* Zimbabwe gripped by shortage of U.S. dollars
* Caledonia generates $70 mln in foreign currency for economy
By Barbara Lewis
LONDON, Oct 9 (Reuters) - Caledonia Mining CAL.TO is seeking to expand in Zimbabwe, where output at its flagship gold mine has hit new highs and the country, gripped by a cash crisis, depends on it and other miners to generate currency.
Zimbabwe is short of U.S. dollars, a currency it adopted in 2009 after its own was wrecked by hyperinflation.
To try to manage the situation, it published currency exchange control rules at the end of September. Vice President Maurice Mason said in an interview the situation was serious, but did not deter him from operating in Zimbabwe, where the miner is increasing production and looking for opportunities.
"We think Zimbabwe has been through the valley of despair and is coming out on the other side. Things are improving for us," Mason said. "The government gives us preferential status because we generate forex."
"We are interested in looking at other assets that are profitable and of good quality," he said, saying they could be in Zimbabwe or in another country in the region.
Caledonia Mining has complied with Zimbabwe's indigenisation requirement of 51 percent local ownership, meaning it owns 49 percent of the Blanket gold mine.
Gold extracted from the mine is sold to the Zimbabwe Reserve Bank, which can export it for dollars. In all, Caledonia Mining generates about $70 million in foreign currency for the Zimbabwean economy every year, Mason said.
"We have a relationship we believe is appropriate with the government," Mason said.
That includes paying it a 5 percent royalty, then getting 3.5 percent back as an export credit.
Caledonia is given priority access to import licences for cyanide and dynamite for gold processing and mining.
In 2009, the company temporarily shut down its Blanket mine, its prime asset, because of Zimbabwe's economic situation, but reopened it.
It also experienced problems earlier this year because of disrupted power supply. Mason said the company had resolved the issue by investing around $400,000 in voltage regulation equipment.
At the start of October, Caledonia Mining reported its highest gold production yet for the quarter to the end of September at 14,389 ounces, up 7 percent from a year earlier. the full year, Caledonia Mining expects to produce between 54,000 and 56,000 ounces and says it is on target for 80,000 ounces in 2021.
Caledonia's shares are listed in Toronto, New York and on London's AIM market.
(Editing by Jason Neely)