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Operational review

Mining

 
Financial highlights
  2014  
Rm  
2013  
Rm  
Variance  
(%) 
  Gross revenue 6 582   7 435   (11) 
  Gross earnings 874   1 008   (13) 
  Net operating system 529   701   (25) 
  Capital expenditure 298   615   (52) 
  Total assets 4 848   5 100   (5) 
  Total Liabilities 2 244   2 582   (13) 

Aveng Mining offers services across the mining value chain, from shaft sinking, underground development, contract mining and open cut mining, to construction of mine infrastructure. The operating group's experience spans a broad range of commodities and it has worked successfully in remote and difficult locations.


43% increase in two-year
order book to R8,6 billion
8% operating profit
margin
 
     

Aveng Moolmans
Aveng Mining Shafts & Underground

 

Stuart White Managing Director: Aveng Moolmans
Brian Wilmot Managing Director: Aveng Mining
Shafts & Underground

 
Sectors served
  • Mining
  • Geotechnical

Aveng Mining comprises Aveng Moolmans (open cut mining) and Aveng Mining Shafts & Underground (shaft sinking, access development and contract mining).

Aveng Mining continued to be impacted by conditions in the mining industry which contributed to Aveng Moolmans' non-renewal of two gold mining contracts in Ghana and Guinea during the second half of the financial year. A further gold mining contract was completed in Tanzania during the second half. These developments were partially offset by the award of a major project in South Africa, strong operational performances in the domestic market and the extension of two existing contracts in southern Africa.

Aveng Mining Shafts & Underground was heavily impacted by challenges experienced at the Chuquicamata copper mine in Chile and margin slippage at some South African projects which were severely impacted by labour disruptions, particularly the Wesizwe Platinum Bakubung mine project.

Operating performance

Aveng Moolmans

Aveng Moolmans owns and operates heavy earth-moving and mining equipment and is one of the largest open cut mining contractors in Africa, mining over 20 million tonnes of material monthly.

In December 2013, Aveng Moolmans was awarded a significant five-year contract at the Nkomati Nickel mine in Mpumalanga for the African Rainbow Minerals and Norilsk Nickel Africa joint venture. The contract to mine 30 million tonnes per annum of waste and ore was scheduled to commence in September 2014 but an early start in July 2014 was negotiated. Aveng Moolmans also secured extensions for Tati Nickel's Phoenix Mine in Botswana to September 2015 and the Langer Heinrich Uranium Mine in Namibia to December 2018. Available fleet will be largely utilised for these new and extended contracts.

Aveng Moolmans continued to record good operational performances in its South African operations. Work proceeded on the Sishen Iron Ore mine and Kolomela iron ore expansion project in the Northern Cape province, both for Anglo American's Kumba Iron Ore; the Smaldeel mini-pit in Mpumalanga for BHP Energy Coal South Africa; and the Tshipi Borwa open cut manganese mine contract in the Northern Cape, where a combination of efficiency improvements, client relationship management and good management of labour relations contributed to solid performances.

The non-renewal of contracts, new awards and extensions have altered the geographic and commodity profile of Aveng Moolmans' project portfolio and reduced its over-exposure to one client in the gold mining sector. Whereas work in the rest of Africa accounted for 57% of the order book in 2013, it has now been reduced to 33%. The business unit's exposure to the gold sector has declined from 25% of its revenue in 2014 to a forecasted 2%, with increases in the nickel and iron ore sectors.

Aveng Mining Shafts & Underground

Aveng Mining Shafts & Underground provides services in shaft sinking, access development and contract mining across a range of commodities in South Africa, the rest of Africa and South America. It is one of only four deep-level shaft sinking companies in the world, with experience in vertical shaft sinking below 1 000 metres.

Work on the 975 metre shaft at Codelco's Chuquicamata Copper Mine in Chile was beset with challenges during the year, following an eight-month delay in site access the previous year. Adaptation to country-specific labour practices and challenging requirements related to seismic designs caused further delays in the start-up and initial shaft sinking operations. Agreement has, in principle, been reached with Codelco, the client for the Chuquicamata contract, to the settlement of a significant amount of outstanding claims. This will assist the contract to return to profitability and reduce cash flow pressure.

In South Africa, Aveng Mining Shafts & Underground is continuing with work at Wesizwe Platinum's Bakubung mine and Sasol's Shondani coal project, and commenced work at the Platreef exploration shaft in conjunction with Aveng Grinaker-LTA, which was involved in civil engineering work. In the horizontal development market, the contract at Eland Platinum continues to deliver a good performance and the Styldrift horizontal development project in expected to commence in the new financial year.

The operation has completed all of its Zambian contracts and is pursuing a number of other opportunities. Aveng Mining Shafts & Underground is pursuing outstanding claims associated with one of the completed contracts.

Key focus areas

Financial performance

Aveng Moolmans recorded a 14% decline in revenue to R4,7 billion due largely to the cancellation of the Lumwana copper contract in Zambia in 2013, the non-renewal of two gold contracts and completion of a third in the second half of 2014. Net operating earnings were further impacted by the unforeseen costs associated with demobilisation of some equipment and project closures and a reduction in scope at the Sadiola contract in Mali.

