Construction Global Underground Mining

PETER ADAMS OPERATING PLATFORM EXECUTIVE

CONSTRUCTION GLOBAL UNDERGROUND MINING THE PLATFORM HAS RECOVERED WELL FROM THE EFFECTS OF THE 2008 GLOBAL FINANCIAL CRISIS AND MAINTAINED SATISFACTORY OPERATING MARGINS OF BETWEEN THE TARGET RANGE OF 5% TO 7,5%.

The Construction Global Underground Mining platform had a mixed year. On the positive side, it lifted turnover. On the downside, it suffered four fatalities and an increase in the rate of serious injuries, and profitability came under pressure. Work execution continued to be of the highest calibre. Client relationships in many of its markets were strengthened and several new business wins were achieved. In the new financial year the platform plans to build a more unified brand.

LEADERSHIP

The Construction Global Underground Mining platform is led by London-based chairman Peter Adams.

PERFORMANCE

Our safety performance remained unacceptable given the Group’s commitment to zero harm. Murray & Roberts Cementation recorded three fatalities in three separate incidents and North America experienced its first death in almost a decade. The overall lost time injury frequency rate (“LTIFR”) for the platform deteriorated from 2.21 in the 2011 financial year to 2.5.

A great deal of senior management’s time and attention was spent on improving safety and we are satisfied that the incisive interventions being implemented at all operations will translate into safer working environments in the near future. Moreover, work is being done on identifying the next “quantum leap” forward in safety performance.

Revenue grew strongly this year to just shy of the R10 billion mark with a minimal negative impact on margins. Strong contributions by the Canadian and USA operations mitigated the pressure on margins experienced by Murray & Roberts Cementation, notably as a result of its contract-mining agreement with Aquarius Platinum SA (“Aquarius”) ending.

Although the operating margin showed a decline compared to these levels in 2012, the outlook for margins is positive.

MURRAY & ROBERTS CEMENTATION

Performance this year was challenging both in terms of safety and profitability.

Three fatalities were recorded from 10 in the previous year. The division’s LTIFR rate showed an improvement to 2.57 but fell well short of the targeted 1.2. Interventions to improve safety were however decisive and far-reaching. The First Choice programme aims to materially change the business culture to improve safety performance. Furthermore, the Cementation Way mechanised shaft-sinking methodology is being systematically rolled out at operations and is expected to have a fundamental impact on keeping our people safer, as will a greater investment in equipping supervisors to be more systematic in enforcing safe production methods.

The approach to investigating safety incidents has changed from focusing on the severity of the injury to the incident’s potential to cause harm. Murray & Roberts Cementation participates in the Global Mining Industry Risk Management programme and the lessons learnt from this initiative will, we believe, move the division towards a level of meaningful safety interdependence (where colleagues actively consider each other’s safety) as envisaged by the DuPont safety intervention undertaken last year.

Given all of these interventions, the division intends to report a much improved safety performance this time next year.

An improved financial performance is however not anticipated. This relates principally to the termination of Murray & Roberts Cementation’s underground contract mining agreement with Aquarius. Following a particularly challenging year for Aquarius with a new support methodology, a challenging regulatory environment, a new labour union and a generally depressed platinum sector, Aquarius and Murray & Roberts Cementation agreed revised contractual terms in the third quarter. These included specific termination provisions which were acceptable to the company. No agreement could be reached however, on targets for FY2013, resulting in the contract being terminated. An orderly handover process is under way. This will result in a cash-flow benefit in the new year but will have a negative impact on operating income.

Because of operational and production difficulties encountered at Aquarius, earnings came in below budget while revenue was largely in line with budget expectations. In FY2013 however a substantial decrease in both revenue and operating income is expected as a result of the cessation of the Aquarius contract.

The business has succeeded in reducing its dependence on platinum and significant new orders point to a growing diversification of revenue streams. Non-contract mining income grew 20% in the past year. Opportunities for Murray & Roberts Cementation to exploit its expertise in contract mining remain and the division is continuing to explore these.

Apart from the drop in operating income related to Aquarius, two projects did not perform to expectations.

More positively, the Zambian operations performed better than anticipated. This underscores the importance the division attaches to Africa and the opportunities sub-Saharan Africa present for diversifying into minerals including copper, diamonds, base metals and thermal coal. The successes achieved in Zambia will be consolidated in the next year and the country used as a springboard for expansion into other territories. In achieving a greater, profitable African penetration, co-operation with other Group companies will be prioritised.

