Operational review. Construction

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1 Operational review Construction BASIL READ Annual Report 2008

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3 page 20 Operational review continued Construction BUILDINGS Paarl Hospital MANAGEMENT Reinoud Oranje (Managing Director) George de Sousa, Gerry Hanna, Louise Cornelessen KEY PROJECTS Chris Hani Baragwanath Hospital Paarl Hospital The Regent Apartments Vredenburg Shopping Centre Galleria Shopping Centre 857 employees Contribution to revenue 27% BASIL READ Annual Report 2008

4 BASIL READ Annual Report 2008 page 21 Galleria Shopping Centre

5 page 22 Operational review continued Construction BUILDINGS Reinoud Oranje The Regent Apartments (above) Park Station (left) BASIL READ Annual Report 2008

6 BASIL READ Annual Report 2008 page 23 MARKET REVIEW The phenomenal growth in the property market experienced over the last few years levelled off in 2008, largely due to the higher interest rate environment and the deteriorating world credit conditions. The implementation of the National Credit Act in 2007, which governs criteria for lending, further contributed to this slowdown. This has been particularly evident in the residential sector, to which Basil Read has limited exposure. Power supply problems at South Africa s national power utility, Eskom, have further compounded the situation and the announcement of a six-month moratorium on the provision of electricity for new projects has led to the delay of a number of projects. Basil Read is the lead contractor of the Galleria Shopping Centre in Umbogintwini, KwaZulu-Natal. The new mall, south of Durban on the N2 freeway and close to the city s airport, has a gross lettable area of m 2, with m 2 of parking decks. With a total contract value of R670 million, work started on the basement area in January and the rest of the centre in March Planned completion is November Another shopping centre development is the West Coast Mall, a new double-storey retail facility just outside Vredenburg on the R45 provincial road to Saldanha Bay in the Western Cape. Construction on the R365 million project began in October 2007 and the centre is scheduled to open in March 2009, boosting economic growth in the west coast area. The non-residential sector of the industry has not been as badly affected, although there has been a marked decline in private sector investment. Public sector spending looks set to continue as the government continues to invest in infrastructure. PERFORMANCE The buildings division experienced a tough trading year, characterised by budget overruns and deteriorating margins. With revenue of R927 million for the year (2007: R401 million), the division has reached capacity based on management and skills availability. Operating profi t was down to R13 million (2007: R13,2 million), resulting in decreased margins of 1,4% (2007: 3,3%). The order book stands at a manageable level of R618 million (2007: R1 billion). The exceptional growth experienced highlighted certain key weaknesses within the division which the group is currently addressing. Problems in the latter half of the year were experienced on two sites resulting in a sharp decline in profi tability. Management believes that it has adequately provided for losses at these sites and will pursue all possible claims during 2009, which could result in future upside for the group. Work on the luxury apartment block, The Regent, in Morningside Sandton, is progressing with completion due in March This project was originally due to be completed by December Work on the Chris Hani Baragwanath Hospital in Gauteng and Paarl Hospital in the Western Cape is continuing. The corporate head offi ce building was completed in October 2008 and comprises six storeys including basement parking. The 6 000m² building consists of executive offi ces, a gym, a restaurant and a number of state-of-the-art meeting rooms. During the year, the division was awarded four of the stations relating to the Gautrain project with the total contract value being R200 million. Construction also commenced on the institutional housing development within the highly successful Cosmo City mixed-use residential development. PROSPECTS The division will continue to focus on public-sector spending and aims to target government s planned infrastructure investments in hospitals and schools, while maintaining an approximate 60:40 split between public and private clients. Now fully operational in Gauteng, Western Cape and KwaZulu- Natal, the division is involved in several high-profi le contracts in South Africa, most notably some of the mall developments being constructed in areas around the country that were greatly in need of an economic boost. Basil Read is bidding for a number of the private-public partnership (PPP) projects on offer, including the new Tshwane municipal offi ces in Pretoria and several prisons around the country which, if successful, could yield signifi cant work for the division. The current order book will sustain the division in 2009 as the group looks to expand its buildings operations globally.

