Monetary Changes Charges Caledonia Into Profits

Gold extraction concern, Caledonia Mining Corporation rallied into profitability during the first half (1H) of 2019 in the face of macro-economic adversities thanks to the Zimbabwean Government monetary policy changes that resulted in the devaluation of the local currency, 263Chat Business can report.

The company recorded a 466 percent increase in net profit of $ 32.621 million during 1H of 2019 from $ 5.758 million realized same period in 2018.

Caledonia, whose earnings are in the United States dollars (USD) has its operational costs and liabilities predominantly in the local currency, and the monetary changes meant a substantial cost devaluation for the firm despite the fact that production went down 3.6 percent in the first six months to 24.660 ounces against 25.582 ounces realized same period last year.

“The devaluation of the Zimbabwe currency resulted in very substantial foreign exchange gains as the value of liabilities such as bank loans and deferred tax were eroded in US-dollar terms,” Steve Curtis, Caledonia chief executive officer said.

Costs on-mine plummeted 5.7 percent due to a combination of lower electricity costs and the currency devaluation.

“Net profit attributable to shareholders for the Quarter (2Q)  increased by almost 800 percent to $23.3 million compared to the comparable quarter due to the substantial devaluation of the newly introduced Zimbabwe currency which resulted in some cost savings and a large net foreign currency gain,” the company said in a statement.

“However, one of the effects of the currency devaluation is that in US dollar terms, Blanket’s financial liabilities become smaller which causes a foreign exchange profit. By way of an example, as at December 31 2018 Blanket had a RTGS$ 6 million loan due to its bankers; whilst the RTGS dollar was pegged at 1:1 with the US dollar, the carrying value of this loan in Blanket’s accounts was US$ 6 million; however, by June 30, at an exchange rate of RTGS$ 6.54: US$1, the carrying value of this loan had reduced to only $912,000. The reduction in the value of the loan results in a foreign exchange profit but also a loss of working capital funding,” the company further stated.

However, the harsh operating environment characterized by power outages and hyperinflation led to a decline in production volumes.

“The reasons for lower than expected production were lower than expected grade and the continued instability in the electricity supply. Management is attending to the grade issue. The electricity problem was not load-shedding (although this was a factor from early July and until the last few days), but peaks and troughs in the voltage supplied by ZESA,” the statement read.

The company is targeting production of 80 000 ounces annually by year 2022 on account of further investments at its Zimbabwean subsidiary, Blanket Mine.

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