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REVIEW OF OPERATIONS
THE BOARD REQUESTED THAT MANAGEMENT "PROGRESS KEY PROJECTS, WHILE CAREFULLY REVIEWING ALL OTHER CAPITAL EXPENDITURE". MANAGEMENT REDUCED ITS CAPITAL BUDGET BY R250 MILLION BY DELAYING SOME REPLACEMENT AND LESS URGENT CAPITAL EXPENDITURE PROJECTS. OF THE R1,2 BILLION SPENT ON CAPITAL EXPENDITURE, R738 MILLION WAS INVESTED IN THE STRATEGIC CAPITAL PROGRAMME. |
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REVIEW OF OPERATIONS: AEL MINING SERVICES
The businesses are as follows:
Each of the 16 businesses has a specific market focus and delivers consistently high levels of fragmentation solutions from a common business platform comprising Global Business Services, Central Operations, Research and Development, and Financial and Information Services. Global Business Services concentrates on the extensive and complex service needs of all 16 businesses; Central Operations includes the large nitrates and initiating systems complexes at Modderfontein; and Research and Development is tasked with providing ongoing technology and product innovation aligned with AEL's three key customer commitments of mining optimisation, mining safety and security of supply. AEL's strategy is to:
BUSINESS ENVIRONMENT A slow recovery from the global commodity crisis late in 2008 became evident in the second half of 2009 but remained commodity-specific. Cutbacks and mothballing in the mining sector slowed as the year progressed and sectors such as surface gold and coal, most notably in Indonesia, Southern Africa and West Africa continued steadily throughout the year. Copper, diamond and platinum mining remained generally suppressed and the slow decline in volumes in the South African narrow reef gold sector continued, exacerbated by safety-related mine closures and notwithstanding greater stability in electricity supply. The cost of some key input products decreased, most notably ammonia and fuel. Global ammonia prices dropped sharply due to demand and supply corrections as well as the more than 20% strengthening of the rand against the US dollar. FINANCIAL PERFORMANCE
AEL's business restructuring and customer focus programmes initiated in 2008 yielded pleasing results. The business was able to cope well under challenging conditions, working even more closely with customers and responding rapidly to changes in their needs in a volatile business environment. Costs were cut where appropriate whilst investment in growth and strategic positioning programmes was maintained. The creation, in 2008, of 16 highly responsive, customer-focused businesses with well defined parameters, well supported by services units, enabled AEL to execute streamlining and growth initiatives simultaneously across many of its commodity sectors in the 23 countries in which it operates. The shift from merely supplying customers with product to providing them with a more comprehensive, performance-enhancing services package gained momentum as customers increasingly recognised the positive impact on mining optimisation of such services. This, coupled with selected price shifts in low value contracts and various product mix changes, contributed to profit growth. Profit from operations increased by 20% on 2008's R248 million to R298 million, even though volumes softened overall and revenue year-on-year remained essentially unchanged at R4 070 million (2008: R4 079 million). Sales revenues in 2008 were inflated due to a temporary spike in ammonia costs which increased market prices. As expected, and in line with specific market recoveries, AEL's performance in the second half-year was significantly better than that in the first. The annual operating margin at 7,3% improved from 6,1% the previous year and will continue to improve as the capital investment cycle runs its course. Working capital was well managed. Inventory and debtor levels decreased significantly from the mid-crisis peaks of 2008. Neither significant debtor nor inventory write-offs were required, despite an increase in provisions in 2008. Company cash flows also improved in the year. Net capital expenditure was R439 million, which included the deployment of a large on-site plant and operation with an investment of over US$15 million at Kaltim Prima Coal (KPC), a new customer in Indonesia. Another R170 million was spent on the Initiating Systems Automation Programme (ISAP) shocktube complex at Modderfontein, bringing total spend to date on this project to R570 million. ISAP was fully installed by end-2009. In 2010 the focus will be on ramping-up individual plants to targeted output levels. SOUTHERN AFRICA BUSINESS Continued pressure on narrow reef gold volumes was countered by coal mining to an extent, whilst platinum and diamond volumes remained depressed for most of the year. Specific areas in the Southern African business performed well, however. In addition, long-term contract renewals on industrial ammonium nitrate sales to non-mining and construction customers lifted prices off a very low base. The year was characterised by excellent customer liaison to assist customers in coping with the commodity crisis in the first part of 2009. The shocktube conversion programme continued, with an additional 18 million holes a year converted to the safer shocktube system from fuse igniter cord. The conversion programme is 85% complete and will be concluded in 2010. The new ISAP product performed well and was well received by the market. A number of other initiatives were undertaken to improve business performance, including a change in packaged explosives products and sourcing. AFRICA BUSINESS The Africa business recorded a fair performance, despite diamond and copper volumes being severely depressed in the first half of the year. Good sales in surface gold and an improved recovery in copper positions in Central Africa aided. Diamond volumes remained low throughout the year with a