7 page 24 Operational review continued BASIL READ Annual Report 2008

8 BASIL READ Annual Report 2008 page 25 New head offi ce showcases the group s skills Apart from being an exciting opportunity to showcase our work and demonstrate our professionalism to clients, Basil Read s new headquarters is a fitting example of the group s abilities innovative and sensitive design complemented by solid construction techniques and financial discipline, working to tight deadlines under difficult conditions. Actual construction was faced with many challenges this year, from heavy summer rains delaying progress to the frustration of late deliveries, but the building was launched in October 2008 at a function in the new auditorium when CEO, Marius Heyns, outlined the group s progress and challenges over five decades to its current position among the leaders in the construction industry. The contemporary design centres around a three-volume atrium and all meeting rooms look out onto this area while the ground-floor reception complete with Koi pond and water feature opens up into a large space for social functions. The 6 000m 2 building comprises four floors of office space with a large auditorium and fully licensed restaurant on the ground floor, and a bridge connecting the new building to the current offices. Although the building faces east-west, the architectural design promotes natural light, and the imported lift is glass fronted, collectively ensuring an airy, spacious feel. The lower levels include basement parking and a gym for the benefit of all staff. The building is high-tech in both materials and equipment, and this is reflected in its look and feel grade A+ standard with a bold and defined corporate signature. Colours were carefully selected to complement both the environment and Basil Read s corporate identity. Another unique feature of the building is that the goal was to create a compact, cost-effective footprint for the design and building in such a way as to keep the space flexible for future expansion.

9 page 26 Operational review continued Construction CIVILS CVR and straddle carrier MANAGEMENT Willem Meyer (Managing Director) Hugo Carlier, Glenn Jardine Roelof van der Merwe, Ron van Biljon KEY PROJECTS Mbombela Stadium Pier one and two, Port of Durban Kusile Power Station CVR and straddle carrier 804 employees Contribution to revenue 11% BASIL READ Annual Report 2008

10 BASIL READ Annual Report 2008 page 27 Mbombela Stadium

11 page 28 Operational review continued Construction CIVILS Willem Meyer Durban Pier (above) Mbombela Stadium (left) BASIL READ Annual Report 2008

12 BASIL READ Annual Report 2008 page 29 MARKET REVIEW The local civil engineering industry has been adversely affected by the downturn in the global economy and the collapse of the commodities market, particularly the mining and private industrial sectors. Certain projects have been delayed as a result. The public civil engineering sector in South Africa has expanded rapidly providing signifi cant work opportunities for local contractors. Government is in the process of rolling out projects relating to power plants, railway expansions, port and harbour upgrades and water facilities. PERFORMANCE Revenue in the civils division declined by 22% to R371 million (2007: R479 million) albeit at a slightly higher operating margin of 10,7% (2007: 10,4%). The order book looks promising at R1,3 billion (2007: R313,8 million). Progress on the construction of the Mbombela Stadium in Nelspruit improved signifi cantly in the second half of the year following widespread labour unrest at the start of the year. Damage was caused to the structure as a result of a tower crane on site collapsing following a freak storm in the area during the December break. No injuries were reported as a result of the accident and work has already commenced on repairing the damage. The time and cost implication of this setback has been assessed and the fi nancial implications are covered by the insurance policies in place. It is not expected to signifi cantly delay the project which will still be completed well ahead of the 2010 Soccer World Cup. At the time of the incident, work had commenced on the erection of the roof structure, with the emphasis moving to the construction of the external structures, building work and seat installation. The division has been extensively involved in upgrading the Port of Durban for Transnet, which comprised an initial R290 million contract, involving the transformation of the old multipurpose terminal at Pier One into a modern container terminal. The group has subsequently been contracted to provide the complete infrastructure for Pier Two and construction on this R430 million project began in April of R130 million and work commenced in July The project comprises the construction of workshops for straddle carriers and container vehicles, with offi ces, stores, external works and services. The division continued with the construction of the Khangela Bridge, in joint venture. The bridge is being constructed over the M4 South freeway and is being built to alleviate traffi c congestion in and out of Durban harbour. The contract is valued at R129 million and is expected to be completed in September Work on the Kusile Power Station, in joint venture with three other contractors commenced in early Located next to the existing Kendal Power Station in the Witbank area of the Mpumalanga Province, Kusile s anticipated capacity will be MW, with the fi rst unit planned for commercial operation in PROSPECTS Although mining and private industrial infrastructure spending is likely to decrease in the year ahead, this should not impact Basil Read signifi cantly as we are not exposed to this market. Instead the group will continue to focus on government infrastructure spending, which is set to continue for the foreseeable future. A number of signifi cant public works contracts and other opportunities in the domestic project pipeline exist that will provide stability during turbulent economic times. Scarce resources, necessary for the division s growth plans, will become available as other sectors of the industry recede. A relatively new division within Basil Read, this construction discipline is considered a high growth area for the group. Targeted projects include contracts relating to power plants, port and harbour upgrades and water facilities. Turnover in the coming year is forecasted to be signifi cantly higher than achieved in 2008, with the entire planned turnover already secured. The substantial order book provides a solid foundation for the coming years. Transnet further awarded the division the contract to construct the CVR and straddle carrier workshops at the Durban container terminal in the Port of Durban. The contract is for a total value

