatility. Changes in the subjective input assumptions can materially affect the fair value estimate, and therefore the existing models do not necessarily provide a reliable single measure of the fair value of the Company's stock options. (d) Warrants The Company has issued the following common share purchase warrants pursuant to private placements which are outstanding as of December 31, 2006: Number of Shares for Exercise Price Expiry Date Warrants Warrants 85,115,885 1 for 1 Various from $0.15 to Various to December 28, $0.20 2007 Caledonia Mining Corporation Notes to the Consolidated Financial Statements (in thousands of Canadian Dollars unless otherwise indicated and except for share and per share amounts) December 31, 2006, 2005 and 2004 The detail of the warrants issued is detailed below. Number Description Exercise Validity Price 17,850,000 Common share purchase $0.20 Until December 28, warrants 2007 10,000,000 Common share purchase $0.20 Until January 31, warrants 2008 2,715,476 Common share purchase $0.20 Until February 2, warrants 2008 2,722,150 Common share purchase $0.20 Until February 3, warrants 2008 22,890,000 Common share purchase $0.15 Until April 28, 2007 warrants 9,748,259 Common share purchase $0.15 Until May 12, 2007 warrants 2,190,000 Common share purchase $0.18 Until May 12, 2007 warrants 17,000,000 Common share purchase $0.16 Until July 27, 2007 warrants The continuity of warrants issued and outstanding is as follows: Number of Warrants Outstanding December 31, 2003 15,449,114 Issued pursuant to private placements 22,694,091 Issued to Broker 4,538,818 Exercised (3,449,114) ------------ Outstanding December 31, 2004 39,232,909 Exercised (16,863,962) Expired (22,368,947) Issued pursuant to private placements 17,850,000 ------------ Outstanding December 31, 2005 17,850,000 Issued pursuant to private placements 67,265,885 ------------ Outstanding December 31, 2006 85,115,885 ------------ 6. Income Taxes The following table reconciles the expected income tax recovery at the Canadian statutory income tax rate to the amounts recognized in the consolidated statements of operations for continuing operations: 2006 2005 2004 --------- ---------- --------- Income tax rate 36.12% 36.12% 36.12% Income taxes at statutory rate $1,072 $(1,354) $(1,001) Tax rate difference (167) 67 13 Foreign currency difference (28) 246 283 Permanent differences 170 50 70 Losses expired - 3,681 1,072 Change in tax rate 847 - 175 Change in Valuation allowance (1,242) (2,690) (612) --------- ---------- --------- Income tax expense $652 $- $- --------- ---------- --------- Caledonia Mining Corporation Notes to the Consolidated Financial Statements (in thousands of Canadian Dollars unless otherwise indicated and except for share and per share amounts) December 31, 2006, 2005 and 2004 The following table reflects future income tax assets and liabilities 2006 2005 2004 --------- ---------- --------- Loss carry forwards $10,009 $10,066 $12,756 Unrealized foreign exchange (857) - - Capital assets (328) - - Valuation allowance (8,824) (10,066) (12,756) --------- ---------- --------- $- $- $- --------- ---------- --------- The corporation has available tax losses for Canadian income tax purposes of approximately $30,598 (2005 - $28,085 and 2004 - $35,203) which may be carried forward to reduce taxable income derived in future years. The expiry of these losses is as follows: Year Amount 2026 $1,580 2015 1,863 2014 1,583 2010 18,984 2009 3,611 2008 142 2007 628 No expiry 2,207 ---------- $30,598 ---------- A valuation allowance has been provided as the potential income tax benefits of these carry-forward non-capital losses and deductible temporary differences and the realization thereof is not considered more likely than not. The Company also has approximately $70,713 in capital losses which can be applied to reduce future capital gains. The right to claim these capital losses is carried forward indefinitely but can only be claimed against capital gains. The Company also has the following expenses which are available to be applied against future income for income tax purposes: Canadian exploration and development expenses $7,560 --------- Foreign exploration and development expenses $1,812 --------- 7. Net Income/(Loss) Per Share The net basic income/(loss) per share figures have been calculated using the weighted average number of common shares outstanding during the respective fiscal years which amounted to 423,838,628 (2005 -313,565,142; 2004 - 289,843,080;). Fully diluted income/(loss) per share has also been