CEO review

Dear Shareholder
The 2011 financial year was a year of tentative recovery for the group. At the same time, it was a year of further consolidation, strategic positioning and restructuring of activities, to improve the overall strategic and financial position of the group. The operating environment remained challenging during the year under review with the protracted recovery in both the construction and mining sectors continuing to impact financial performance.

The group reported an operating loss before amortisation of R85 million largely due to:
• depressed macro-economic conditions;
• the impact of these conditions on second-hand yellow metal fleet prices worldwide; and
• excessive rainfall experienced in our operating areas during the last four months of the financial year.

Maintaining competitiveness and returning to profitability is the top priority. In order to improve the operating business model and financial position of the group, we remained steadfast on achieving the substantial on-going strategic initiatives which commenced during the review period.

Strategic and restructuring initiatives undertaken during the year included:
• Strengthening the senior management team through replacement of senior managers in crucial positions within the group’s mining division as well as bolstering the management team in terms of technical, marketing and human resource skills.

• Re-evaluating our asset portfolio in order to achieve strategic alignment and improve profitability and cash flow. A careful analysis of performance and financial forecasts of all operating entities to deliver sustainable returns has been undertaken. As a result, the sale of Watertite was approved during the year and BSB subsequent to year-end. The loss making Vukuza operation was successfully closed and the assets have largely been sold off in an orderly fashion, as planned.

• Restructuring the Mining Services business unit through appropriate right sizing, the ongoing focus on renegotiating inadequate contract rates, active marketing, introducing a robust tendering methodology and implementing improvements in maintenance programmes and facilities. Work undertaken to strategically reposition the business towards targeting less capital intensive revenue opportunities, along the mining value chain, was also progressed.

• Establishment of the Equipment Sales and Rental business unit to improve second-hand brand equity as well as the efficiency of asset disposals that was undertaken during the year. Ad-hoc disposals of assets in various businesses within the group has therefore ceased.

• Strengthening our financial position by the completion of a successful rights issue raising R300,5 million, which was used to reduce interest-bearing short-term debt, provide equity for medium-term capital expenditure for Mining Services and providing additional working capital for the group. Capital discipline and cost control remained a key focus throughout the group.

• Strategic repositioning of the group by focussing on transforming the group into a supply chain management company operating in largely the opencast mining sector of the economy, striving towards unlocking bottlenecks and strategic value on behalf of customers. Strategic focus has also been on reducing the geographic and commodity concentration of the group.

Strategic and restructuring initiatives deliver positive results
It is encouraging to note that these initiatives have already started to deliver promising results with a notable improvement in our operating results, particularly during the second half of the financial year. There is also a positive sentiment towards improved trading conditions and operational efficiencies for the forthcoming year.
• Revenue from continuing operations increased by 4,7% to R1,3 billion.

• Operating losses before amortisation, for the second half of 2011 reduced significantly when compared to both the second six months of the prior financial period and the first six months of the current financial year.

• Overall the group’s basic loss reduced by 63,8% compared to the previous financial year.

• Total interest-bearing debt reduced by 56% to R289 million.

The above-mentioned strategies will assist the group in delivering further improvement in value over the short-term to medium-term. Strategically a new, more effective organisational structure, our good reputation in the markets we operate in, improved efficiencies and the repositioning of the Mining Services business towards targeting less capital intensive business opportunities will enable us to achieve sustainable improved long-term returns for shareholders.

Achieving world-class safety standards
We remain fully committed to proactively achieving fatality free operations and a zero harm workplace. We are proud to report that despite the significant changes undertaken during the year our Diesel Power Opencast Mining business unit recorded three million injury free production hours over a period of 18 months. The lost time injury frequency rate in our Mining Services business was 0,05, which relates to two relatively minor incidents during the course of 2011. This is an outstanding achievement when benchmarked against industry norms.