13 page 30 Operational review continued Construction ROADS N17 MANAGEMENT Martin Lombard (Chairman) Deon de Jager, Greg Badenhorst Paul Walker, Jimmy Strydom Stix de Jager, Zybrand van Dyk Morné van Schalkwyk KEY PROJECTS D1 and D2, Gauteng Freeway Improvement Project N17 Atterbury Main Road 435 Sasolburg employees Contribution to revenue 40% BASIL READ Annual Report 2008

14 BASIL READ Annual Report 2008 page 31 D1 and D2, Gauteng Freeway Improvement Project

15 page 32 Operational review continued Construction ROADS Martin Lombard Deon de Jager Greg Badenhorst D1 and D2, Gauteng Freeway Improvement Project (above) Atterbury (left) BASIL READ Annual Report 2008

16 BASIL READ Annual Report 2008 page 33 MARKET REVIEW With many of South Africa s roads in a state of deterioration, much work is needed to restore and improve the country s road network. Billions of rands have been earmarked for investment in national, provincial and municipal roads infrastructure and as a leader in road construction, Basil Read aims to continue to aggressively target new projects. The South African National Roads Agency (SANRAL) commenced its Gauteng Freeway Improvement Project during 2008 and projects in other provinces are expected to roll out during Roads and public transport spending constitute one of the largest areas of expansion of public sector spending. PERFORMANCE Easily the group s biggest operating division, revenue improved by an impressive 162% to R1,4 billion (2007: R527 million) and accounts for 40% of the group s turnover. Operating profi t was R118 million (2007: R49 million) at a slightly decreased operating margin of 8,5% (2007: 9,2%). The division s order book stands at R3,6 billion (2007: R1,4 billion). During the year, the Basil Read roads division was awarded its largest contract to date packages D1 and D2 of the Gauteng Freeway Improvement Project commissioned by SANRAL as part of the 2010 Roads Improvement Project. In conjunction with newly acquired subsidiary, Roadcrete, and other joint venture partners, Basil Read has responsibility for improvements between the Brakfontein and Flying Saucer interchanges and improvements from Atterbury to Scientia (N4 interchanges). Construction began in May 2008 and needs to be substantially completed before the fi rst-half 2010 deadline. Also under way is an upgrade of the N1 between Bloemfontein and Winburg, with a contract value of R200 million, which is nearing completion, and the extension of the N17 to Leandra, which is due to be completed in May 2010 and has a contract value of R311 million. Further awards relating to the N17 upgrade project totalling R341 million were awarded in the year under review. These contracts involve the upgrade of a 27km stretch of road between Leven and Bethal. The roads division is set to benefi t from work secured by the developments division as various property developments come on line in the year ahead. Site establishment is taking place at the Klipriver Industrial Park in the south of Johannesburg and construction of the internal and link services for Cosmo City are continuing. Phase 1 of the St Micheil s leisure estate in Machadodorp, Mpumalanga is completed and has been handed over to the client. Phase 2 and the construction of the golf course commenced in early PROSPECTS Contracts in the next phase of the Gauteng Freeway Improvement Project will be targeted and the division anticipates being awarded a certain amount of this work. Major expansionary plans are expected from Eskom and the division will target associated infrastructure and access roads. Sasol are currently busy with pre-feasibility studies for Sasol 4, which could provide signifi cant infrastructure opportunities if successful. Work on the Sasolburg contract, which encompasses the rehabilitation and upgrade of two sections of the R59 passing Sasolburg between the Vaal River and the N1 highway, as well as the widening and rehabilitation of several bridges in the surrounding area is continuing. This contract is the largest awarded by Free State Province with a total value of over R225 million and is expected to be completed by May The provision of internal and link services to mixed-use residential developments, such as Cosmo City, will continue to be a major contributor to revenue in the years to come. The group is awaiting fi nancial closure on various projects around the country. The R370 million contract to improve a section of the N1 between Pretoria s landmark flying saucer and the Atterbury interchange is progressing well. The project involves extensive design changes to several busy interchanges to accommodate rising traffi c density. An extension of time was awarded due to rain delays and extra works and the revised completion date is set for July 2009.