calculated only for 2006 as the group achieved a profit before discontinued operations, the earnings per share have been calculated using a fully diluted number of common shares outstanding during 2006 of 425,984,395. Fully diluted earnings per share has not been calculated for previous years as it would be anti-dilutive. Caledonia Mining Corporation Notes to the Consolidated Financial Statements (in thousands of Canadian Dollars unless otherwise indicated and except for share and per share amounts) December 31, 2006, 2005 and 2004 8. Other Expense (Income) before discontinued operations Other expense (income) is comprised of the following: 2006 2005 2004 Investment income - ($55) ($152) Foreign exchange (gain)loss (143) 50 513 Other - (27) (77) --------- --------- --------- ($143) ($32) $284 --------- --------- --------- 9. Statement of Cash Flows Items not involving cash are as follows: 2006 2005 2004 Amortization $40 $27 $20 Provision for site restoration 81 22 69 Net Option expenses 66 283 195 Blanket long term liability (35) - - Other 35 (68) - ------- --------- --------- $187 $264 $284 ------- --------- --------- The net changes in non-cash working capital balances for operations are as follows: 2006 2005 2004 Accounts payable $1,400 $662 $51 Accounts receivable 1,200 150 24 Inventories (3,263) - 1 Prepaid expenses 334 (159) (18) Assets held for sale (315) - - --------- --------- --------- ($644) $653 ($44) --------- --------- --------- Supplemental cash flow Information: 2006 2005(restated) 2004(restated) Interest paid $54 $1 $16 Tax paid 237 - - Non-cash Financing activities 3,009 - - Blanket Acquisition Caledonia Mining Corporation Notes to the Consolidated Financial Statements (in thousands of Canadian Dollars unless otherwise indicated and except for share and per share amounts) December 31, 2006, 2005 and 2004 10. Financial Instruments Unless otherwise noted, it is the opinion of management that the Company is not exposed to significant interest rate or credit risks arising from its financial instruments. A significant portion of the Company's assets and liabilities are denominated in South African rand and Zimbabwe dollars . Fluctuations in the value of the currencies relative to the Canadian dollar could have a significant impact on the results of operations. The fair values of these financial instruments approximate their carrying values, unless otherwise noted. The Company does not use any derivative instruments to reduce its foreign currency risks. Below is a summary of the cash or near cash items denominated in a currency other than the Canadian dollar that would be affected by changes in exchanges rates relative to the Canadian dollar. All values are in thousands. Pounds Sterling US Dollars Zimbabwe Dollars SA Rands Euro Cash - 298 145,595 352 - Accounts Receivable - 539 130,220 1,797 10 Accounts Payable 7 16 353,892 10,186 - 11. Related Party Transactions The Company had the following related party transactions: 2006 2005 2004 Management, administrative services and benefits paid or accrued to a company which employs the Company's President(1) $534 $441 $225 Interest paid to the Company's President(2) - - 127 Consulting fees accrued to the Chairman of the Board 44 275 - Rent paid to a company owned by members of the President's family 47 37 83 Legal fees paid to a company director 42 17 - Interest paid to a company owned by members of the President's family(3) - - 23 Sale of a motor vehicle to the President at a market-related price - - 114 Purchase of a motor vehicle from the President at a market-related price - - 16 Consulting fees paid to Directors of the Company 27 - - (1) In prior years the President delayed submitting regular expense claims due to the Company's cash situation. During 2004, all outstanding claims were submitted and the amount due, including interest at market-related rates, was paid to him. (2) In prior years' office rental payable to a company owned by members of the President's family was not always paid. During 2004 all outstanding amounts were paid, including interest at market-related rates. These related party transactions were in the normal course of operations and are recorded at the exchange amount. The Company has the following related party balances: Caledonia Mining Corporation Notes to the Consolidated Financial Statements (in thousands of Canadian Dollars unless otherwise indicated and except for share and per share amounts) December 31, 2006, 2005 and 2004 2006 2005 2004 Included in accounts payable - owing to a company that employs the Company's