Shaft Sinkers Holdings PLC : Trading Update

Shaft Sinkers Holdings Plc

17 February 2014

Shaft Sinkers Holdings plc

("Shaft Sinkers" or "the Group")

Trading Update

Shaft Sinkers Holdings plc (LSE: SHFT), the international shaft sinking and underground construction group announces an update to trading during the last quarter of 2013 ("the Period"), further to the Interim Management Statement issued on 14 November.

In line with management's expectations, Group revenues during the year ended 31 December 2013 are expected to be lower than during the prior year at approximately £150m (2012: £192.5m). This is mainly due to the Group's reduced workload during the year and the deteriorating value of the ZAR against Sterling, which impacted revenues by some 11%. However, a number of the Group's projects also encountered operational difficulties resulting in reduced billings to clients. Gross margin is expected to have decreased to between 9 - 10 per cent. (2012: 11.7%).

Since the Group's last update to the market, operations have been materially impacted by the following key factors:

1.   Poor sinking progress at the Hindustan Zinc Limited project which resulted in higher than expected costs and lower revenues;

2.   Operational underperformance at the Group's South African business, with performance at the Impala 17 and Styldrift projects particularly disappointing;

3.   The write-off of previously incurred costs at the Impala 16 project that cannot be recovered from the client;

4.   The under-recovery of Engineering overhead costs due to the lower workload;

5.   Higher interest costs as a result of weaker than expected cashflow in South Africa; and

6.   Delays to the commencement of the Kazchrome contract. Negotiations with Kazchrome are still ongoing and the Group shall provide a further update as appropriate.

The Group has, however, successfully reduced the level of outstanding claims in respect of variation orders outlined in the November IMS although discussions with its clients over additional scopes of work are ongoing. Progress at the Group's other projects, including the Kibali Goldmine project, Lonmin's Saffy, Hossy and Karee 3 projects, and Afplats' Leeuwkop project was broadly in-line with management's expectations during the Period.

Full year operating expenses were reduced to approximately £17 million (2012: £23.7 million), after incurring exceptional legal expenses of approximately £3.5 million (2012: £1.0 million), as a result of internal restructuring and cost reduction exercises. Operating income for the year is expected to include a £1.6 million gain from foreign exchange movements and £0.9 million profit on the sale of plant, property and equipment.

At 31 December 2013 the Group had gross cash of £4.1 million, drawn overdraft of £3.0 million and £2.9 million of interest bearing term debt. During the Period, the Group repaid £6.8 million (using average exchange rates) of its ZAR-based term loan.

As a result of the above, the Group's profitability will be materially below expectations for the year ended 31 December 2013, and profit before tax is expected to be between £2.5 million and £3.0 million, subject to the audit process.

Order book

At 31 December 2013, the Group's order book stood at approximately £350 million (30 June 2013: £344.1 million) (revenue to be billed on committed contracts).

As mentioned above, negotiations continue with Kazchrome and management are hopeful that an agreement shall be reached soon.

The Group is in discussions with Impala over the continuation of the 17 Shaft contract. This may have an impact on the value of the order book in the current financial year.

Outlook

The well-publicised strikes called by the Association of Mineworkers and Construction Union ("AMCU") continue to affect the Group's operations for Impala Platinum Holdings Ltd. and Lonmin Plc. Revenue and margins from these projects in FY2014 are therefore expected to be significantly reduced. The Group's other projects (Leeuwkop and Styldrift) in South Africa remain unaffected and should contribute revenue and margins in line with management's expectations. The tight liquidity in South Africa has been exacerbated by the lack of revenues from the strike-affected projects.

Outside of South Africa, the Group looks forward to continued excellent performance at the Kibali project in the DRC where the project is on schedule and expects operational progress at its Hindustan Zinc project in India, after a slow start up, to return to the originally planned monthly rates.

Profitability and cash availability will remain under pressure until the EuroChem arbitration comes to an end, which management expects to be by early 2015.

Audited financial results for the year to 31 December will provide further detail about trading during the year and the outlook for 2014.

Speaking today, Alon Davidov, Chief Executive, said:

"The Group has endured an extremely difficult trading period in South Africa and the labour concerns remain for the current year. We are disappointed by the performance of the HZL project during the final quarter of 2013, however management has reacted quickly to address the issues. Numerous cost reduction exercises have been implemented in order to ensure the business can sustain the lower gross profit and exceptional legal charges. Nonetheless, I am confident that the business has solid fundamentals to ensure its future profitability once these adverse factors have been resolved."

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Enquiries

Shaft Sinkers Holdings plc Alon Davidov, Chief Executive Officer Chris Hall, Chief Financial Officer	[phone] [phone]
Aura Financial Michael Oke / Andy Mills	[phone] [phone]

Notes to editors

Shaft Sinkers specialises in the sinking of particularly deep and large diameter vertical and decline shafts and the development of underground infrastructure, used primarily in mining and hydropower applications.

The Group is a world leader in vertical shaft sinking with a focus on particularly deep and/or wide vertical shafts. It has the capability to sink shafts through all types of rock strata. The Group works principally for established mining and infrastructure companies.

Historically, the Group has completed projects in over 20 countries worldwide across Africa, Europe, South America, the Middle East, Asia and Australia. The group is on record for sinking one of the deepest shafts in South Africa used for conveying men and material to a depth of 3,131 meters below surface.

This information is provided by RNS

The company news service from the London Stock Exchange

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