The Phoenix contract in Botswana continued to perform below expectation. This is largely attributable to the impact on efficiencies of the mine nearing end-of-life. The Nkomati project commenced on 1 July 2014 and therefore made no contribution to revenue or earnings during the year. Efficiency initiatives undertaken by management will assist in sustaining the underlying strength of Aveng Moolmans' overall financial performance.

Aveng Mining Shafts & Underground reported a 3,4% decline in revenue to R1,9 billion due to the impact of conditions in the mining industry and a more selective approach to new work in order to strengthen the quality of the operation's earnings. Net operating earnings were impacted by challenges experienced at some projects, and labour disruptions of R20 million.

The combined Aveng Mining ended the year with revenue of R6,6 billion (2013: R7,4 billion) and net operating earnings of R529 million (2013: R708 million). The combined operating profit margin declined to 8% (2013: 9,5%).

Moolmans Mining Zambia is currently in a taxation dispute with the Zambia Revenue Authority (ZRA) relating to additional taxation assessments. Aveng Moolmans has raised sufficient provision in this regard.

 
 

Aveng Mining's contribution to
the Group's revenue

It is anticipated that investment in the mining industry will remain constrained during the 2015 financial year. However, uncertainty in the industry gives rise to increased use of contractors and a number of related opportunities are becoming evident.

 
 
Operational efficiency

Aveng Moolmans maintained its practice of continuous improvement to extract maximum value from its mining equipment and has strengthened its focus on extending the life of equipment with effective monitoring and maintenance. Most of the idle equipment has been, or will shortly be, deployed on projects.

The Shafts & Underground operation is in a process of rightsizing its fixed overhead costs relative to its gross earnings margin, and strengthening working capital management.

Geographic expansion

In challenging operating environments, Aveng Moolmans attempts to mitigate risk by diversifying its portfolio of assets across a range of geographies, commodities and clients. The loss of two projects (a third was completed and a fourth downscaled) undertaken with one client in a single commodity in the rest of Africa confirms the risk of not diversifying sufficiently. While Aveng Moolmans is not under pressure to secure replacement work in Guinea or Mali to utilise idle mining equipment, it is pursuing other opportunities to rebalance its portfolio and capitalise on growth prospects in Africa. The idle fleet from the completed contract in Ghana will be fully utilised at the Nkomati contract in South Africa.

Further afield, the development of a strong presence in deep-level shaft sinking in Chile should open up other opportunities for Aveng Mining in the Chilean copper industry.

Safety and environment

Aveng Moolmans and Aveng Mining Shafts & Underground were both fatality-free in 2014. Both operations maintained a strong focus on safety and visible safety leadership during the year. The combined LTIFR was 0,42 (2013: 0,21). The AIFR was 1,81 (2013: 1,84). Shafts & Underground achieved three million fatality-free shifts in February 2014.

No major environmental incidents were recorded during the year.

Human capital

Brian Wilmot was appointed acting Managing Director of Aveng Mining Shafts & Underground in June 2014 following the resignation of Martin Hobbs in February 2014. Brian brings 22 years of experience in contract mining in Africa to this role. Shafts & Underground appointed new financial and engineering directors on 1 April 2014 and Moolmans appointed a new human resources director.

Aveng Mining has a strong focus on leadership and skills development. Aveng Moolmans is accredited by the Mining Qualifications Authority (MQA), and 443 people undertook MQA skills training internally. Apprenticeships amounted to 145 registered, with 21 qualifying during the year, and a civil engineering bursar is due for completion in 2014.

The communities in which the business operates are major stakeholders, particularly on the long-term contracts where localisation and skilling of the local workforce provides a social and competitive advantage.

Looking ahead

The combined two-year order book of Aveng Mining increased to R8,6 billion (2013: R6 billion) as a result of the Nkomati Mine award, contract extensions and new awards for Shafts & Underground.

Aveng Moolmans accounts for 68% of the order book, with significant long-term contracts at Nkomati Nickel Mine and Sishen Iron Ore Mine in South Africa. Work outside South Africa has declined from 57% in 2013 to 33%, and while securing replacement work in the rest of Africa is difficult in the prevailing mining environment, Moolmans is pursuing opportunities in copper, zinc and coal in southern Africa and iron ore in West Africa.

Shafts & Underground is strongly positioned for a number of opportunities in the Rustenburg region, where work was tendered on two major long-term shaft sinking projects, and the Styldrift development contract is due to commence. The Platreef project has been awarded a mining licence and expects its environment management plan to be approved early in the new financial year. Platreef has the potential to grow into a multi-shaft project in future.

In Chile, Aveng Mining Shafts & Underground has completed the pre-sink phase of the Chuquicamata vent shaft and the main sink has commenced.

It is anticipated that investment in the mining industry will remain constrained during the 2015 financial year. However, uncertainty in the industry gives rise to increased use of contractors and a number of related opportunities are becoming evident.

The cost pressures faced by mining companies will maintain pressure on contractors' profit margins. In this environment, Aveng Moolmans and Aveng Mining Shafts & Underground will both focus on improving internal operational efficiencies and managing risk by ensuring that contracts are undertaken with sound clients on viable projects.