Aveng anticipated year end financial results

Wednesday 2nd July, 2014
Shareholders are advised that in respect of the financial results for the 12 months ended 30 June 2014, the group anticipates that headline earnings per share (\"HEPS\") and adjusted earnings per share, excluding the impairment of goodwill intangible assets, will be between 0% and 10% lower, at 112.1 cents per share and 124.6 cents per share, compared to 124.6 cents per share in the comparative period.

Due to the impairment of goodwill intangible assets of both Aveng Grinaker-LTA and the Water business of Aveng Engineering, a loss per share of between 99.6 cents per share and 112.4 cents per share is anticipated for the 12 months ended 30 June 2014, compared to an earnings per share of 124.6 cents in the comparative period. This impairment is non-cash in nature and is excluded from HEPS.

Operational and segmental update
The South African construction and manufacturing markets remain challenging due to the slow infrastructure-related spend, the impact of lower mining activity resulting from weaker commodity prices, industry labour disruptions and a generally subdued manufacturing and steel sector. The building and rail related infrastructure environment in the SADC region offers good opportunities for the group. The Australia construction market is experiencing a slowdown in mining-related infrastructure spend, though it still offers good opportunities, particularly in transport and general infrastructure.

Notwithstanding these challenges, there has been an uptick in operating group performance with previously reported under-performing businesses and contracts expected to report a marked improvement. The group anticipates a substantial improvement in net operating earnings before the impact of impairment of goodwill intangible assets. The expected increase in the interest and taxation expenses however, adversely impacted headline earnings. The overall financial performance of the group was adversely affected by the Gold Coast Rapid Transit (\"Gold Coast\") project in Australia. This project was disclosed as a risk during the interim reporting period and has continued to deteriorate during the second half of the 2014 financial year. The underlying performance of the rest of McConnell Dowell\"s operations was fundamentally sound. The stabilisation and recovery process at Aveng Grinaker-LTA is beginning to yield results, while the Manufacturing and Processing operating segment is expected to report improved results compared to the prior year mainly due to a strong performance from the non-mining related businesses. The open-cut mining business continues to generate strong margins on lower revenue due to a reduction in mining activities in the rest of Africa.

Construction and Engineering: Australasia and Pacific
The underlying businesses of McConnell Dowell are generally performing well despite the challenging business environment in the Australasian and Pacific region and the slow-down of its core sectors such as mining and pipelines. The financial performance has been eroded by the loss- making Gold Coast project, resulting in substantially lower earnings against the comparative period. Overseas operations in New Zealand and South East Asia have performed well, achieving strong profit growth on increased revenue with excellent project execution in most sectors.

The Australian order book improved by 5% in Australian Dollar and 9% in South African Rand terms at 31 March 2014 compared to December 2013 reflecting new contracts awarded during the year particularly in the marine, civil, rail and industrial sectors.

The Gold Coast project has now been substantially completed with technical hand-over to the client scheduled for July 2014. Consequently, additional cash outflow exposure on this project is limited but its cost to completion has significantly exceeded budget due to complex design and scope amendments, along with the impact of execution delay events and project acceleration requirements. This has resulted in a substantial loss being recognised in the 2014 financial year along with a significant increase in uncertified revenue. With completion imminent, the process of claim finalisation and resolution thereof with the affected counterparties, will be intensified. Given the technical and legal complexities associated with the process, it is expected that the commercial negotiations will be protracted, and thus the final outcome remains an uncertain and material risk.

As previously communicated, the Queensland Curtis Liquefied Natural Gas (\"QCLNG\") export gas pipeline project was largely completed by December 2013, but the claims position associated with this project remains unresolved. Although discussions with the client on a commercial settlement are ongoing, McConnell Dowell is also pursuing its contractual entitlements through the formal arbitration process, which has commenced. McConnell Dowell will repay the advance payments received from the client of AUD142.5 million during the first half of the 2015 financial year.

Construction and Engineering:
South Africa and rest of Africa
The stabilisation and recovery process implemented continues to gain traction. Aveng Grinaker-LTA remains well placed to achieve a break-even position during the 2015 financial year, in-line with previous guidance.

Although the second half of the financial year\"s performance has improved compared to the first half of the year, the impact of the tough external environment and continued labour disruptions in this and related sectors, together with the challenges experienced on some of the legacy contracts, will result in a still-significant operating loss for Aveng Grinaker-LTA in the 2014 financial year, though substantially less than that recognised in the comparative period. Reflecting the delayed commencement of infrastructure projects in South Africa, Aveng Grinaker-LTA\"s two-year order book declined by 9% to R6.6 billion over the three months to 31 March 2014.

