Caledonia Mining (LON:CMCL, TSE:CAL) revealed that it has almost doubled profits from the Blanket gold mine in Zimbabwe during the first quarter of 2011.

This was the result of growing production, reduced costs and higher sale prices.

"I am very pleased to report a strong first quarter performance for 2011,” chief executive Stafan Hayden said.

In the three months ended 31 March 2011 Caledonia produced 7,322 ounces of gold from the blanket mine, 17 percent more than the preceding quarter.

Average cash costs fell 18 percent to US$648 an ounce and the average sale price was US$1,397 an ounce.

It made a US$5.248 million gross profit for the first quarter, almost twice as much as the US$US$2.8 million gross profit for the fourth quarter of 2010. It ended the period with net cash and cash equivalents of $1.4 million.

“The increased production coupled with the continued strength in the gold price and a reduction in Blanket's cash cost resulted in a substantial improvement in Caledonia's profitability and cash generation,” Hayden said.

"We have made significant progress during the current quarter to address the remaining constraints which, once solved, should enable us to reach our target of 10,000 ounces per quarter. 

He added: “A new ore pass was raise-bored and commissioned on May 13, 2011. The commissioning of the complete standby generating system commenced on May 16, 2011 and is expected to be completed by the end of May, after which Blanket will be able to maintain full operations during any interruption to the normal power supply. 

“I am confident that Blanket will achieve its targeted quarterly production from the third quarter of 2011.”

Hayden also confirmed that Caledonia has now submitted its Indigenization Plan to the Government of Zimbabwe, it is awaiting a response.

Under the Zimbabwe’s existing indigenization legislation, Caledonia would be obliged to sell a 51 per cent shareholding to black Zimbabweans over the next four to five years.

In March Caledonia’s head of Corporate Development Mark Learmonth told Proactive Investors that the group had been hoping for a compromise deal, which seems unlikely ahead of the general election later this year as the issue of indigenisation in the mining sector has turned into a political football. 

“We can do a partial leveraged buyout of our own assets and use the proceeds to invest elsewhere. 

We are not ambivalent about the situation, but the cash we would then receive from a forced sale does sweeten what would otherwise be a bitter pill,” Learmonth said.

It is important to point out that Caledonia isn’t simply a one-way bet on Zimbabwe. While a revival of Zimbabwe’s fortunes will help the company enormously, it is not the be all and end all 

The group also has the Nama mining licences in Zambia’s Copperbelt.

Caledonia has four large scale, long term, contiguous mining licences covering more than 800 square kilometres in one of the world premier locations for conventional copper-belt type mineralisation. 

In this morning’s update Stefan Hayden highlighted the progress being made on the ground in Zambia.

"The drilling program at the Nama base metals project in Zambia commenced in March 2011 to identify typical copper-belt type mineralization,” Hayden said.

“This drilling program is expected to be completed by the third quarter 2011."

The initial drill programme is fairly modest. At first the plan is to drill four 800 metre holes on the Konkola East prospect – which borders the world class Konkola copper property where Vale and African Rainbow Minerals is investing US$400 million to start production in 2013.

Caledonia intend to carry out a more aggressive drilling campaign, subject to the initial results, once it has a better appreciation of the potential scale of the opportunity at Nama. 

By Special correspondent