President $ - $ - $ - - owing to the Corporation's President - - 3 - owing to the Chairman of the Board for consulting fees 129 85 - - owing to directors/officers for unpaid salaries, consulting and/or directors' fees 193 137 - - unsecured loan due to a shareholder 450 - - 12. Segmented Financial Information The Company has been engaged directly or through subsidiaries in the production of and the exploration for precious metals in various geographical locations. The Company's operating segments have been identified based on geographic areas as follows: For the year ended December 31, 2006 --------- ---------- --------- -------- ------- Corporate Zimbabwe South Africa Zambia Total Revenue from sales $8 $13,575 $3 - $13,586 Operating costs - (8,210) (451) - (8,661) General and administrative (1,787) (11) (209) - (2,007) Interest - (54) - - (54) Amortization - (20) (20) - (40) Other income (expense) (276) 292 128 (1) 143 -------- --------- -------- ------- --------- Income (loss) for continuing operations (2,055) 5,572 (549) (1) 2,967 -------- --------- -------- ------- --------- Discontinued operations (loss) - - (7,990) - (7,990) -------- --------- -------- ------- --------- Income tax expense - (652) - - (652) -------- --------- -------- ------- --------- Net income (loss) for the year ($2,055) $4,920 ($8,539) ($1) $5,675 --------- --------- --------- ------- --------- Identifiable assets - continuing operations $965 $12,547 $4,521 $1,662 $19,695 -------- --------- -------- -------- --------- Identifiable assets - discontinued operations Capital and Current assets - - $11,764 - $11,764 -------- --------- --------- ------- --------- Expenditures on capital assets & mineral properties continuing operations - $1,998 $382 $277 $2,657 -------- --------- -------- ------- --------- Expenditures on capital assets & mineral properties - discontinued operations - - $922 - $922 -------- --------- -------- ------- --------- Caledonia Mining Corporation Notes to the Consolidated Financial Statements (in thousands of Canadian Dollars unless otherwise indicated and except for share and per share amounts) December 31, 2006, 2005 and 2004 For the year ended December 31, 2005 --------- --------- -------- ------- Corporate South Africa Zambia Total Revenue from sales - $6 - $6 Operating costs - (757) - (757) General and administrative (3,001) - - (3,001) Interest - (1) - (1) Amortization - (27) - (27) Other income (expense) 39 (7) - 32 --------- -------- ------- --------- Income (loss) for continuing operations (2,962) (786) - (3,748) --------- -------- ------- --------- Discontinued operations (loss) - (5,932) - (5,932) --------- -------- ------- --------- Net income (loss) for the year ($2,962) ($6,718) - ($9,680) --------- --------- ------- --------- Identifiable assets - continuing operations $2,095 $676 $1,384 $4,155 --------- --------- -------- --------- Identifiable assets - discontinued operations Capital and Current - $18,183 - $18,183 assets --------- --------- ------- --------- Expenditures on capital assets & mineral properties continuing operations - - $350 $350 --------- --------- -------- --------- Expenditures on capital assets & mineral properties - discontinued operations - $4,934 $4,934 --------- --------- -------- --------- For the year ended December 31, 2004 --------- --------- -------- ------- Corporate South Africa Zambia Total Revenue from sales - $3 - $3 Operating costs - (470) - (470) General and administrative (1,676) (308) - (1,984) Interest - (16) - (16) Amortization - (20) - (20) Other income (expense) 6 (130) (160) (284) Non-controlling interest - 13 - 13 --------- -------- -------- --------- Income (loss) for continuing operations (1,670) (928) (160) (2,758) --------- -------- -------- --------- Discontinued operations (loss) - (7,221) - (7,221) --------- -------- -------- --------- Net income (loss) for the year ($1,670) ($8,149) ($160) ($9,979) --------- --------- -------- --------- Identifiable assets - continuing operations $7,234 $77 $1,090 $8,401 --------- --------- --------- --------- Identifiable assets - discontinued operations Capital and Current - $15,265 - $15,265 assets --------- --------- --------- --------- Expenditures on capital assets & mineral properties continuing operations - $406 - $406 --------- --------- --------- --------- Expenditures on capital assets & mineral properties - discontinued operations $- $3,407 $- $3,407 --------- --------- --------- --------- Caledonia Mining Corporation Notes to the Consolidated Financial Statements (in thousands of Canadian Dollars unless otherwise indicated and except for share and per share amounts) December 31, 2006, 2005 and 2004 13. Acquisition of the Minority Interest of Eersteling Gold Mining Company Limited On June 14, 2004, Eersteling Gold Mining Company Limited, a subsidiary of the Corporation acquired the remaining 3.6% minority shareholdings from the shareholders for a cash consideration of $26. The transaction has been accounted for as a step-by-step acquisition by the Corporation, resulting in negative goodwill of approximately $746 which has been allocated on a pro-rata basis as a reduction of the non-monetary assets of the subsidiary. 