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Construction Materials
* Property, plant and equipment and investment property. |
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Construction Materials contributed 4.7% (2010: 4.3%) to group revenue. As it suffered a loss, it did not contribute to group total operating profit in the current year.
Construction Materials consists of a number of business units which produce sand and aggregates, readymix and extenders, and mining crushing services.
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Market review - Aggregates and readymix
Aggregates and readymix
The markets for both aggregates and readymix were extremely trying in F2011. The economic slowdown was aggressively felt, as these businesses typically do not have a large geographic reach due to their low selling prices and high cost of transport. The excess market capacity which was installed leading up to the peak of the super construction cycle in 2007 is mostly still in place. This exacerbated the already pressured volumes and margins as there is an over-supply of material and resources due to a depressed construction market.
As outlined at interim results time, the incidences of dump rock entering the market continues to increase, with mining companies selling off their dumps mostly through tender bidding. Most recently our East Rand market was impacted by the sale of the Pamodzi dumps to crushing operators. The legislation defining these activities as mining remains unclear and many of these players slip under the radar of the onerous mining legislation. This continues to hamper both pricing and available market.
The graph below demonstrates that the cement industry, which is a relatively good gauge of activity in the construction materials market, is currently going through the deepest recession in the past 57 years. Although cement can be profitably distributed countrywide from a few strategically located plants, aggregates and readymix are only distributed regionally. These markets have therefore been more negatively impacted.
A large portion of our material finds its way into the civils market, which is also experiencing a severe market downturn on the back of the large infrastructure contracts which are now being concluded. There were also only a few sizeable awards during the year. The graph on the right illustrates how confidence levels have plummeted in the civils sector, coupled with the significant fall in actual construction works. This has dragged the entire supply chain for this sector down, including both aggregates and readymix.
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Market review - Mining crushing services
Mining crushing services
The mining crushing services business continues to provide opportunities to employ under-utilised crushing and mining assets during the downturn. However, this market is also suffering from low margins due to companies pricing at lower levels in an attempt to prevent their equipment from standing idle. As such, the tender activity around each contract has increased with more players looking for work and debasing margins. Clients appreciate the over-supply of equipment and the overall market conditions and contracts are therefore typically short term in nature with tough performance targets.
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Delivery
Key focus areas Desired results Status Aggregates and readymix Further consolidate and rationalise plant within our fixed quarries. Implement the correct plant in terms of market requirement and cost base. Plant has been relocated and aligned to the current market demand. Where possible, plant was disposed of or moved to group construction contracts through our plant business. Further re-engineer and reduce cost within all business units. Ensure a cash earnings contribution throughout the downturn and position the business for when volumes recover. Good progress made as plant is returned to original equipment specifications and process flows are de-constrained. This increased product throughput. Quarry yields were also improved to match product output to market requirements. Structurally, costs were removed throughout the cluster as well as significantly reducing central overheads Improve its service offering as a differentiator outside of price. Maintain – and possibly grow – volumes in a
declining price environment, without eroding pricing.Some success was achieved in offering a higher specification product at elevated
returns. However, the general decline in market conditions severely undermined gains.Develop sustainable mine plans for our operations, while taking cognisance of reducing activities. Ensure appropriate and commercially viable
mining and dump recovery in all our fixed quarries.Mine plans were revisited and quarry shaping and the accessing of ore addressed in line with agreed objectives. Mining crushing services Further develop mine service contracting opportunities within South Africa and over-border. Improve overall returns and keep assets employed during the downturn to mitigate carrying value impairments. Three contracts reached the end of their contract period, with one new contract secured. We are looking at contract extensions on one of our haul contracts to fully recover our investment in plant. -
Financial overview
Year ended
30 June 2011Year ended
30 June 2010Revenue (R’000) 434 233 491 860 Total operating margin (%) (15.7) 4.1 Core operating margin (%) (15.7) 3.6 The cluster experienced a particularly tough trading year, with volumes and prices depressed by the slow roll out of public infrastructure and current recessionary pressures in the residential property market.