recovery expected later in 2010. A number of key contracts were renewed and the new packaged explosives plant in Zambia came on line with excellent product quality, output rates and very low waste levels. It is well positioned for increased regional demand. The Africa business team took a broader view regarding mine closures and mothballing, working closely with customers to ensure rapid start-up post-crisis. This proved to be highly effective as volumes began their recovery. INTERNATIONAL BUSINESS AEL continued to build its capability to establish businesses in selected target markets outside of Africa whilst maintaining a cautious approach to growth. Four tenders at coal mines in Indonesia were awarded to AEL, the largest being to supply 50% of KPC's annual explosives and related services requirements. On-mine operations at KPC were deployed in a highly effective and efficient manner, with all start-up targets being met when the supply contract took effect in October. Indonesian sales volumes are now significant and volume targets for the last months of 2009 were met. Further volume growth from these operations is expected in 2010. Other international opportunities were developed further, most notably in the sale of shocktube products to selected channel partners in Europe and South America. The development of the ISAP shocktube complex and related products and know-how are expected to impact positively on sales initiatives abroad. Regional channel partnerships for an extended range of products and technologies are being shaped, most notably in underground bulk systems and electronic initiators. DETNET DetNet's products have proved to be reliable, effective and highly competitive globally. The DetNet technology platform, and DetNet as a technology development and support entity, is well respected. In 2009 the joint venture partners, AEL Mining Services and Dyno Nobel, assumed all sales responsibilities to enhance the global footprint of DetNet's electronic systems. The DetNet JV entity's capability as a product and systems development and support centre was also aligned further to enable the JV to retain its global leadership position in this arena in an ever-evolving mining industry. SUPPORT SERVICE UNITS AEL's ability to deal with rapid and significant market changes was a credit not only to the business teams but equally the result of the capability of the service units within the company. The deployment of the KPC plant in Indonesia in less than three months, with no recordable injury, was due primarily to the execution capability of the Global Services unit. Central Operations at Modderfontein continued to cope with ammonium nitrate supply issues and new ISAP plant installations amid the large-scale market conversion to shocktube initiating systems. The research and development unit further progressed ISAP-related leading technology and product development whilst working on broader new generation solutions. Risk was a central theme in 2009 and leadership from the finance, IT and legal functions ensured effective management thereof. MAJOR PROJECTS Major projects in 2009 included the final installation of all new plants for the ISAP shocktube complex. The plastic shocktubing plant in ISAP is complete and running at high efficiency levels. The second and final detonator plant was installed and commissioned, and has produced for trial purposes. The first plant has produced over 65 million detonators, 280 million metres of tubing, 1,8 million auto-assembled units and is being ramped-up further. ISAP's final stage high speed assembly plant progressed; the second robotic assembly unit was also completed and is in production. The focus in 2010 will be on ramping-up all plants and on extending the product range. A number of other capital projects were also completed, ranging from various plant upgrades, the in-house design and manufacture of five world-first, leading technology mobile manufacturing units deployed at KPC, remote bulk plants, and emission reduction projects. SAFETY, HEALTH AND ENVIRONMENT The positive trend in safety and health performance noted in the second half of 2008 was sustained, with a reduction in the Total Recordable Injury Rate for employees from 0,75 in 2008 to 0,58 in 2009. There were no fatalities. Good progress was made in environmental programmes. A culture of care and respect for the environment was encouraged and developed further. OUTLOOK The recovery of most mining sectors to pre-crisis levels is expected through 2010 and into 2011. The recovery in copper should lead that in platinum, with diamonds taking the longest to reach firm volume levels. Surface gold is expected to remain steady whilst the South African narrow reef gold sector is expected to continue to focus on reversing current volume declines. Rand strength will continue to affect AEL's profit performance, given its foreign revenue earnings, imported input costs and rand commodity prices A recovery is forecast in sales of electronic detonator systems, used extensively in the diamond and platinum sectors. AEL will maintain its close liaison with customers in 2010 to facilitate recovery. Effective execution of current strategies and projects will remain a central theme. Investment in operational capability, productivity and growth will continue but overall capital investment should start decreasing with the completion of the ISAP complex. As ISAP volumes ramp-up and old plants are shut, the additional cost of running both the new and old plants will reduce. Cash generation to reduce borrowings and to fund future growth projects will remain an imperative. Bringing existing and future customers continued benefits in mining safety, mining optimisation and security of supply remains at the core of the company's business model. Delivery in terms of this model, with meticulous care, is the brand essence of AEL.
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