14. Contingent Liability In the Share Sale Agreement dated May 12, 2006 pursuant to which the Company purchased 100% of the shares of Blanket, the Company agreed that it would, as soon as reasonably practicable after the Closing of the Agreement, cause Blanket to implement a share incentive scheme considered by the Directors to be in the best interests of Blanket, pursuant to which a percentage of the shares of Blanket will be deposited in a Trust for the benefit of the management and employees of Blanket. As at December 31, 2006 no scheme had been established, nor were any shares of Blanket deposited in a Trust for the purposes of such a scheme. The Company and the Board of Directors of Blanket, have expressed their intention to delay the establishment of the required scheme pending the passing of anticipated Zimbabwe laws relating to the indigenization of the mining industry, as it is recognized that the Zimbabwean laws, when passed, will likely have a material impact on the structure of the proposed scheme and the percentage of the issued shares of Blanket required to be put into trust for the purposes of the scheme. 15. Long Term Liability The long term liability refers to a provision for the Service Bonus Fund relating to employees at Blanket Mine in Zimbabwe. The fund was established in 1975 to provide a gratuity to permanent employees of Blanket Mine on cessation of employment at Blanket Mine for any reason apart from dismissal or resignation. The provision is built up by providing 15% of an employees basic salary per year up to a maximum of Z$5,000. The maximum payout to any employee is Z$5,000 (five thousand Zimbabwe Dollars) in terms of the current rules. This fund represents a defined contribution future employee benefit fund for which the funds have not been segregated by the company. The expense for the year, representing the required contributions in the year, was $13. 16. Acquisition of Blanket Mine During 2006 Caledonia Mining Corporation through its wholly owned subsidiary Caledonia Holdings (Africa) Limited purchased 100% of the shares in Blanket (Barbados) Holdings Limited ('Barbados') from Kinross Gold Corporation. 'Barbados' owns 100% of the shares in Caledonia Holdings Zimbabwe Limited who owns 100% of the shares in Caledonia Mining Services (Private) Limited (dormant) and Blanket Mine (1983) (Private) Limited. The effective date of the share sale agreement was April 1, 2006 but Caledonia Mining Corporation effectively only took control after payment of the purchase price and thus the Zimbabwe operations are consolidated into the results of Caledonia Mining Corporation from July 1, 2006. Caledonia Mining Corporation Notes to the Consolidated Financial Statements (in thousands of Canadian Dollars unless otherwise indicated and except for share and per share amounts) December 31, 2006, 2005 and 2004 The purchase price consideration was made up of $1,120 (US$1,000) in cash and by the issue of 20,000,000 shares in Caledonia Mining Corporation at an assigned value of $3,009. This resulted in an effective purchase consideration of $4,129. The allocation of the purchase price is presented in the abridged balance sheet below: Current Assets $4,548 Capital Assets and Mineral Properties 2,519 -------- Total Assets 7,067 -------- Current Liabilities (2,107) Other Long Term Liabilities (831) -------- Total Liabilities (2,938) -------- -------- Total Purchase Consideration $4,129 -------- There are no unfinalized purchase price considerations. 17. Comparative Figures The prior period figures have been reclassified to conform to the current presentation. 