Mining solutions

AFRICAN EXPLOSIVES LIMITED (AEL)

Volumes and sales in the surface market sector in South Africa and in AEL's businesses in Africa recorded strong growth in 2007. In South Africa, however, the narrow reef market was impacted severely by lower volumes and intense competition. These factors contributed to slower revenue growth and a disappointing decline in trading profit.

Progress was made in AEL's capital projects and DetNet, the second component of the mining solutions segment, expanded international volumes sufficiently to record a maiden trading profit.

Financial performance

In a difficult trading environment, revenue increased by 8 per cent on the previous year to R2.7 billion. Good sales were achieved thanks to significant growth in the surface business in South Africa, and improved mining activity in East and West Africa in particular.

This performance was partly offset by delayed mining growth in Central Africa, the loss of market share in underground mines in South Africa, and a major decline in gold and platinum mining volumes, especially in the last quarter.

Gross margins were eroded, with cost increases not being recovered in full from customers. Margins from improved surface business sales were inadequate to offset the losses associated with lower sales to the underground gold and platinum mining sectors.

Fluctuations in ammonia input costs had a minimal impact in 2007. However, in view of the trend in global commodity prices, a greater effect is anticipated in 2008. Owing to the fluctuation in the ammonia price, AEL has moved to passing on these costs to customers contractually on a monthly basis.

Fixed costs increased as AEL operated two generations of initiating systems plants, namely capped fuse and shocktube. This was due in part to commissioning difficulties at the "Factory of the Future".

More detail on this is given elsewhere in this review. Furthermore, customers are in the process of converting to the newer shocktube technology but still require capped fuse during the transition period. A combination of these factors had a major negative impact on the company's financial performance.

Operating profit of R163 million was 38 per cent lower than the R261 million of 2006. The margin of operating profit to sales declined from 10 per cent to 6 per cent.

Capital expenditure increased from R183 million the previous year to R359 million. Key areas here were R122 million for strategic delivery of the "Factory of the Future", R73 million for upgrading and extending the nitrates facility, R64 million to recapitalise mobile manufacturing units and upgrades associated with distribution sites, and R28 million to support Central African copper mining growth.

Average working capital as a ratio of sales increased slightly to 14.6 per cent from 14.0 per cent in 2006, as inventory increased to support AEL's operation of its old and new shocktube plants.

AEL's executive committee

	Graham Edwards (53) Managing director and AECI’s chief executive designate. See directorate for more details
	Rafael Fernandes (36) Rafael was appointed AEL’s financial controller in 2007. A registered chartered accountant, he joined the company in 1996 as financial manager of a wholly-owned subsidiary. He moved to AEL’s head office as finance manager and, thereafter, became business accountant. He left in 2001, returning to AEL two years later where he continued to provide financial and management support to sales and marketing business units.
	Cyril Gamede (44) Cyril joined AEL in 2002 as operations director. He has an MSc (Eng) degree and a qualification in labour law. Cyril’s background and experience are in engineering, projects, manufacturing and operations.
	Vassie Ponsamy (48) He joined AEL as executive director: international business, in 2006. A BCom (Hons) graduate who also has qualifications in metrology and quality engineering, Vassie has experience in disciplines such as engineering, sales, marketing, business development and strategic management.
	Liesel de Villiers (43) Liesel is business director: narrow reef. She joined AECI as an engineering scholarship holder in 1983 and went on to gain experience in engineering, information technology, supply chain, strategic planning and marketing. She took up her current position in 2005 and was appointed to AEL’s executive committee in 2007.
	Piet Halliday (55) Piet joined the company in 1980 after completing a PhD degree in the synthesis of high energy sensitisers for explosives. As director: products, research and technology, he has overall responsibility for the technical aspects of AEL’s products worldwide. He is also responsible for the company’s product management function.

Business environment

Although volumes in the global mining industry remained robust and the high commodity price trend continued, the differences in performance between components of AEL's business created a challenging environment. Sales were boosted by growth in the domestic surface business and by increased mining activity in other African territories.