Financial performance reflects challenging conditions
The financial performance of the group reflects the challenging macro-economic conditions we have experienced since the onset of the global financial crisis. Our principal business, Mining Services, remains highly dependent on fleet replacement, availability of asset-based funding, a stable and productive workforce and securing reasonable prices for second-hand equipment. The low levels of activity in global markets resulted in a surplus of second-hand equipment and vehicles, reducing resale prices by as much as 50%. Furthermore, whilst we experienced a rise in demand for second-hand equipment and vehicles during the second half of the year, asset-based finance required by potential buyers of second-hand equipment remained constrained. In light of this and compounded by the tougher credit climate, the group was compelled to continue with extending the useful life of certain assets beyond the ideal replacement cycle. Consequently, production during the year was negatively impacted by an abnormal investment in maintenance, reducing both top and bottom line growth. This investment in maintenance will bode well for improved plant availability in the future.

Revenue from continuing operations grew by 4,7% to R1,30 billion (FY2010: R1,24 billion). EBITDA, however, decreased by 45,6% to R117,0 million (FY2010: R215,1 million) primarily as a result of costs associated with:
• the continued decline in the value of second-hand equipment and the scarcity of bank finance for new equipment;

• on-going use of sub-contractors and hired equipment at punitive rates;

• the Mining Services business unit having to extend the life of its yellow metal fleet which resulted in an increased investment in maintenance and related resources to improve plant availability and productivity; and

• excessive rainfall during the last four months of the financial year and the continued erosion of margins in the construction industry.

The loss before taxation, including non-cash impairment losses of R274,4 million, improved from R810,9 million to R377,5 million in the current year.

Shareholders’ funds decreased to R550,1 million from R629,1 million at the end of the 2010 financial year.

Net tangible asset value increased from R312,4 million to R476,9 million largely as a result of the reduction in debt and successful rights issue which resulted in a capital injection of R300,5 million.

The group reported a basic loss per share from continuing operations after impairments of non-current assets of 12,8 cents compared to the comparative period loss of 34,1 cents.

The mining operations of Vukuza have been disclosed as discontinued operations. Revenue from these operations was R69,7 million, with EBITDA of R15,7 million and an operating loss of R9,5 million. The carrying value of the fleet was further impaired by R21,3 million. Including the impact of the impairment on property, plant and equipment, discontinued operations reported a loss before interest and taxation of R30,8 million.

The group recorded a total HLPS of 4,4 cents compared to a loss of 5,9 cents originally reported for the comparative period. The group did not issue any potentially dilutive instruments for the year under review.

Gross debt was R289,3 million at the end of the year, significantly lower than R660,3 million for the comparative period. Debt repayments during the period amounted to R459,8 million and were funded from internal cash resources, proceeds from the sale of surplus mining equipment and vehicles as well as from the proceeds of the rights issue.

The group’s net cash position increased by R13,0 million and it generated R128,0 million from operations.

Some of the group’s debt facilities are subject to covenants in terms of which a number of subsidiaries are required to meet pre-determined performance indicators. As set out in the 2010 annual financial statements, we commenced with renegotiating these covenants. Subsequent to the successful implementation of the rights issue, Buildmax’s bankers have displayed improved confidence in Buildmax and the sector in general and as a result have renewed their support to the group in terms of the provision of conservative asset-based financing facilities and less restrictive covenants.

As a result at year-end the group was not in breach of any borrowing covenants.

The onerous and conservative bank-lending environment during the period under review for new and used equipment remains an impediment to the equipment replacement cycle. This resulted in substantially lower capex for the period. Gross capex amounted to R89,9 million, 54,3% lower than in the previous year. The group was able to generate R2,2 million from its investing activities in the period under review.

Recently there has been renewed confidence in Buildmax by traditional and new potential lenders. This has been evidenced by the group securing an asset-based funding facility of R130 million from the IDC. By the end of the 2011 financial year there were no drawdowns made against this facility. The group will utilise this facility for plant replacement and growth that will have a positive impact on productivity in the Mining Services business unit.

In November 2010, the group successfully raised R300,5 million through a fully subscribed rights issue to qualifying shareholders. The rights issue was completed on 15 November 2010.

Operational review
Mining Services
Revenue increased by 1% to R825 million (FY2010: R816,6 million). EBITDA reduced by 60,9% to R71,2 million (FY2010: R182,4 million). The business unit incurred a loss before interest and taxation of R209,2 million including impairments of R140,5 million on goodwill, intangible assets and equipment.