18. Generally Accepted Accounting Principles in Canada and the United States The Company's accounting policies do not differ materially from accounting principles generally accepted in the United States ('US GAAP') except for the following: (a) Mineral Properties US GAAP requires that expenditures on mineral properties with no proven reserves be reflected as expenses in the period incurred. (b) Employee and Directors Stock Options Prior to 2003, the Company accounted for employee and director stock options under APB Opinion No. 25 under which, no compensation cost is recognized when the exercise price equals or exceeds the fair value at the date of grant. Effective January 1, 2003, the company has, for US reporting purposes, prospectively applied the fair-value recognition provisions of SFAS 123. Under Canadian GAAP, effective January 1, 2002 on a prospective basis, the Company adopted the new CICA policy of accounting for stock based compensation. Compensation expense on stock options granted to directors, officers and employees, was not recorded. However, disclosure of the effects of accounting for the compensation expense, utilizing the fair value method estimated using the Black-Scholes Option Pricing Model, was disclosed as pro-forma information. For 2002, a compensation expense was shown reflecting the intrinsic value attributable to stock options granted to directors, officers and employees. Under Canadian GAAP, effective January 1, 2003 on a prospective basis, the Company commenced the expensing of all stock based compensation for new stock option grants applying the fair value method estimated by using the Black-Scholes Option Pricing Model. Caledonia Mining Corporation Notes to the Consolidated Financial Statements (in thousands of Canadian Dollars unless otherwise indicated and except for share and per share amounts) December 31, 2006, 2005 and 2004 (c) Comprehensive Income Under US GAAP, comprehensive income must be reported which is defined as all changes in equity other than those resulting from investments by owners and distributions to owners. (d) Marketable S ecurities Under accounting principles generally accepted in Canada, unrealized gains and losses in shares of public companies are not recognized until investments are sold unless there is deemed to be an impairment of value which is other than temporary. Under US GAAP, such investments are recorded at market value and the unrealised gains and losses are recognized in other comprehensive income unless there is deemed to be an impairment which is other than temporary. Under FAS 115 the Company is accounting for the marketable securities as available for sale. (e) Warrants Under US GAAP the fair value of the warrants re-priced in Note 5(b)(5) are considered to be a benefit awarded to certain holders. This would be considered to be a deemed dividend to these shareholders. The fair value of the warrants was calculated using the Black-Scholes Option Pricing Model. The assumptions used in the calculation are: Risk free interest rate - 2.77%; Expected dividend yield - nil; Expected stock volatility - 38%; Expected warrant life in years - 0.134. (f) Recently Issued United States Accounting Standards (i) On February 15, 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115. This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. The FASB's stated objective in issuing this standard is as follows: 'to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.' A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. Statement 159 is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of FASB Statement No. 157. The company did not elect to adopt this standard early. (ii) FASB Statement No. 157, Fair Value Measurements, has been issued by the FASB. This new standard provides guidance for using fair value to measure assets and liabilities. The FASB believes the standard also responds to investors' requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. Under Statement 157, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. The provisions of Statement 157 are effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year. The company has not elected early adoption of this standard. Caledonia Mining Corporation Notes to the Consolidated Financial Statements (in thousands of Canadian Dollars unless otherwise indicated and except for share and per share amounts) December 31, 2006, 2005 and 2004 (iii) On July 13, 2006, FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109, was issued. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The new FASB standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The evaluation of a tax position in accordance with FIN 48 is a two-step process. The first step is a recognition process whereby the enterprise determines whether it is more likely than not that a tax position will be sustained upon examination. The second step is a measurement process whereby a tax position that meets the more-likely-than-not recognition threshold is calculated to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. Earlier application is permitted as long as the enterprise has not yet issued financial statements, including interim financial statements, in the period of adoption. The provisions of FIN 48 are to be applied to all tax positions upon initial adoption of this standard. Only tax positions that meet the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that fiscal year. The adoption of FIN 48 will not have an affect on the companys financial position or the results of operations. (iv)On March 30, 2005, FASB Interpretation (FIN) No. 47, Accounting for Conditional Asset Retirement Obligations - An Interpretation of FASB Statement No. 143, was issued. The FASB issued FIN 47 to address diverse accounting practices that developed with respect to the timing of liability recognition for legal obligations associated with the retirement of a tangible long-lived asset when the timing and (or) method of settlement of the obligation are conditional on a future event. FIN 47 concludes that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated. Originally, the FASB proposed guidance in FASB Staff Position (FSP) FAS 143-x, 'Application of FASB Statement No. 143, The company recognises the fair value of retirement obligations as estimations are made and updated on a regular basis to ensure the liability is still valid. (v) In September 2006, the SEC issued Staff Accounting Bulletin No. 108 ('SAB 108') Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, that provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. This pronouncement is effective for fiscal years ending after November 15, 2006. The adoption of SAB 108 did not have a material affect on the Company's financial position and results of operations. (vi) In September 2006, the FASB issued SFAS No. 158, 'Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87, 88, 106, and 132(R),' which requires employers to: (a) recognize in its statement of financial position an asset for a plan's over-funded status or a liability for a plan's under-funded status; (b) measure a plan's assets and its obligations that determine its funded status as of the end of the employer's fiscal year; and (c) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes Caledonia Mining Corporation Notes to the Consolidated Financial Statements (in thousands of Canadian Dollars unless otherwise indicated and except for share and per share amounts) December 31, 2006, 2005 and 2004 occur. These changes will be reported in comprehensive income of a business entity. The requirement to recognize the funded status of a benefit plan and the disclosure requirements are effective as of the end of the fiscal year ending December 15, 2006 for entities with publicly traded equity securities. The requirement to measure plan assets and benefit obligations as of the date of the employer's fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The Company has no defined benefit pension plans The impact of the foregoing on the financial statements is as follows: (a) Income Statement 2006 2005 2004 Income/(Loss) for continuing operations per Canadian GAAP $2,315 ($3,748) ($2,757) Mineral property expenditure with no proven reserves (expensed) or previously expensed under US GAAP (659) (2,040) (406) ------- ------- ------- Net income (loss) from continuing operations 1,656 (5,788) (3,163) Loss from discontinued operations (7,990) (5,932) (7,222) ------- ------- ------- Net income (loss) (6,334) (11,720) (10,385) Deemed Dividend - (171) - ------- ------- ------- Net income (loss) available for common shareholders ($6,334) ($11,891) ($10,385) ------- ------- ------- Net income (loss) ($6,334) ($11,720) ($10,385) Other comprehensive (loss)/gain 85 (18) (36) ------- ------- ------- Total comprehensive loss ($6,249) ($11,738) ($10,421) ------- ------- ------- Basic and diluted income/(loss) per share continuing operations $0.00 ($0.02) ($0.01) Basic and diluted income/(loss) per share discontinued operations ($0.02) ($0.02) ($0.03) Basic and diluted income/(loss) per share for the year ($0.02) ($0.04) ($0.04) (b) Balance Sheet 2006 2005 Total assets per Canadian GAAP $31,456 $22,338 Unrealised loss on marketable securities 31 (54) Mineral properties with no proven reserves expensed (5,352) (4,693) -------- -------- Total assets per US GAAP $26,135 $17,591 -------- -------- Total liabilities per Canadian