Africa

An encouraging start was noted in what is expected to be very strong growth in copper and cobalt mining in the Democratic Republic of Congo (DRC) and Zambia. Against this background, AEL Zambia plc won major contracts for the supply of explosives to large new projects in both countries. Great improvements are expected from these operations as they escalate to full production, with a parallel sharp increase in the demand for explosives, initiating systems and other related products and services.

To meet greater demand, AEL Zambia plc is establishing a bulk emulsion plant in the Solwezi area to support mining growth in North-western Zambia, as well as a distribution site in South-eastern DRC to facilitate supply in that area. The company also upgraded its base operations in Mufulira, constructing a new cartridged explosives plant and commissioning a new Anfex* plant. These projects represent a total of R42 million in capital expenditure.

Elsewhere on the continent, gold mining volumes in both East and West Africa were good. In Ghana, AEL is extending its operating footprint by establishing another bulk emulsion plant. A second plant has been approved for the Tarkwa region to accommodate the growing volume of business secured.

Pleasing volume growth was recorded at AEL's operations in Burkina Faso, Guinea and Tanzania.

South Africa

In the local market, there was excellent growth in opencast mining, with record production in a number of areas. As a direct result of this, AEL's business grew strongly. Although margins remained under some pressure, a pleasing performance was achieved, supported by robust demand from opencast platinum and iron ore customers, and the thriving quarrying sector which is benefiting from major infrastructure projects. The trend is expected to continue.

Volumes of explosives and initiating systems supplied to underground platinum and gold customers in the narrow reef market declined significantly owing to loss of market share to competitors, lost time at mines due to safety-related shutdowns, labour unrest in the mining industry, and mines' failure to meet production targets.

The narrow reef market is in the process of converting from traditional capped fuse initiating systems to the more modern shocktube systems. For AEL this has required a reduction in capped fuse output and a simultaneous increase in its shocktube production. It meant that the company had to run three different operations in 2007: the capped fuse facility, and the "old" and "new" shocktube plants. This had a severe impact on fixed costs. It was most gratifying, however, that the company was able to increase its output of shocktube units by more than 85 per cent compared with 2006's volumes, and as a result the erosion of market share was contained.

"Factory of the Future"

In 2004, AEL's strategic planning process alerted the company to widespread changes in the global economy that would have severe consequences for its initiating systems business. Specifically, the possibility of allegedly state-subsidised Chinese shocktube systems entering the South African market at prices significantly below global norms was seen as a major threat. To mitigate this risk, and at the same time build a long-term strategic advantage, the company embarked on a bold and innovative automation and modernisation programme known as the "Factory of the Future". This involves capital expenditure of R560 million over three project phases, named Bernice, Charlize and Denise, and is scheduled to be completed by 2010.

The first project, Bernice, was designed to install the infrastructure and plant needed to produce 40 million detonators in an automated factory. The next project, Charlize, doubles this capacity and adds shocktube manufacture and automated assembly to the plant. The last project, Denise, completes the "Factory of the Future" and takes annual capacity up to 100 million units.

By year-end, R250 million had been spent, project Bernice had been completed and had been ramped up to 60 per cent of design capacity. Bernice's progress was slower than expected due to larger than anticipated inter-batch variations in the powder drying section of the plant. The solution to this problem has been found in an innovative way of drying powders. The change is being made and tested and it is expected that Bernice will be operating at full design capacity by the second or third quarters of 2008.

Final completion and commissioning of the second phase, Project Charlize, is underway and full production rates, doubling those of the first phase for a total of 80 million detonators a year, are planned by the end of 2008. By June 2008, Project Charlize should be delivering above 60 per cent of design capacity.

The final phase, Project Denise, is scheduled for commissioning by the first quarter of 2010 and will bring AEL's total annual capacity up to 100 million units.