Gross capex for the period of R69,1 million was 26,6% lower than the comparative period’s capex of R94,2 million. Strict disciplines have been introduced and as a result the group aims to only commit to growth capex if new projects meet acceptable financial criteria within the group’s risk profile.

Equipment Sales and Rental
The new Equipment Sales and Rental business unit delivered revenue of R84,7 million. The unit’s revenue was generated through short-term plant rental to selected and preferred customers. The division’s EBITDA for the period under review was R36,1 million and it reported an operating profit of R13,6 million.

Construction Materials
Revenue for this business unit was R389,8 million, a decrease of 8,1% from the R424,3 million reported for the comparative period. Margins were eroded as a result of increased input costs, which the division was unable to pass on to customers.

EBITDA declined to R9,7 million from R32,7 million in the 2010 financial year. The business unit incurred a loss before interest and taxation of R154,6 million which included non- cash flow impairments on goodwill and intangible assets of R133,9 million.

Gross capex for the period was R10,3 million being 68,4% lower than capex for the comparative period of R32,6 million. Capex was financed by internal cash resources. No significant capex is forecasted in the short-term for the business unit.

In order to achieve strategic alignment and improve the group’s profitability and cash flow, management has been analysing the performance of all operating entities to ascertain which have medium to long-term prospects of achieving acceptable and sustainable returns for the group. As a result of these reviews the Board approved the sale of Watertite and subsequent to year-end, the sale of BSB to management.

In addition it was decided to move the group’s quarrying businesses from the Construction Materials business unit to the Mining Services business unit given the similar operating methods, business risks and challenges as well as BBBEE requirements of both business units. This change was effective in March 2011. The new group structure is presented on page 13.

Key sustainability issues
Buildmax provides services that cater to the demands of the mining and construction industry. Both industries have major impacts on natural resources. Given the nature of these industries there are many environmental and socio-economic ramifications. It is therefore imperative, to be mindful of sustainability within our business framework. This requires taking a holistic approach on all significant strategic factors which impact the long-term sustainability of our business, and further implementing proactive solutions to manage these factors.

The key material sustainability factors which have been identified include:
Safety
Safety remains one of the highest priorities of the group. During the period under review no fatalities were recorded at any of the group’s operations. Various systems and processes are in place to ensure that workplaces are safe: Safety awareness is encouraged amongst all levels of employees.

The group’s SHECQ management system has been successfully implemented, maintained and monitored to ensure continual improvement in safety. This system has been assessed and certified by SABS to confirm compliance with ISO 9001:2008 (quality management) and the OHSAS 18001:2007 (occupational health and safety standards).

Organisational health and wellness
It is important to the group that our management team and workforce at all levels are both healthy and cared for. Our Wellness Programme aims to identify health risks, provide health education and influence positive behaviour change amongst our employees. We therefore ensure counselling for employees with stress-related problems, provide support for chronic disease management such as HIV/AIDS, and address issues such as alcoholism and drug abuse in the workplace. The educational component of our Wellness Programme encourages employees to live healthier lifestyles to reduce the likelihood of chronic health problems. Regular medical screening of employees for diabetes, high cholesterol and high blood pressure is also undertaken and encouraged as preventative healthcare.

Skills attraction and retention
The group continues to experience a shortage of skills at operator and technical level. The key concerns are a high turnover of staff in these jobs and competition for skilled resources. We remain committed to critical skills development through implementation of training programs, in order to meet current and future skills requirements. During 2011 a total of 3 814 trainees were trained at our training centres. The group’s headcount reduced by 30,3% to 2 405 mainly due to the restructuring of the Mining Services business unit.

Environment
The primary environmental concerns for the group are:
• water management;
• carbon emissions;
• waste management and disposal; and
• contractual rehabilitation responsibilities.

The group is committed to maintaining sound environmental measures and practices in all its operating activities however, the environmental risks and impacts vary amongst operations.

Water management
The group recognises that water is a scarce resource in South Africa. At our opencast operations underground water is pumped from the individual mining pits to our customers’ storage facilities. The management of these facilities, however is the responsibility of our customers. Our quarrying operations are registered with the DWA as a water user. We are currently in the process of obtaining an Integrated Water Use Licence for each of the operations from the DWA which governs water usage and discharge into the natural environment. Processed water is kept separate in slimes dams and reused after the fine materials have settled. Water from these storage facilities are supplemented with stormwater and seepage collected within the quarry basins. Methods to reduce natural water usage are being investigated.

