Zimbabwe Rising Conference 2010 London- Paul Burton - GFMS World Gold - The Zimbabwean G

The Zimbabwean Gold Mining Industry- An independent Evaluation

Paul BurtonManaging Director, GFMS World Gold

Zimbabwe RisingLondon, 3 December 2010

GFMS World Gold is an independent, mining equities research company formed in 2008 as a joint venture between GFMS and World Gold Analyst.

AGENDA

Introduction & terms of reference

Zimbabwe & world gold production

Characteristics of the Zimbabwe gold mining industry

Growth potential – challenges & risks

Observations & concluding remarks

Commissioned and sponsored by COMZ plus New Dawn Mining and GAT Investments

Completed in September 2010 after a week-long field trip in July.

Contents: Political & Economic review Geology Review of production, mines & projects SWOT analysis In-depth reports on sponsor companies.

2,000 distributed free to investors worldwide

The Report

Zimbabwe’s gold production in global perspective

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 (f)

2300

2350

2400

2450

2500

2550

2600

2650

2700

0.00

0.20

0.40

0.60

0.80

1.00

1.20

t%

Source: GFMS/COMZ

Zimbabwe gold producers by category

2006 2007 2008 2009 2010 f0

10

20

30

40

50

60

70

80

90

100

OthersPt by-productCustom millersLarge

%

Source: COMZ

Top 5 Zimbabwe gold producers 2009

RioZim 24 koz

Metallon 18 koz

Caledonia 10 koz

Forbes & Thompson 10 koz

Casmyn 10 koz

Source: COMZ

Characteristics of Zimbabwe’s gold mining industry

Greenstone rocks Many small mines Underground culture Private ownership

common Undercapitalised Power problems


Greenstone rocks

Greenstones are one of the most extensive and productive sources of gold on the planet and as such the Zimbabwean rocks represent a huge potential treasure chest for miners.

“There is no reason why mines of the same significance as those in other Archaean granite-greenstone terrains should not be found in the Zimbabwe Craton” (ZGS 2005)

Sulphides beneath the oxides.


Greenstone rocks

Source: Duration Gold


Many small mines

Small mining methods are notoriously inefficient as they fail to take into consideration the geological setting and the potential of the whole mineral deposit.

With a more systematic and objective approach companies could determine not only the scope of the whole deposit, but also which techniques would serve them best for optimal exploitation of the mineral wealth.


Underground mining culture

Historically underground was their only form of exploration – sink a prospecting shaft and develop along the strike of any veins.

“It is astonishing to note that this form of exploration became so entrenched in the exploration culture of Zimbabwean prospectors that it has remained basically unchanged up to today”. (ZGS 2005)


Private ownership common

Although in itself this is not necessarily a bad thing, it is often a sub-optimal way to run a capital intensive enterprise.

Private companies do not have the same degree of access to the capital and equity markets as a public quoted company will have and that can limit the amount of finance the company can raise to build mines, construct new plant and fund exploration programmes.


Undercapitalised

The mining companies generally have an idea of the sulphide potential that lies not far below the surface but need intensive drilling programmes to define this potential. For this they will require an injection of capital, firstly to bring existing plants up to scratch to process the surface material and secondly, to expand the operations.

I would stress the international markets as being a key to unlocking a supply of funds for much needed capital injections.


Power problems

The limited availability of power in Zimbabwe has severely hampered miners over the past year or more at a time when they are trying to ramp up production to installed capacity levels after the 2008 hiatus.

Capacity utilisation of mining operations and treatment plants is only about 40% at present because of the inability of the state power provider, ZESA, to maintain output to match demand.

Challenges & risks to growth

In this section we will look at some of the most critical challenges that the gold producers and the politicians face in order to ensure a thriving gold mining industry.

Some can be overcome by structural political overhaul; others through investment, which can only come after the first condition is satisfied.


Looking from the outside, the level of political risk in Zimbabwe is the most fundamental hindrance to the development of a robust gold industry. The government has a key role to play in making sure Zimbabwe loses its image of being one of the pariah states in world investment terms and starts to be a favoured destination for mining companies and a place where investors feel comfortable leaving their money.

In the 2009/10 Fraser Institute study, Zimbabwe scores poorly coming 69th out of 72 countries, with only the Philippines, Ecuador and Venezuela below it.

96% of the respondents said that the lack of political stability within Zimbabwe was either a strong deterrent or dissuaded them completely from investing there.


Indigenisation legislation

The subject of indigenisation is one of the most divisive issues that government and the mining industry have to settle for the greater good of the country’s economy. Clarity is needed urgently to remove the uncertainty that hangs over the mining industry and deters foreign investment.

The 2007 Act requires 51% of companies to be owned by indigenous Zimbabweans. Uncertainty still surrounds how this will be made up, with the COMZ suggesting 15% equity plus credits, a principle which seems to have been accepted by the government and President Mugabe.

A ZSE listing as a credit also seems to have gained widespread approval.


Other challenges & risks

Nationalisation

Infrastructure

Skills shortage

Observations The geology should not be a constraint to

large scale mining but the miners have generally had a mindset that favours small, privately-owned, underground mines as the default option.

I would suggest that a strategy rethink is needed and most of the more progressive mining companies have realised this.

To implement strategies they need large capital injections, mostly from overseas.

However, the political and economic situation, coupled with uncertainty over ownership and the tax regime, is a deterrent to investors.

Observations Some companies have put together aggressive growth

plans that will involve systematic exploration of sulphide mineralisation with a view to building large, modern mines.

Companies such as Metallon, Duration Gold & Bilboes (GAT Investments) all have strategic plans to raise foreign capital through listing on major international exchanges. Metallon is looking to spend some US$600 million on projects over the next 5 years.

New Dawn Mining is also raising capital. It is listed already, in Canada, and has started the consolidation process that the industry needs through the acquisition of Central African Gold.

South African producer, DRDGold, has recently invested in an exploration programme in Zimbabwe.

Observations If the investment climate improves, through

consolidation and modernisation, the country’s gold mining industry could well grow to become a world player again.

Specific 5-year gold production growth projections.

Cal Dur Met Mwana NDM RioZim0

200

400

600

800

1000

1200

QUESTIONS?

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Zimbabwe Rising Conference 2010 London- Paul Burton - GFMS World Gold - The Zimbabwean G

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