CEMENTATION CANADA AND USA

The North American operations delivered a sterling operational and financial performance, which was unfortunately undermined by a safety performance below the industry leading standard the business is accustomed to. It recorded its first fatality since becoming part of the Murray & Roberts Group eight years ago.

Not only are a culture of shared values and open, effective communication essential to safety, they are vital to retaining and developing skills and to promoting innovation. Cementation Canada and USA sees innovation as a key competitive advantage and this year set achieving greater innovation as a corporate goal. That the business is becoming an employer of choice was borne out by independent surveys.

The continuing resurgence of both the Canadian and USA mining sectors helped Cementation Canada and USA to post earnings that were 35% above budget, on revenues that were up 41% and amounting to R3,2 billion. A particularly noteworthy contribution was made by the USA operation, which has increased income 57% over three years and now accounts for a third of the North American business.

Revenue was distributed across commodity classes, with copper and potash accounting for a combined 48% of turnover. The engineering component of the company is a substantial business and a key differentiator of the North American operations. It is structured to deliver design-build shaft projects, a number of which are in the construction phase. The company’s progress in offering an engineering, procurement and construction (“EPC”) solution was demonstrated by the strong execution of two EPC shaft-sinking contracts in the year.

Performance on project delivery remained exceptional, including the Diavik Diamond Mine, located in remote territory within the Arctic Circle, and Piccadilly, a twin-shaft EPC contract for the Potash Corporation of Saskatchewan. In the USA, a key project at the Resolution copper mine includes sinking a shaft with a nine metre diameter to a depth of 2 050 metres and the rehabilitation of another shaft.

The strength of the order book at year-end indicated that an increase in revenue of at least 10% would be achieved in 2013. Such is the company’s track record and the growing strength of the brand that by 2016 significant growth is expected to come from existing projects.

RUC CEMENTATION MINING CONTRACTORS

The highlight of an excellent all-round performance by RUC Cementation Mining Contractors (“RUCC”) was a dramatic improvement in safety, with the LTIFR reducing from 6.9 (per million shifts worked) to 2.9.

This was achieved through a heightened focus on training, improved methods of hazard identification and increased audits to ensure compliance with the company’s safety management plan. It was also realised despite an increase in employee numbers from 313 to 469. The improved safety record is now better than the sectoral average.

In Rand terms revenue approached R1 billion, reflecting the company’s standing as a serious mining contractor in Australia with an increasingly significant international footprint.

A key development this year was a change in the mix of business won. While RUCC has typically derived 60% or more of its income from raise drill contracts, this percentage declined in the year, to the point that only around 40% of revenue is expected to be from raise drilling in the year ahead. Typically, margins on raise drilling are generally higher than those for non-raise drilling. Non-raise bore work will continue to drive the company’s expansion but at a lower operating margin.

The Australian and regional shaft sinking and mine development markets remain buoyant and are expected to be even stronger in the new financial year. Important wins this year included off shaft development and raise drilling for Newmont Asia Pacific’s Callie mine in the Northern Territory and the development of a trial mine for Integra Mining in Western Australia.

In the year RUCC bought Incycle Shotcrete and Civil to add specialist shotcreting and civil construction capabilities to its suite of services. An office was opened in Hong Kong to cement relationships and opportunities with clients based in that territory, Indonesia, Mongolia and the Philippines.

In the new financial year, while non-raise drill work will account for the bulk of income, it is significant that mine development will contribute almost a quarter of total revenue whereas previously this was negligible. At the end of the year RUCC had an order book of R1,2 billion (2011: R1,0 billion). Important prospects included shaft sinking, mine development and raise drilling work at Callie at PTFI’s Grasberg copper and gold mine in Indonesia.

