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UPDATE 1-South African defence firm Denel expects state aid in Q3

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JOHANNESBURG, Aug 2 (Reuters) - South Africa's Denel expects to receive government support in the third quarter of this year as ministers are satisfied with how its planned turnaround is going, the state defence company said on Friday, adding it saw potential to cut more costs.

Denel last month asked for a 2.8 billion rand ($190 million) cash injection to help it emerge from a financial crisis.

A cornerstone of the country's once-mighty defence industry, Denel is one of several state firms whose finances were damaged by years of mismanagement during former President Jacob Zuma's tenure.

Denel said it was talking to the Department of Public Enterprises (DPE) and the National Treasury (NT) about the process and discussions were ongoing about details and the conditions of the support.

"The DPE and the NT have indicated that they are satisfied with the progress Denel has made on the recapitalisation conditions and the recapitalisation is expected during the third quarter of the year," Denel said in a statement.

The statement contained no details on the size of any cash injection. A spokeswoman for the Treasury declined to comment and the DPE was not immediately available for comment.

Under current President Cyril Ramaphosa, public finances are stretched by the need to rescue other ailing state firms such as loss-making power company Eskom and South African Airways, which have both already received government support.

Denel added it saw potential to cut costs by a further 500 million rand from its supply chain processes, having already cut operating costs by a similar amount in its restructuring.

The company said it agreed with shareholders on the need to urgently dispose of non-core bits of its business, and said it could generate 2 billion rand from strategic equity partnerships.

"It should be noted that Denel's liquidity issues are short-term and the company is expected to generate positive cash flows within the next 12 months," the company said.

($1 = 14.7010 rand) (Reporting by Alistair Smout; Editing by Mark Potter)

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