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Operational review

Construction and Engineering: South Africa and rest of Africa

 
Financial highlights
  2014  
Rm  
2013  
Rm  
Variance  
(%) 
  Gross revenue 8 543   7 392   16  
  Gross earnings 14   (346)  (104) 
  Net operating system (566)  (968)  (42) 
  Capital expenditure 152   47   223  
  Total assets 4 546   4 281   6  
  Total Liabilities 2 450   2 669   (8) 

Aveng Engineering offers concept and detailed engineering, design and project management services to its clients in the minerals processing, water, power and energy, and industrial sectors. Aveng Engineering complements these activities with long-term operation and maintenance services to support the full fixed asset lifecycle in these sectors in sub-Saharan Africa and Australia.


60% increase in revenue
 
34% reduction in net operating expenses  
     

Aveng Engineering operations

 

Gavin Young Managing Director

 
Sectors served
  • Infrastructure
  • Mining
  • Mineral processing
  • Renewable energy
  • Power
  • Water

Project delivery improvements achieved in water projects


Operating performance

Poor market dynamics which resulted in delays, mothballing or outright cancellation of new projects continued to impact the performance of Aveng Engineering in its traditional minerals processing and acid mine drainage water treatment markets during the year.

By combining operations that serve the minerals processing, water, and power and energy sectors, Aveng Engineering is optimising its collective capacity and strengthening the resilience of the business as exposure to additional market sectors mitigates risk and enables a more efficient response to rapidly changing market dynamics.

The operating group's revenue for the year under review reflects a distinct shift from the minerals processing and water sectors, which are under pressure, to the more buoyant renewable energy sector. Operating earnings, while impacted by challenges in the water and minerals processing divisions, improved as a result of cost optimisation measures and an improved performance from the equity-accounted renewable energy business.

Power and energy

Aveng Engineering is involved in a joint venture with Acciona Energia to design, build and operate the Sishen photovoltaic solar energy farm in the Northern Cape and the Gouda wind energy farm in the Western Cape. The contracts were awarded during the second round of the South African Government's Renewable Energy Independent Power Producer Programme in 2012.

Following extensive challenges and delays in the early groundworks and civil construction of these projects, there was a strong focus on restoring the planned schedule during the year under review. Civil engineering challenges experienced in the construction of the foundations for the Sishen solar farm are being addressed and Aveng Engineering expects to meet the completion deadline of December 2014. The Gouda wind farm project is on schedule for completion in May 2015. Plans to mobilise for the operation and maintenance of both renewable energy facilities commenced in the first quarter of the 2015 financial year.

The Department of Energy has published details of a fourth round bid under the Renewable Energy Independent Power Producer Programme which provides further opportunity for participation in this market. However, as the market matures it is attracting increasingly competitive bidders, placing margins under pressure, and this is expected to be a feature of round four.

Water

The water division continued to be impacted by a lack of new work as a result of ongoing weakness in the domestic mining market it serves, and challenges at one of its main projects, the Anglo American eMalahleni Water Treatment Plant Phase 2B expansion project. While progress in project delivery improved at the eMalahleni project, extensive delays in the civil scope of the work could not be fully mitigated and this impacted the division's financial performance.

Construction works continued on the acid mine water treatment plant in Middelburg for BHP Billiton Energy Coal South Africa, and Aveng secured a five-year operations and maintenance contract for the plant. Optimisation of the Kromdraai mine water reclamation plant was completed during the year.

Operations and maintenance activities geared up in stages at the Erongo sea water desalination plant in Namibia. The plant, originally intended to support the Trekkopje Uranium Mine which has been mothballed, now supplies potable water to local communities through an arrangement between Areva and NamWater. The contract to operate and maintain the Optimum Colliery water reclamation plant will expire early in the 2015 financial year and discussions are underway to renew the contract.

 
 

Aveng Engineering's contribution
to the Group's revenue

Forging a closer relationship with Aveng Grinaker-LTA (from 1 July 2014) will leverage synergies between the operations and strengthen the Aveng Group's position in the renewable energy and water markets.

 
 
Minerals processing

The minerals processing division continues to be heavily impacted by poor investment conditions in the mining industry, and has had difficulty replacing engineering, procurement and construction management (EPCM) contracts and operations and maintenance contracts that expired in 2014.

The Moma heavy mineral sands recovery plant in Mozambique was successfully commissioned in June 2013 and is operating above design capacity. However, the client, Kenmare Resources, has disputed this with Aveng and is holding back a substantial payment due upon commissioning, which has exacerbated cash flow pressures experienced by the business. Dispute arbitration proceedings have commenced but are only expected to reach resolution in 18 to 24 months.