THE CEMENTATION WAY In Africa no-one does mine-shaft sinking as well as Murray & Roberts Cementation. But the way Murray & Roberts Cementation develops mines on the continent is about to change completely – using international best practice to mechanise operations and most importantly, much safer than before. Working closely with colleagues in North America, Murray & Roberts Cementation has begun implementing what it calls the Cementation Way. Allan Widlake, Murray & Roberts Cementation’s business development executive, says the company has “completely abandoned” shaft-sinking methods traditionally used in South African mining. “The Cementation Way is radically different to the methods used in South Africa but it has been tried and tested over many years in Canada and the United States of America. In future we will only use this methodology for deep shaft systems in Africa. It is the future of mine development and we are pleased that our clients share our excitement about the huge benefits it holds for all concerned,” says Widlake. Very crudely put, digging a mine shaft involves drilling holes and detonating the rock. The resulting debris is then “mucked” out using grabs and carried to the surface. As the shaft gets deeper, the sides are reinforced with concrete and steel. Traditionally, a Jumbo drill rig sat at the bottom of the shaft. With the Cementation Way, the drill rig is suspended in the stage used as an operating platform above the bottom of the shaft. Conventional South African drilling resulted in a wedge cut which funnelled flying debris up the shaft damaging equipment and slowing the process. With the new method a “burn cut round” is drilled and detonated, without the hazards of flying rock. The cactus grab has been replaced with more efficient “clam shell” muckers. Instead of all the shaft-sinking activities being carried out concurrently, with the Cementation Way they are done in line. “Conventional wisdom would dictate that this would slow things down,” says Widlake “but the reality is that we can work faster, more productively and as we keep stressing, much safer.” The new approach to shaft sinking also entails significant improvements to the preparation of explosives and to the manner in which concrete is conveyed to the shaft bottom. Murray & Roberts Cementation is investing millions in equipment and most importantly, transferring skills from North America to the local workforce. “We will have a number of our Canadian colleagues working in South Africa, training and passing on their insights and understanding. This will not be inexpensive but it is an investment that will pay handsome dividends in future,” says Widlake. To ensure that training is as effective as possible, the Canadian experts will be deployed at Murray & Roberts Cementation’s world-class Bentley Park training facility which has been specially configured to replicate real-life shaft-sinking conditions and new equipment and processes. The Cementation Way reduces the number of people required for any particular job but it calls for a significantly enhanced set of skills. “We are recruiting and training people who are team players and who can multi-task,” explains Allan. “The exciting prospect for people selected for the Cementation Way is that they will have skills they can use anywhere in the world; Africa, North America, Australia, Mongolia, wherever underground mines are being developed. They will have had experience in state-of-the-art shaft sinking and will have great careers ahead of them. In August 2012 Murray & Roberts Cementation had bids worth several billion Rand being adjudicated, all of them submitted on the basis of being highly mechanised. Recently Murray & Roberts Cementation was identified by De Beers as its preferred bidder to construct the underground phase of its Venetia diamond mine in Limpopo. “De Beers has emphasised safety as their top priority and, we believe, has identified the Cementation Way as the best methodology to ensure that everyone is kept as safe as possible,” says Widlake.

CEMENTATION SUDAMÉRICA

A major disappointment this year was the failure to secure shaft sinking and tunnel construction work at Codelco’s Chuquicamata copper mine in Chile. A relative newcomer to the South American market, Cementation Sudamérica continued this year to garner widespread interest but struggled to secure orders. The Terracem disposal was under final negotiation at year-end. It is envisaged that a new general manager, to be appointed early in the new financial year, will help take the business to a level of sustained and significant growth.

PROSPECTS

Demand for commodities is almost universally expected to continue growing. Chinese economic growth, although flattening out from the unsustainable levels experienced in recent years, will continue to drive demand as an increasingly urbanised, more affluent population demands access to goods and amenities which require large amounts of commodities. Similar demand is expected from other industrialising states.

Worldwide some 3 400 mining projects are either in the pre-feasibility, feasibility or actual construction phases. All of the world’s mining majors have announced significant growth pipelines although ongoing commodity price volatility will inevitably bring some of these investments into question. The fastest growing region for underground mining will be Asia-Pacific, most notably Australia, China and Mongolia. North and South America are seen to contribute strongly to worldwide mining growth while mine development in Africa is likely to also grow strongly, mainly because of increased demand for iron ore, copper and coal.

It is worth noting that in each of the top three countries for future mining development – Australia, Canada and the United States of America – the operating platform has well-established, well-resourced operations.

The termination of contract mining at Aquarius will negatively impact on turnover in FY2013 but will have the effect of improving operating margins. In Australia margins will inevitably decrease because of a more mixed mining profile. Expanding African operations beyond South Africa will be a key priority in the new financial year with a number of opportunities already being followed up.

Apart from a strong management focus on organic growth, acquisitions, notably in Australia, North and South America, are considered essential to exploiting the market opportunities and growth potential that exists within the operating platform and to realise the goal of a R1 billion operating profit by 2015.

The widespread rollout of our Cementation Way mining technology and the sharing of expertise and experience within the platform will further differentiate the platform in the near future while significantly improving our safety performance, especially in Africa.