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Caledonia cuts 2019 production outlook; H1 gold output down 3.6% on year

London — UK miner Caledonia Mining said due to operational difficulties relating to grade and unreliable power, production guidance for 2019 has been reduced to a range of 50,000 to 53,000 oz from the previous 53,000 to 56,000 oz estimate.

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The Toronto-listed company's production of gold in the first half of the year decreased by 3.6% year on year to 24,660 ozat an AISC (All-In Sustaining Cost) of $797/oz, it said in a statement Tuesday.

"First, the bad news," Shore Capital mining equity researcher Yuen Low said in a note Tuesday. "Caledonia is having to reduce its full-year 2019 production guidance for the 49%-owned Blanket mine to 50,000-53,000 oz (from 53,000-56,000 oz; 100%) due mainly to two issues; mining dilution [adversely affected the grade] and instability of power supply."

Caledonia's second-quarter gold production rose 6.4% on the quarter and 0.4% on the year to 12,712 oz at an AISC (All-In Sustaining Cost) of $656/oz from its Blanket gold mine in Zimbabwe, the company said.

ZIMBABWE POWER OUTAGES

"The electricity situation worsened considerably in July and early August and Blanket experienced frequent and long interruptions to its power supply. To address this problem Blanket has procured additional back-up diesel generators which willbe installed in the coming weeks," Caledonia CEO Steve Curtis said in the release.

Curtis added: "We have had constructive engagement with the state electricity utility and the chamber of mines as a result of which Blanket has signed a new electricity supply agreement in terms of which it will receive un-interrupted importedpower at a lower cost than it previously paid."

The company said it is at an "advanced stage" of evaluating a solar PV generating facility that would reduce Blanket's dependence on grid power.

STRENGTH IN GOLD

The company retained its 2019 earnings guidance at 86 cents to $1.17/share.

"This is due to the current strength in the gold price and lower-than-expected costs (Q2 2019: on-mine cost of $534/oz and AISC of $656/oz; Q2 2018: on-mine cost of $717/oz and AISC of $856/oz)," Low said. "The lower costs were attributed to "stringent" cost control and the weakening of the Zimbabwe currency, the South African rand and the pound sterling, which reduced the US dollar value of expenses incurred in those currencies."

Caledonia said it is on track to achieve the production target of 80,000 oz/year by 2022 at its Blanket mine, with AISC guidance target of $700-$800/oz.

"Following completion of the shaft sinking phase at Blanket Mine's Central Shaft, the mine remains on course to achieve its 80,000 oz/year production target by 2022," analysts at investment group SP Angel said in a note Tuesday. "News that the Zimbabwe Government is addressing the legacy of historic financial mismanagement and implementing practical incentives for the mining industry is welcome," the analysts added.

-- Filip Warwick, filip.warwick@spglobal.com

-- Edited by Manish Parashar, manish.parashar@spglobal.com