and US GAAP $7,120 $2,966 -------- -------- Shareholders' equity Shareholders' equity per Canadian GAAP $24,336 $19,372 Mineral properties with no proven reserves expensed (5,352) (4,693) Accumulated other comprehensive income/(loss) 31 (54) -------- -------- Shareholders' equity per US GAAP $19,015 $14,625 -------- -------- Total liabilities & shareholder's equity per US GAAP $26,135 $17,591 -------- -------- Caledonia Mining Corporation Notes to the Consolidated Financial Statements (in thousands of Canadian Dollars unless otherwise indicated and except for share and per share amounts) December 31, 2006, 2005 and 2004 (c) Cash Flow 2006 2005 2004 Cash provided by (used in) Operating activities for continuing operations per $1,858 ($2,831) ($2,530) Canadian GAAP Mineral properties expenditure by continuing operations (659) (2,040) (406) -------- --------- -------- Operating activities per US GAAP 1,199 (4,871) (2,936) -------- --------- -------- Investment activities for continuing operations per (3,516) (2,040) (406) Canadian GAAP Mineral properties expenditure 659 2,040 406 -------- --------- -------- Investment activities per US GAAP (2,857) - - -------- --------- -------- Financing Activities per Canadian and US GAAP 7,362 6,785 14,314 -------- --------- -------- Increase (decrease) in cash for continuing operations 5,704 1,914 11,378 -------- --------- -------- Operating activities for discontinued operations (4,560) (4,064) (5,680) per Canadian GAAP -------- --------- -------- Investment activities for discontinued operations (922) (3,244) (3,407) per Canadian and US GAAP -------- --------- -------- Increase (decrease) in cash for the year 222 (5,394) 2,291 Cash and cash equivalents, beginning of year 1,076 6,470 4,179 -------- --------- -------- Cash and cash equivalents, end of year $1,298 $1,076 $6,470 -------- --------- -------- BOARD OF DIRECTORS and OFFICERS G.R. Pardoe (2) (3) (4)(5 Chairman of the Board, Johannesburg, South Africa S. E. Hayden (2) (3) (5) President and Chief Executive Officer S. E. Hayden (2) (3) (5) President and Chief Executive Officer Johannesburg, South Africa S R Curtis (5) Vice-President Finance and Chief Financial Officer Johannesburg, South Africa J. Smith Vice-President Exploration Cantabria, Spain J. Johnstone (5) Retired Executive Chief Operating Officer Gibsons, British Columbia, Canada F C. Harvey Retired Executive Oakville, Ontario, Canada W. I. L. Forrest (1) (2) (3) Business Executive Nyon, Switzerland C. R. Jonsson (2) (3) (5) Principal of Tupper Jonsson & Yeadon Barristers & Solicitors Vancouver, British Columbia, Canada R.G. Fasel (1) (4) Business Executive Geneva, Switzerland R. Liverant (1) Retired Executive Vancouver, British Columbia, Canada BOARD COMMITTEE MEMBERS (1) Audit Committee (2) Compensation Committee (3) Corporate Governance Committee (4) Nominating Committee (5) Disclosure Committee Corporate Directory CORPORATE OFFICES SOLICITORS Canada - Head Office Borden Ladner Gervais LLP Caledonia Mining Corporation Suite 4100, Scotia Plaza Suite 1201 67 Yonge Street 40 King Street West Toronto, Ontario Toronto, Ontario M5H 3Y4 Canada M5E 1J8 Canada Tel: (416) 369-9835 Tupper, Jonsson & Yeadon Fax: (416) 369-0449 1710-1177 West Hastings Street info@caledoniamining.com Vancouver, British Columbia V6E 2L3 Canada South Africa Greenstone Management Services (Pty) Ltd. P.O. Box 587 AUDITORS Johannesburg 2000 BDO Dunwoody LLP South Africa Chartered Accountants Tel: (27) (11) 447-2499 Suite 3300, 200 Bay Street Fax: (27) (11) 447-2554 Royal Bank Plaza, South Tower Toronto, Ontario M5J 2J8 Canada Zambia Caledonia Mining (Zambia) Limited REGISTRAR & TRANSFER AGENT P.O. Box 36604 Equity Transfer Services Inc. Lusaka, Zambia Suite 400 200 University Ave Tel: (260) (1) 29-1574 Toronto, Ontario M5H 4H1 Canada Fax: (260) (1) 29-2154 Tel: (416) 361-0152 Fax: (416) 361-0470 Zimbabwe Caledonia Holdings Zimbabwe (Limited) P.O. Box CY1277 Causeway Harare Zimbabwe Tel: +2634 701 151/4 Fax: +2634 702 248 SHARES LISTED The Toronto Stock Exchange Symbol 'CAL' BANKERS NASDAQ OTC BB Symbol 'CALVF' Canadian Imperial Bank of Commerce London 'AIM' Market Symbol 'CMCL' 6266 Dixie Road Mississauga, Ontario L5T 1A7 Canada CAPITALIZATION at December 31, 2006 Authorised: Unlimited Shares, Warrants and Options Issued: Common Shares: 457,981,021 Warrants : 85,115,885 Options : 17,238,000 Web Site: http://www.caledoniamining.com This information is provided by RNS The company news service from the London Stock Exchange

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