Completion of the project will result in a world-class quality shocktube product being available to customers at highly competitive prices. For a total investment of R560 million, AEL will have a manufacturing platform far superior to that of any global competitor in terms of quality and the cost base. AEL will then be ideally placed for launching its products and services into international markets beyond Africa. The completion of the projects will enable AEL to achieve a saving in fixed costs of R120 million per annum and will reduce the people directly involved in the manufacturing activity from 1 800 in 2007 to around 700 in 2010.

Internationalisation

In 2007, the company began extending its footprint beyond the African continent and directed its initial focus at South-East Asia as an expansion opportunity. Work began on the construction of AEL's first international shocktube assembly plant, east of Jakarta in Indonesia. This facility, representing a capital investment of R6 million, will increase its output from an initial two million units to five million units within three years. It is scheduled to launch production before mid-2008.

Meanwhile, AEL continues to investigate the feasibility of international operations in several more countries.

Other achievements

Further progress was made in developing new products and services in areas such as underground bulk systems, mobile manufacturing units and electronic detonators.

Considerable success has been achieved with bulk emulsions and new formulations have been developed that enable the use of waste fuels instead of virgin oil, thereby reducing costs. The company has also been successful in reducing the size and increasing the robustness of its pumping systems for bulk explosives in underground mines.

Sales of electronic detonators continued to grow and, in another field of innovation, there was further development of i-mining* - a system that helps explosives engineers coordinate the interrelated actions that affect a mine's profitability.

The vigorous management and control of costs, the reduction of wastage and production planning were also noteworthy. On-time-in-full delivery remained excellent, with AEL again achieving a close to perfect performance. The safety performance was pleasing, with a Total Recordable Incident Rate of below 0.6. More detail on this is included in the corporate citizenship chapter of this annual report.

Outlook

A significant factor in AEL's future performance remains the volumes of explosives and initiating systems used in the narrow reef market. The outlook for this sector is not promising, given the inability of the mining industry to achieve production targets, and aggressive competition from competitors. South Africa's electrical current supply problems are further limiting production at these mines and the effect of this is likely to depress volumes in the medium term. However, the outlook in other markets is much more promising, with the strong growth trend seen in 2007 expected to continue into 2008 and beyond.

The capital investment programme underway should deliver significant results from 2009 and, to an even greater extent, from 2010.

DetNet

Entering 2007 as a restructured company, the DetNet joint venture had a successful year in terms of financial performance, international market penetration and new product development.

AECI's share of DetNet yielded a small trading profit, compared with a loss in 2006. Further improvement is expected in 2008 as volumes grow with increasing acceptance of the company's electronic detonators in global markets.

International sales rose sharply in 2007, albeit off a low base. The Smartshot* system, designed for state-of-the-art control and deployment of large-scale blasts, was launched successfully in Australia. More than 100 000 units were sold in the first year and this volume is expected to double in 2008.

The new DigiShot* two-wire system is poised for good volume growth in North America, the world's biggest market. Prototypes were produced in 2007 and trial blasts were impressive. Based on this, volumes in the year ahead are expected to reach close to 300 000 units.

Meanwhile, the African surface market performed strongly, growing by 27 per cent. It is estimated that some 40 per cent of AEL's customers in this market have converted to DetNet's electronic systems.

	DETNET
	Gys Landman (46) He is chief executive officer of DetNet, which appointment he took up in 2007. His qualifications include a PhD (Eng) and degrees in business management and economics. Prior to joining AEL in 1984, Gys lectured at the University of the Witwatersrand, and had gained extensive experience in production management in the mining industry.

Outlook

The business is on a sound footing and another successful year is anticipated, with increased acceptance and sales of products in key markets that include the United States, Australia and Africa. The African market currently accounts for 80 per cent of the electronic detonators sold, with the international market taking up the balance. This ratio is expected to shift dramatically in future years as the company's electronic detonator technology gains increasing international acceptance.

* Trademark