17 Operational review continued Mining BASIL READ Annual Report 2008

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19 page 36 Operational review continued Mining BLASTING & EXCAVATING Mupane MANAGEMENT Frans van Wyk (Managing Director) Paul Merifi eld, Charles Schloesser André Oosthuysen, Eppo Broos Trevor Moldenhauer, Stephen Marx KEY PROJECTS Venetia Mine Mapochs Mine Medupi Power Station Lafarge contracts Afrisam contracts 604 employees Contribution to revenue 9% BASIL READ Annual Report 2008

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21 page 38 Operational review continued Mining BLASTING & EXCAVATING Frans van Wyk Paul Merifield BASIL READ Annual Report 2008

22 BASIL READ Annual Report 2008 page 39 MARKET REVIEW This division operates mainly in the mining and civil engineering sectors. Due to the sharp decline in commodity prices in the mining sector, the division is expecting to see a knock-on effect. Work in the civil engineering space is expected to grow in line with government s planned infrastructure spend. Stone and Allied Industries Limited which falls within this division continues to operate in the aggregate business with static crushers erected on mine dumps mainly in the Free State and North West provinces. The overall performance of Stone and Allied was once again disappointing as they incurred a loss of R8 million for the year (2007: R10 million loss). PERFORMANCE The division had an exceptionally good year with revenue growing to R326 million (2007: R112 million for six months) and operating profi t of R73 million (2007: R18 million for six months). The operating margin grew from 16,5% in 2007 to 22,5% in the current year due to exceptional profi ts earned on a few of the projects undertaken. The division s order book amounted to R270 million (2007: R270 million) at year-end. The division continued to work together with the opencast mining division as the drill and blast operator. This partnership has been instrumental in the success of the opencast mining division. PROSPECTS The division is expecting to see a slight decline in activity during 2009, mainly due to the completion of the Medupi earthworks contract. Margins are also expected to come under pressure as demand in the mining sector drops and due to the completion of exceptionally profi table contracts. Prospects in the civil engineering sector are good as large infrastructure projects continue to be rolled out during The division continues to build on the strong alliances already in place with Lafarge, Highveld Steel and Afrisam, among others. These clients provide a solid base for operations as the division continues to work for them on an ongoing basis. The earthworks contract at the Medupi Power Station will come to an end in March This contract is the main reason for the sharp increase in revenue and will have a fi nal contract amount of approximately R150 million. The division secured a R120 million contract for the drilling and blasting at Venetia Mine. This contract commenced in October 2008 and is expected to be completed in September 2011.

