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Blanket: low-cost, highly cash generative

Blanket's results for the Quarter and the Year confirm its position as a low-cost producer, despite the adverse effects of higher work-in-progress at the end of 2013 and the planned increased capital investment. These investments to increase production at Blanket are expected to result in continued strong cash generation, notwithstanding any further decreases in the gold price, as Blanket's fixed cost base is spread across more production ounces.

Following the implementation of Indigenisation at Blanket, Caledonia receives 49% of Blanket's dividend distributions in addition to receiving the repayments of the facilitation loans of US$30 million.

Exploration at the Blanket Mine and at the Satellite Projects, Zimbabwe

Exploration continued at the Blanket Mine:

• Five holes were drilled into the Eroica zone from the extended haulage on 22 Level, all of which identified mineralisation;

• One hole was drilled from the 22 Level into the AR Main zone below 750 meters which also intersected mineralisation as expected and the second hole has commenced;

• Two holes were drilled into the Blanket zone below 750 meters in addition to the six holes which were drilled in the previous quarter. As expected, all eight holes that have been drilled into the Blanket zone below 750 meters have intersected mineralisation; and

• Exploration has commenced on the Lima ore body above 14 Level with the objective of upgrading the existing indicated and inferred mineral resources

Exploration development and diamond drilling at the GG Project established the existence of multiple mineralized zones with potentially economic gold grades. The preliminary indications from metallurgical test work are that material from GG is not fully compatible with Blanket's metallurgical plant. Exploration at GG will continue with the objective of identifying the extent and characteristics of mineralisation so that an assessment can be made of the optimal processing methodology for material from GG.

At the Mascot Project development and exploration has continued during the Quarter on the 90 meter level (3 Level) and mineralisation has now been exposed covering a strike of 100 meters between 60 and 120 meter levels. A surface drilling programme was also initiated to test the main Mascot shear below the deepest workings. Two holes were drilled, both intersecting a mineralised zone approximately 60 meters below the known bottom of the old workings (approximately 350 meters below surface). Drilling will continue on a success-driven basis to test the lateral extent of the main Mascot shear.

Nama Cobalt and Copper Projects, Zambia

Metallurgical test work in 2009 indicated that only a small proportion of the cobalt-enriched material at Nama was amenable to hydro-metallurgical processing to produce cobalt hydroxide. Accordingly in quarter 4 of 2009 the carrying value of investment in D-type material at the Nama cobalt project was impaired. In 2012 Caledonia indicated that it was willing to commence cobalt mining activities on a smaller scale than had initially been envisaged so that the mining licences at Nama remained in good standing and Caledonia could continue to explore with the objective of identifying a significant deep-level copper resource. The 2013 copper exploration programme identified copper mineralisation which management believes is unlikely to show a sufficiently large return on the required investment. The results of the exploration programme also provide insufficient support for further deep-level copper exploration. Accordingly Caledonia has impaired all of the remaining capitalised investment at Nama.

Caledonia's Dividend Policy

On November 25, 2013 Caledonia announced a revised dividend policy in terms of which it intends to pay a dividend of 6 Canadian cents per share in 2014, split into 4 equal quarterly payments of 1.5 Canadian cents per share. The first quarterly dividend was paid on January 31, 2014; the next quarterly dividend is expected to be paid on April 30, 2014.

Notwithstanding the lower profits in the year, Caledonia's total 2014 dividend of 6 cents per share is almost eight times covered by Caledonia's cash resources at December 31, 2013 and over four times covered by net cash flow from operations in the year to December 31, 2013.

Caledonia will continue to maintain its strong financial position so that it can implement its stated growth strategy and retain the flexibility to take advantage of any opportunities that may arise without the need to raise third party finance.

Following the appointment of Computershare Investors Service Inc. as Caledonia's transfer agent and registrar in December 2013, Caledonia shareholders in the USA and UK now receive their dividends denominated in US dollars and Pounds sterling respectively; all other shareholders will continue to be paid in Canadian dollars. Computershare also offers Direct Registration System (DRS) services for Caledonia shareholders who do not wish to hold their shares in nominee accounts in the name of their financial adviser or stock-broker.

Caledonia's Strategy

Caledonia's primary strategy is to continue the existing investment programme at Blanket with the objective of increasing production. Caledonia believes the continuation of this strategy is in the best interests of shareholders because it is expected to increase cash flows and accelerate the repayment of the outstanding facilitation loans. Subject to an ongoing evaluation of the investment climate in Zimbabwe, Blanket and Caledonia will also consider additional acquisition opportunities in Zimbabwe on the basis of, inter alia, their fit with the existing operations and their capacity to enhance value for both Blanket's indigenous shareholders and Caledonia.

Caledonia will also use its financial and managerial resources which are outside Zimbabwe to consider any new opportunities in sub-Saharan Africa.

Outlook

Despite the lower and volatile gold price from April 2013, development and exploration activity at Blanket has continued unabated. As previously advised, production is expected to increase to 48,000 ounces in 2014 and 52,000 ounces in 2015.

Exploration at Blanket below 750 meters continues and we are encouraged by the results evaluated so far. The down plunge extent of the Blanket 4 Ore body has now been intersected with 8 boreholes, all of which returned payable gold values. Work is in progress to add this resource body to the mine's mineral resource inventory.

Blanket has surplus metallurgical plant capacity and is sufficiently cash generative so that, if the investment climate is acceptable, it could invest in projects with a view to further increasing production, thereby helping to maintain downward pressure on the cost per ounce of gold produced.

Commenting on these results, Stefan Hayden, Caledonia's President and Chief Executive Officer said:

"Gold production in 2013 remained slightly ahead of 2012 and was also ahead of our guidance.

"Blanket's on-mine cash cost increased in Q4 compared to the previous quarter, however this was largely due to the higher work-in-progress at December 31, 2013. As a measure of Blanket's continued cost efficiency, the cost per tonne processed in 2013 fell from US$75.90 to US$70.40.

"In the early part of 2014, the achieved grade in certain production areas became uneconomic and production in those areas was terminated. Production in the first quarter of 2014 was also adversely affected by the unscheduled requirement to replace the winding ropes on the main production shaft. Both of these factors had an adverse effect on gold production in the first quarter of 2014. New production areas have and are being developed and I am confident that the 2014 production target of 48,000 ounces will be achieved, with 52,000 ounces expected in 2015.

"Development and exploration work at our satellite projects, GG and Mascot, has established the existence of multiple mineralized zones with potentially economic gold grades. Further work is being done to define the extent and viability of these mineralized zones.

"Under new Zimbabwean legislation, from the beginning of 2014 Blanket is required to sell its gold production to Fidelity Printers and Refiners. The new sales arrangements with Fidelity have reduced Blanket's working capital requirement due to the earlier payment terns. Blanket has received all payments due from Fidelity in-full and on-time.

"Zimbabwe offers some highly attractive investment opportunities, both at Blanket Mine (including the Satellite Projects) and elsewhere, which have the potential to generate substantial returns for all stakeholders. However, in light of the increased credit risk associated with the requirement to sell gold to Fidelity, Caledonia will actively consider other suitable investment opportunities with a view to using its resources outside Zimbabwe to optimise shareholder value."

The full Report & Accounts, including the Management Discussion and Analysis for the quarter and year ended December 31, 2013 are available from the Company's website www.caledoniamining.com and from SEDAR.