Directors’ report

The directors are pleased to present this report, which forms part of the audited financial statements of the company and the Group for the year ended 31 March 2010.

NATURE OF BUSINESS

The Group, through its subsidiaries, is a specialist chemical services company providing customised chemical solutions in the chemical, mining and agriculture markets. The subsidiaries of the Group are involved in the manufacture, distribution and trade of chemicals, mining explosives and accessories, fertilizers and speciality fertilizers.

FINANCIAL RESULTS

The financial results are reported in accordance with International Financial Reporting Standards (IFRS). The financial results and related information is disclosed in the independent auditor’s report.

The principal policies used in the preparation of the results for the year ended 31 March 2010 are consistent with those applied for the year ended 31 March 2009, unless otherwise stated.

The financial results for the year under review indicate the sensitivity of the Group’s earnings to declining commodity prices and the strengthening of the rand.

In the previous financial year, as a consequence of the buying pattern changes which brought abnormally high demand from agriculture in the first six months, the second half of the previous financial year saw significantly reduced sales levels. The Group was thus left holding substantial fertilizer stocks at the March 2009 year end. The decline in commodity prices which started during the latter part of the 2009 financial year continued into the current year and, combined with the effect of further rand strength, necessitated a R350 million write-down in the value of fertilizer inventory by the September interim stage. Commodity prices continued their downward spiral into the second half of the year, when the peak fertilizer season normally occurs, while the rand also continued to strengthen.

The combined effect of the decline in commodity prices, rand strength and lower levels of economic activity arising from conditions of global recession, led to all three divisions facing challenges from a combination of softer volumes, pricing pressures and weaker export prices. The inevitable reduction in earnings that came about is amplified by the comparison with the unprecedented buoyant market conditions that prevailed in the previous 2009 financial year.

The continuing strong rand remains one of the major contributors to the weaker financial performance of the Group in the short term, impacting negatively on each of the three business divisions – chemicals, mining and agriculture. This rand strength is also having a negative impact on the Group’s customers, particularly those in the Chemicals Division, who find themselves in turn uncompetitive in export markets and having to compete with cheap imported finished goods in the domestic market.

Although there has been an improvement in volume sales in the second half of the 2010 financial year, the persistent strength of the rand, the stock write-downs and a share-based payment charge of R41 million relating mainly to the two new share participation plans implemented in January 2010 has resulted in Group earnings for the year reaching only R58 million (2009: R491 million).

The prior financial period brought to a close the five-year target set for management by shareholders in 2004. This target was to achieve a 10% real growth in earnings per annum over the five years that ended 31 March 2009. The 2010 financial year marks the beginning of the Group’s fourth five-year target cycle.

Revenue for the year fell by 21% to R8,8 billion (2009: R11,1 billion) and, after the initial downward stock adjustment of R350 million and further downward price movements, net profit for the year declined by 88% to R58 million (2009: R491 million). Included in revenue is an amount of R50 million from the sale of the first tranche of 400 000 carbon credits. Net production costs for these carbon credits amounted to R7 million.

A loss of profits claim in respect of a plant failure in the prior year amounting to R32 million and a R20 million profit on the transfer of businesses to the Nalco associate are included in the R77 million other operating income.

Administrative expenses reduced by 11% to R487 million (2009: R546 million) while distribution expenses increased by 5% to R674 million (2009: R639 million).

Finance costs of R217 million (2009: R205 million) comprise interest paid, foreign exchange gains or losses and forward cover costs. A combination of lower interest rates and lower values of working capital needing to be funded resulted in interest charges reducing by 12% to R185 million (2009: R210 million) while exchange rate losses on foreign bank accounts and forward cover costs amounted to R23 million (2009: R5 million gain).

Profits were impacted by non-tax deductible items comprising amongst other things, mainly non-cash share-based payments of R41 million, and a further R32 million incurred in net non-tax deductible expenses, including interest from funding the acquisition of shares in Zetachem, which resulted in the effective charge for taxation to be high at 47%.

With the strengthening of the rand, the foreign currency translation reserve needed to be adjusted negatively by R228 million, this being the main reason for the reduction in other reserves to R54 million (2009: R286 million) and thus also the main reason for the R166 million reduction in total equity to R1 971 million (2009: R2 137 million).

Intangible assets increased by R20 million following the acquisition of Petroleum Fine Products, a producer of basic personal care ingredients, petroleum jelly and technical oil, and the capitalisation of ERP implementation costs. Mainly as a result of entering into an associate with Nalco, a world leader in water treatment activities, as announced on 28 January 2010, investments in associates grew by R44 million to R84 million (2009: R40 million).