No spillages which could have had an impact on the surrounding environment occurred at any of the group’s operations during the period under review.

Carbon emissions
The group’s energy needs are sourced from the national energy utility, Eskom, either directly or via customers’ infrastructure. The group therefore has limited opportunity to directly reduce carbon emissions, as this is largely dependent on governments energy mix going forward. Various initiatives, however, are in place to reduce energy consumption for 2012 and the group encourages awareness amongst employees in terms of electricity usage and climate change.

Disposal and closure management
The primary materials used by the group in its production activities are: fuel, lubricating oil, tyres and spares. The efficient and safe usage of these materials form part of the group’s environmental management programme. The safe disposal of second-hand tyres remains problematic and the group has consulted with its tyre supplier and manufacturer to identify methods of disposal that will not have an adverse impact on the surrounding environment. We are confident that we will achieve a solution to this problem. Lubricating oils, consumables and used spares are disposed of in terms of the local municipality legislation and no fines were levied on or paid by the group in the period under review.

At the quarry operations we have prospecting and mining rights. As a result, the group is responsible for the rehabilitation of land. To this end the group adheres to the environmental laws, regulations and permits associated with our quarrying activities. In particular, the Mineral Resources and Petroleum Development Act of 2002 and the National Environmental Management Act of 1998 in South Africa are both used to guide environmental practices. Each operation has an Environmental Management Plan in place and closure liabilities have been estimated for all these operations. There are no protected areas in close proximity of the group’s quarrying operations.

At our opencast mining operations we operate on our customers’ sites, which are largely brownfields operations and, in certain instances, already in a disturbed state when the tender was awarded. Closure liabilities are therefore not provided for and no liability existed at the end of the
financial year.

During the period under review no environmental fines were levied against the group.

Committed to transformation
The group’s BEE shareholding has significantly reduced from 17% at the end of the previous financial year to 6,75%, due to dilution subsequent to the finalisation of the rights issue. The Transformation Committee has formulated a four-year plan to improve the group’s rating from a Level 6 to a Level 4 contributor.

Outlook: Mining Services to drive prospects for the next year
Coal remains one of the cheapest sources of energy available and its abundant reserves compared to other fossil fuels renders it likely to remain the primary source of energy for the foreseeable future. Whilst Eskom has curtailed its projected demand for coal over the medium-term and has announced its intention to introduce alternative energy sources, the continued roll-out of coal fired power stations coupled with international demand for thermal and coking coal, particularly from China and India, should ensure continued growth in this sector for the foreseeable future. Additional export capacity continues to come on stream at Richards Bay, Durban and Maputo. Exports from Richards Bay for the financial year under review were marginally higher than the sales for the comparative period. Further, Transnet has announced that it intends to increase the size of its rolling stock fleet and improve its rail network, which should alleviate some bottlenecks currently experienced by coal exporters.

We are grateful for the meaningful contractual relationships with some of the leading mining groups in the country and our aim is to grow these relationships for the mutual benefit of both parties as the propensity to outsource by mining houses continues to grow. Mining Services is therefore well-positioned to participate in additional coal mining supply chain activities that are less capital intensive. We continue to roll out our strategy in this regard.

The outlook for the construction industry is reliant on spending by both government and the private sector. The lack of funding continues to hamper public sector projects while high levels of debt, excess stock and a lack of bank funding continue to impact negatively on the private sector.

Predicting a recovery in the construction market is extremely difficult and the market is not expected to improve during the 2012 financial year. The businesses in the Construction Materials unit are well-positioned to benefit from improved trading conditions as and when they occur.

Conclusion
I would like to thank the Board, our employees, management and all other relevant stakeholders for their dedication and support towards achieving the restructuring initiatives we implemented at the beginning of 2011. While there remain a few key challenges to be overcome, we are confident that the Buildmax turnaround is on track and that the group will deliver improved results in the forthcoming financial year.


Terry Bantock
CEO
22 August 2011

Group structure effective 1 March 2011


* Recently sold to management
** In the process of being sold to management