23 page 40 Operational review continued Mining OPENCAST MINING Rössing Uranium, Namibia MANAGEMENT Frans van Wyk (Managing Director) Derek Leatherbarrow Danny Stopforth André Oosthuysen Paul Merifi eld KEY PROJECTS Rössing Uranium, Namibia Debswana mines 573 employees Contribution to revenue 11% BASIL READ Annual Report 2008

24 BASIL READ Annual Report 2008 page 41 Letlhakane mine

25 page 42 Operational review continued Mining OPENCAST MINING Frans van Wyk Derek Leatherbarrow Damtshaa mine (above) Mupane mine (left) BASIL READ Annual Report 2008

26 BASIL READ Annual Report 2008 page 43 MARKET REVIEW The fi rst half of 2008 saw commodities trading at record levels prompting increased investment in the mining industry, particularly in Africa, where an abundance of resources exist. The second half saw the decline of global economies as the fi nancial crisis gained momentum and led to a collapse of commodity prices as demand for resources declined. The sharp decline in commodity prices led to a number of future projects being postponed or shelved. Mining conglomerates have started to announce production cutbacks with the possibility of retrenchments. Despite economists predictions that commodity prices will bottom-out by the second quarter of 2009, the year ahead is likely to be a diffi cult one for the mining industry. PERFORMANCE The mining division had a very good year and reported revenue of R394 million (2007: R431 million), slightly down from Operating profi t increased signifi cantly from R30 million in 2007 at a margin of 6,9% to R51 million in 2008, at a respectable margin of 13%. With an order book of R415 million (2007: R280 million) at year-end, the division looks set to continue with a steady performance in The contracts at Mupane and Letlhakane open-pit mines were successfully concluded during Both projects exceeded client s expectations. The recent announcement regarding Debswana s cancellation of mining activities in Botswana has impacted on the division s order book by R235 million with the cancellation of the Damtshaa contract. Mutually acceptable termination conditions and compensation have been agreed upon. Work at the Rössing Uranium mine in Namibia continued and the division was awarded a contract extension for three years. The contract is for Rio Tinto, one of the world s largest mining houses. The Rössing mine is considered one of the safest in Africa. The contract is a highly labour intensive operation and comprises working 24 hours a day, six days a week. Capital intensive in nature, the division acquired new plant to the value of R129,5 million. Basil Read continues to explore options to mitigate the risk of owning specialised mining trucks and excavators. PROSPECTS The coal industry has proven to be a diffi cult market to enter given the high level of competition. Despite tendering on various projects Basil Read has been unable to make progress in this regard. As commodity prices have slumped and a number of projects have been shelved, the division will look to continue mining on current contracts for clients with whom we have an established track record. Partnering with local partners has proven to be a key success factor in Botswana and strategic partnerships will continue to be nurtured. The division is in the process of identifying suitable partners in Namibia to ensure continued success in that country. Farther afi eld, Basil Read is exploring opportunities in other African countries but given the collapse in commodity markets, the division expects the lead times for new work to increase.

27 Operational review continued Developments BASIL READ Annual Report 2008

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29 page 46 Operational review continued Developments Cosmo City MANAGEMENT Des Hughes (Managing Director) Brian Mulherron, Russell Zama KEY PROJECTS Cosmo City Phakisa Estate Doornkuil Fisantekraal Klipriver Business Park 13 employees Contribution to revenue 2% BASIL READ Annual Report 2008

30 BASIL READ Annual Report 2008 page 47 Cosmo City

31 page 48 Operational review continued Developments Des Hughes Brian Mulherron Russel Zama Cosmo City (above and left) BASIL READ Annual Report 2008