In spite of aggressive cost reduction and process improvement measures taken, Construction Materials had to deal with the worst downturn for decades in the aggregates and readymix market.
A core operating loss of R68,2 million in F2011 against a core operating profit of R17,6 million in F2010 was reported, resulting in negative margins compared to the prior year’s core operating margin of 3.6%.
During the year, the cluster was re-engineered and rightsized to survive the downturn and to create improved returns when the market recovers. Structural, management and operational changes were implemented and a detailed market validation and asset verification and valuation exercise undertaken. As outlined at interim time, an impairment of R550,5 million was effected. Refer to page 91 for more information.
During the last six months, process costs were reduced and efficiencies gained to limit the margin impact from depressed volumes and prices. A gradual recovery is expected over the next 12 to 18 months. -
Material issues within the business and how these have been managed
The quality of fixed plant at quarries not conducive to achieving performance targets
The plant uptime in the first quarter of F2011 was particularly poor, with frequent breakdowns which negatively impacted our ability to serve a market already severely diminished by the construction downturn. During the second and third quarters, repairs and maintenance and plant rebuilds were undertaken to bring the equipment back to original specification. The number of plants was also reduced in line with the decimated market. This allowed the business to improve returns and plant uptime in the fourth quarter.
Further cost reduction by reducing overhead structure
The business was historically structured for volumes significantly above what the current recessionary markets provide. We have therefore had to restructure activities to create a more efficient business without affecting outputs. We are in the process of building a shared services structure across our Manufacturing and Construction Materials segments with one finance director overseeing both. We have also decentralised the mine site structures and resources to improve site administration and technical controls.
Reduce balance sheet gearing and interest cost
The cluster was highly geared at the end of the construction super cycle, with excess plant on lease, resulting in related interest costs. The model going forward will change to one where operating cash will be used to settle plant and equipment leases wherever possible to reduce gearing in a rising interest rate market. The focus is on positioning the business for the next upturn with as lean a balance sheet as possible.
Reposition mining crushing services business
We have identified the importance of obtaining crushing contracts earlier in prospective mine builds to ensure an entrenched position at a mine start up with good client relationships at the time of the mine commissioning. In line with this, we are working closely with our Engineering cluster due to their regular involvement at a mine’s build stage. Similarly, we will work with our Civil Engineering cluster to secure contract crushing opportunities within the many new civils opportunities in road building, dams and other large contracts. Group Five will restructure mining crushing services in the new financial year for improved opportunities within our target markets.
Dump recovery redefining the aggregates market
The environmental pressure to rehabilitate several rock waste dumps in Gauteng is gaining momentum and will see the market change over the next five to ten years. A number of tenders are being adjudicated for waste rock recycling at a cost significantly below the cost of drill blast and haul within a typical stone quarry. Group Five is aware of these threats and opportunities and is working in a focused manner to protect our market and to grow our crushing business.
Key achievements 
Improved plant uptime – the primary and secondary crushing equipment was realigned to original specifi cation, resulting in greater material output at reduced costs Risk of additional impairments was limited by reducing the quarry breakeven volumes through restructuring and cost minimisation within the drastically reduced volumes of the current recessionary market Building a fl exible and mobile operating structure within the readymix division which has enabled a smaller team to move from plant to plant as market volumes dictate. This reduced the overall operating cost and the division’s breakeven point 
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Looking forward
Key focus areas for F2012 Desired results Bed down the new, refocused structure.
Complete outstanding appointments and settle the business at the reduced volumes. The shared services and decentralised strategy will result in further structural cost savings Grow mining crushing services opportunities.Fully employ any under-utilised assets and attempt to match contract life to plant availability. The restructured business will grow and develop new contracts and returns Develop a more integrated offering.Grow our asphalt business as a subset of our developing road building business and create a greater pull through from our existing quarries or mining crushing services opportunities Evaluate structuring opportunities.Aim to optimise shareholder returns through matching the operating and cost structure to the current market conditions. Evaluate any external approaches which seek to add value through merging or disposing current activities Full Department of Mineral Resources (DMR) compliance throughout our mining operations.All new order licences awarded and mining charter fully adopted