The Mining segment continues to benefit from its diversified client, commodities and country portfolio, and notwithstanding the non-renewal of contracts in Guinea, Ghana and Tanzania, Aveng Moolmans continues to deliver strong financial results, though down on the comparative period. A large percentage of the recent work lost in Africa has been replaced by new contracts in South Africa which are at various stages of commissioning and consequently the impact will only be fully felt in the 2015 financial year.

Aveng Mining Shafts & Underground is expected to deliver a better performance in the second half of the financial year as some of its projects have progressed to a steady-state shaft sinking phase.

Aveng Mining\"s order book as at 31 March 2014 increased by 13% to R8.0 billion due to new contracts in South Africa in both the open-cut and Shafts & Underground environment

Manufacturing and Processing
Apart from those operations with exposure to the platinum industry and its related industrial action, the manufacturing-related businesses had a strong year. In particular, the Infraset and Lennings Rail Services businesses performed well, taking advantage of transport-related opportunities in both sub- Saharan Africa and South Africa.

Following on from the poor first half of the 2014 financial year, Aveng Trident Steel\"s second half performance was constrained by weak demand, the inability to pass on price increases, increased competition and lower demand from the automotive industry. The recovery in both Aveng Steeledale and Aveng Steel Fabrication continues to proceed well.

Balance sheet and liquidity
The financial performance and the increased unsettled claims mainly on the QCLNG and Gold Coast projects have resulted in a deterioration of the group\"s cash position over the past two years. Notably, the uncertified revenue position of the group is anticipated to increase by 30 June 2014 from that reported for the interim period ended 31 December 2013, with a consequential weakening of the operating free cash flow and net cash position for the second half of the 2014 financial year.

The gross debt position for the group is expected to be approximately R2.9 billion at 30 June 2014, compared to R2.5 billion reported at 31 December 2013, whilst a net cash position of approximately R1.3 billion is anticipated, compared to net cash of R2.4 billion at 31 December 2013. Although the Board remains confident that the claims recognised in uncertified revenue should be positively resolved, their complexity and the protracted negotiations with the clients may result in their delayed resolution, which represent an earnings risk to the group.

Although the group has sufficient undrawn banking facilities, the Board has decided to diversify the funding sources, extend the debt maturity profile and reduce the group\"s overall debt levels, thus enabling the group to pursue these claims to a positive conclusion and take advantage of growth opportunities. The group will therefore:
* actively pursue capital market funding alternatives, which do not currently include a rights issue, to diversify its funding sources and reduce the group\"s reliance on bank debt. Details will be announced closer to the implementation of any such transaction; and
* dispose of non-core assets (including properties) with the objective of raising at least R2.5 billion. Actions relating to these initiatives are well advanced.

The Board believes that the steps proposed above will allow the Aveng group to manage its liquidity needs, reduce its level of debt and position the business to take advantage of opportunities in Africa, as well as Australasia and the Pacific.

Impairment of intangible assets
Following financial losses at Aveng Grinaker-LTA for the financial years 2012 through 2014, allied to prolonged weakness within the local infrastructure environment and the limited evidence of near- term market improvement, the Board has taken a decision to fully impair the goodwill and related intangible assets associated with this business, which was initially recognised in 2001 with the merger of Grinaker and LTA, with a carrying amount of R756 million.

In addition, as a result of lower than anticipated commercial uptake of Aveng Water\"s water treatment technology, particularly due to a depressed mining sector, the Board has decided to fully impair the goodwill and related intangible assets of R74 million. The impairment will affect the earnings per share of the group whilst the headline earnings per share will remain unaffected.

Order book
The group\"s two-year order book increased to R38.8 billion as at 31 March 2014, an increase of 8% compared with the R36.7 billion two-year order book reported as at December 2013.

Within the Construction and Engineering: Australasia and Pacific segment, the order book increased by 9% to R22.2 billion, the Construction and Engineering: South Africa and rest of Africa segment order book declined by 10% to R7.7 billion, Aveng Mining\"s order book increased by 13% to R8.0 billion, and the order book of the contracting business within Aveng Manufacturing increased by 39% to R0.9 billion

The group has made substantial progress in addressing the operational under-performance in certain areas. Despite a difficult economic environment, notably domestically, the performance of Aveng Grinaker-LTA and certain steel businesses has improved, supporting continuing strong performances by Mining, Manufacturing and the majority of the McConnell Dowell business. The Board has a clear plan to improve liquidity over the short term and is addressing the overall fixed cost base of the group. Whilst addressing the aforementioned claims recoveries, the group will continue to focus on improved operational performance with a specific focus on returns and cash generation.

The group\"s financial results for the year ended 30 June 2014 will be released on 26 August 2014.