32 BASIL READ Annual Report 2008 page 49 MARKET REVIEW The high interest rate environment, increased material prices and stringent lending requirements in terms of the National Credit Act had a major impact on this critical sector of the housing market and it has become more challenging to develop affordable housing in mixed-used integrated housing developments. The lack of bulk services coupled with local municipalities inability to fund installation of these services, has put additional strain on developers as they have needed to fi nance these capital costs. The recent interest rate cuts and increased budget allocations should stabilise the market during Government has reaffi rmed its commitment to the eradication of informal settlements, which will impact signifi cantly on employment creation and poverty reduction. The developments division is well placed on a number of projects to take advantage of the expected upturn. PERFORMANCE The division performed well in the year under review, increasing revenue by 28% to R77 million (2007: R60 million). Operating margins were maintained above the 17% level with a 31% reported increase in operating profi t to R14 million (2007: R10 million). Despite being the smallest of Basil Read s divisions, developments are of signifi cant strategic importance due to the philanthropic nature of the contracts undertaken and the secondary work the division creates for the group. Some R3 billion worth of work will be generated for other divisions in the group over the life of current projects of the homes at Cosmo City have already been occupied and six schools, including a hotel school, a clinic and various churches are fully operational. The Cosmo City development should be substantially complete by the end of 2010 and will become home to residents. Cosmo City Phase 2 is expected to break ground in November 2009 and will accommodate the informal settlement of Itsoseng on the northern boundary of Cosmo City. This extension to the original Cosmo City development will involve the construction of housing units as well as additional schools, churches, parks and commercial opportunities. construction activities in the second half of Doornkuil is being developed in partnership with Old Mutual Investment Group South Africa, who are providing the funding for the project, and has the full support of the Midvaal Municipality. Preliminary work on the Fisantekraal site in the Western Cape is under way and we are expected to break ground in the fi rst half of This 767ha project, being co-developed with Garden Cities, will be phased to accommodate units, of which will be RDP homes, fi nance linked and bonded units. Total development value is estimated at R6,5 billion with the internal services comprising R1,2 billion, which will be installed by Basil Read. Site establishment is taking place at the Klipriver Business Park and bulk services are in the process of being installed. This 230ha industrial development, situated on the R59 and K154 interchange between Johannesburg and Meyerton, comprises a total of 96 developable erven. With the exception of the Cosmo City project, none of the pipeline work for the division is included in the group s order book. The division recognises the importance of energy effi cient design and the impact that new town developments have on the environment. As a result, Basil Read Green Projects was established during the year to ensure that best practice is applied on all of its projects. PROSPECTS The developments division is fully aligned with the government s Breaking New Ground strategy and will continue to invest in the provision of affordable housing for all South Africans. To this end, the division will undertake sustainable, mixed-use integrated housing developments as private-public partnerships, joint ventures or as sole contractor. This type of project is longer term and can take several years from inception and feasibility studies to the breaking of ground. The division is currently negotiating two more major developments which, if successful, will extend the development value to R18 billion. The development of the Doornkuil site in the south of Johannesburg is progressing well and the division expects to commence

33 Operational review continued Plant BASIL READ Annual Report 2008

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35 page 52 Operational review continued Plant MANAGEMENT Antonie Fourie (Managing Director) Malachi Setati, Johan Swan 137 employees BASIL READ Annual Report 2008

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37 page 54 Operational review continued Plant Antonie Fourie BASIL READ Annual Report 2008

38 BASIL READ Annual Report 2008 page 55 Basil Read s plant division has been substantially strengthened in recent years to provide the quality of work and services required by the group. The department s fi nancial objective, to break even during the year, was achieved in 2008 as the division cared for over 500 individual items of major plant. During the year maintenance capacity was increased, creating a larger working area and space for new tools and equipment. An engineering shop is being established to eliminate outsourcing delays and aid in reducing costs. Certifi ed training is being expanded to include new equipment and facilities, maintain safety performance and protect assets. The focus of the plant division remains on group productivity and optimal use of assets. In the year under review, Basil Read spent R388 million on plant and equipment in line with its three-year plant replacement plans. The group s depreciation policy ensures that all plant and equipment items are written down over realistic periods, taking into account the punishing nature of work undertaken. Capital expenditure of R150 million is planned for 2009.