Some long-term operations and maintenance contracts for minerals processing plants, which have in the past provided a baseload of work in a volatile market, have been negatively impacted by poor mining market dynamics. The operations and maintenance contract for Sumo's Kopermyn in Mpumalanga was cancelled due to mining out of feed material and the project has been demobilised, while the contract for Kayelekera sulphuric acid plant in Malawi expired in June 2014 and will not be renewed until the uranium price recovers.

Key focus areas

Financial performance

Aveng Engineering recorded a 60% increase in revenue to R1,0 billion (2013: R643 million), largely as a result of the renewable energy projects. Net operating earnings, despite being impacted by the challenges experienced by the water and minerals processing divisions, improved as a result of equity-accounted earnings on the good progress of the renewable energy contracts and cost optimisation measures.

While the decision to diversify away from the underperforming minerals processing sector has mitigated risk, the contracting model commonly entered into for renewable energy projects has altered the revenue profile of Aveng Engineering. Whereas minerals processing projects are generally awarded as EPCM contracts, with revenues accruing only as fees levied for managing the project, renewable energy projects are typically awarded as EPC contracts, with all project costs flowing through as business revenue. The net result is higher revenue without a material uplift in operating margins.

Restructuring, and the associated cost optimisation, enabled the business to deal more effectively with increased pressure on profit margins in competitive market environments.

A decision to be more judicious in project selection – and not take on projects with unsustainable profit margins in over-traded markets – is intended to mitigate future risk but has exacerbated the immediate challenge of replacing completed and near-complete projects.

Operational efficiency

By integrating three operations into one, Aveng Engineering has been repositioned as a leaner organisation that is leveraging synergies to improve project delivery. Deployment of advanced engineering and project management skills and techniques in all projects across the merged business has already resulted in an improvement in the reliability of project delivery.

Results have been particularly pleasing in project delivery improvements realised in the water projects. This is evident in the eMalahleni and Middelburg Water Treatment projects where problems in project delivery were corrected, which arrested schedule slippage on both projects. However, Aveng Engineering has experienced commercial challenges in these projects, none of which has yet been successfully resolved. In addition to resolving these challenges as quickly as possible, the main focus of the operating group is on achieving more balanced revenue streams from the project delivery and plant operations sectors of the business.

Geographic and market diversification

From 1 July 2014, Aveng Engineering will forge a closer working relationship with Aveng Grinaker-LTA, particularly in the renewable energy and water markets.

While the business continues to provide project delivery and plant operations services in Namibia and Zambia, its plan to diversify further into the rest of Africa has been slowed by the prolonged downturn in mining.

Safety and environment

Lost-time injuries were limited to two incidents at the Gouda wind farm project and the overall LTIFR improved to 0,19 (2013: 0,27). The AIFR was 2,08 (2013: 2,07). A number of commendable safety performances were achieved at plants that Aveng Engineering is operating and maintaining, including six years of lost-time injury (LTI) free operation at the Kopermyn and Pembani coal washing plants, four years of LTI-free operation at the Optimum and Erongo water reclamation plants and the Kayelekera sulphuric acid plant, and two years of LTI-free operation at the eMalahleni and Kromdraai water reclamation plants.

Aveng Engineering operated without any significant environmental incidents during the year.

Looking ahead

Aveng Engineering continues to be constrained by the protracted downturn in the mining and acid mine water treatment sectors. A major renewal of capital investment in the mining industry is unlikely to materialise before the 2017 financial year and the operating group's decision to mitigate risk by diversifying into other sectors is reflected in its revenue profile, where a growing percentage of revenue is being generated in the energy sector. A larger proportion of future revenue is anticipated to come from the operation and maintenance of plants across the minerals, water and energy sectors.

A number of additional renewable power opportunities are being pursued, mainly for independent power producers as they respond to the various programmes run under the auspices of the Department of Energy.

While demand for the water treatment services of Aveng Water has been lower than anticipated, the HiPro Water Recovery Process represents a competitive advantage which the Aveng Water business will be able to leverage when the water sector recovers. This is likely to occur in advance of a renewal of investment in the mining sector, as water treatment projects are likely to be required prior to the approval of new mining developments.

Forging a closer relationship between Aveng Grinaker-LTA and Aveng Engineering will leverage synergies between the operations and strengthen the Aveng Group's position in the renewable energy and water markets.