Resulting from the reduction in commodity prices and the relatively high carryover inventory from the previous year, net working capital reduced by 67% to R514 million (2009: R1 542 million) contributing significantly to the cash generation from operations of R1 045 million (2009: R143 million utilised) as reflected in the cash flow statement.

Cash outflow from investing activities increased by 81% to R466 million (2009: R257 million) of which R309 million represents the net investment in property, plant and equipment with the balance being mainly corporate activity from the acquisition of Petroleum Fine Products, Protea Polymers Eastern Africa, and the associate with Nalco.

Arising from the excellent cash generation, net interest-bearing debt has reduced to R404 million (2009: R952 million) resulting in a debt:equity ratio of 20% compared to the 45% that prevailed at the end of the prior year.

Non-current interest-bearing borrowings have increased by a net R134 million to R804 million (2009: R670 million) with the injection of term loans following the Nanotron and Sakhile 2 transactions relating to management and staff participation plans that were approved by shareholders on 11 December 2009.

DIVIDEND

Given the need to raise capital for the development and construction of the nitric acid complex the board has decided not to propose a dividend for the year.

STATED CAPITAL

Stated Capital increased by R117 million to R318 million following the issue of shares to management in terms of the Third Partnership with Management Scheme, the five year target to financial year end 2009 having been achieved, as well as the capitalisation award in lieu of a cash dividend that took place during the year.

The authorised share capital has remained unchanged at 75 million ordinary shares of no par value, and 10 million 15% cumulative redeemable preference shares of 1 cent each since the prior year.

The total number of issued shares on 31 March 2010, net of treasury shares, stood at 46 490 987 shares (2009: 44 370 004 shares), an increase of 2 120 983 shares.

PROPERTY, PLANT AND EQUIPMENT

The Group’s world-class state-of-the-art fertilizer and explosives process plants have again performed well.

Capital expenditure on tangible assets amounted to R366 million (2009: R238 million) comprising maintenance expenditure and ordinary replacement capital, as well as expansion capital expenditure mainly in respect of plant, equipment and vehicles. Capital expenditure on intangible assets amounted to R19 million (2009: R20 million).

The board has approved an amount of R1,4 billion for the construction of a second nitric acid complex at the facilities in Sasolburg. The nitric acid complex is to be developed adjacent to Omnia’s existing plant, which for some time has operated at capacity and will produce some 1 000 tons per day, which equates to about 140% of the existing plant’s capacity. It is estimated that it will generate internal cost savings of approximately R280 million per annum (operating at 60% capacity level).

DIRECTORS AND SECRETARY

Details regarding the directors and secretary in office at the date of this report appear on pages 14 and 15 of the annual report.

In terms of the company’s articles of association, Mr TR Scott and Dr WT Marais will retire at the forthcoming annual general meeting. Being eligible, they offer themselves for re-election. Mr DL Eggers has announced his retirement from the Board with effect from 31 August 2010.

Mr JG Pretorius retired on 23 October 2009, and Mr RR Masebelanga resigned on 19 February 2010.

MANAGEMENT BY THIRD PARTIES

None of the businesses of the company or its subsidiaries had, during the financial year, been managed by a third party or a company in which a director had an interest.

DIRECTORS’ INTEREST IN CONTRACTS

No material contracts in which the directors have an interest were entered into during the current year.

DIRECTORS’ REMUNERATION

Details of directors’ remuneration are set out in note 30 to the financial statements.

SHAREHOLDER SPREAD

A summary of shareholder spread as at 31 March 2010 has been included on page 127.

MAJOR SHAREHOLDERS

According to information received by the directors, the following are the only shareholders holding, directly or indirectly, in excess of 5% of the share capital as at 31 March 2010.

SUBSIDIARIES, JOINT VENTURES AND ASSOCIATES

Details of the company’s principal subsidiaries, joint ventures and associates are set out on page 121. The attributable interest of the holding company in the income earned and losses incurred after taxation by its subsidiaries, is set out in note 10 on page 96.

GOING CONCERN

The directors endorse and are of the opinion that the Group has sufficient resources to maintain the business for the future. Consequently, the going concern basis for preparing the financial statements is adopted. The board statement in this regard appears in the statement of responsibility of directors for the annual financial statements.

The Board minutes the facts and assumptions used in the assessment of the going concern status of the Group at financial year end. At the interim reporting stage, the directors consider their assessment at the previous year end of the Group’s ability to continue as a going concern and determine whether any of the significant factors in the assessment have changed to such an extent that the appropriateness of the going-concern assumption at the interim reporting stage has been affected.

AUDITORS

PricewaterhouseCoopers Inc. will continue office in accordance with Section 270 (2) of the Companies Act, 1973.