CHAIRMAN’S REPORT

The difficult trading conditions of the 2009 financial year continued into the 2010 reporting period. The rapid strengthening of the rand against the US dollar in the first few months of the 2010 financial year materially affected earnings for the year ended 31 March 2010.

My report last year described 2009 as a turbulent year – one of two halves. This was highlighted by the change in normal buying trends as volumes and sales grew exponentially in the first half of the financial year, with farmers, uncertain of what the future held, stockpiling fertilizer. A significant drop off in volumes and sales occurred in the second half of the financial year 2009, and the traditional peak sales period around September 2009 did not materialise. The rapid strengthening of the rand against the US dollar in the first few months of the 2010 financial year left the division facing major write-downs in stock values. The atypical 2009 financial year materially affected earnings for the year ended 31 March 2010. The continuing global economic slowdown was another contributing factor, impacting severely on the international chemicals industry in particular.

A challenging year for the Chemicals Division

Protea Chemicals had a challenging year, with volumes declining 11% as the South African economy was exposed to similar conditions as the generally depressed global circumstances. The continuing strength of the rand impacted severely on the division, reducing rand margins and putting significant pressure on operational costs.

The strategic acquisition of Petroleum Fine Products during the year represents a carefully considered move to further enhance the product and growth opportunities available to the Division.

It will allow Omnia to have access to essential bulk base ingredients and will further strengthen Omnia’s existing consumer care portfolio and will build on one of Omnia’s stated objectives to grow the business and enhance margins through vertical integration and forward blending strategies.

Protea Chemicals and Nalco, the world’s leading water treatment and process improvement company based in Illinois, USA, formed an Associate. We believe this Associate, named Nalco Africa, will enable Omnia to assist its clients to significantly reduce their environmental impact using Nalco’s industrial water and process treatment technologies. This partnership complements our existing chemicals business and demonstrates our continued commitment to growing our business through proactive management of South Africa’s scarce water resources in the critical area of water improvement.

The office in Shanghai, China, is operational and is showing signs that it will contribute to enhancing the diversity of Protea Chemicals’ supplier base as well as improving the quality of raw materials sourced from China.

Continued development in the Mining Division

Although the ongoing global recession and declining commodity prices impacted negatively on the productivity of some customers, BME continued to develop strongly in line with the mining sector in which it operates. Coal mining will remain a key commodity as Eskom’s demand for coal increases to supply the new power stations under construction.

The division’s new shock tube plant is producing good quality product off a low cost base, which will assist it to penetrate the underground accessory market. Deep level miners have come to appreciate the advantages of modern shocktube initiation systems over the traditional “fuse and ignitor cord” system.

The design of BME’s latest generation electronic delay detonator has been completed and field trials have begun. This design represents a significant step forward in the technology and we believe that the product will add considerably to improvements in blasting that will enhance our customers’ ability to mine in the most cost-effective manner, with added safety benefits.

Protea Mining Chemicals has continued to develop strongly in Namibia. However, a number of our customers’ uranium projects are running significantly behind schedule, which has impacted negatively on the division. These delays are largely resolved and it is expected that good progress will be made in the coming year to bring these large projects on stream.

A year of mixed fortunes in Agriculture

Farmers in the central summer planting region of South Africa had a year of highlights and lowlights. Rainfall patterns were very favourable and summer crop production is close to all time highs. Prices have fallen dramatically in line with the continuing strong rand/US dollar exchange rate and significant drop in commodity prices, and have reached export parity levels. The maize crop is significantly higher than local demand and large tonnages are theoretically available for export. Unfortunately, the infrastructure for exporting maize is no longer capable of managing large tonnages, which means that the country will have a significant stock carryover into the 2010 maize planting season. This could affect the hectares to be planted.

The issues associated with land reform continue to impact upon the development of agriculture in South Africa to the detriment of the country. Until stakeholders enter into serious debate on how to practically resolve the problems of land ownership, commercial food production will be hampered and the development of the agricultural sector will be compromised.

Agriculture in South Africa will continue to be under pressure until government realises that the sector needs to be protected from unfair competition from highly subsidised agricultural products. The impact of an unsupported, weakening agricultural sector will lead to de-industrialisation as the downstream processing of agricultural products slows in preference to cheap imported products, with the resultant impact on investment and job retention.

The project at Mpongwe in Zambia, where Omnia is developing a deep agronomic understanding of the optimal way to grow Jatropha to produce biodiesel, has reached the stage where the refining plant has been built and small quantities of biodiesel will be produced for internal consumption during the next few months.

Investing in new capacity

Highly capital intensive sectors such as the chemical industry go through periods of significant change infrequently. The South African fertilizer sector is no different and is for the first time in many years going through such a phase.

This financial year has seen a major competitor, Yara, sell its retail assets in South Africa. This, together with the recent Competition Commission agreement with Sasol Nitro to divest of its regional blending operations, withdraw from retail operations and to focus on nitrogenous production at its Secunda site, has major implications for the way in which the domestic fertilizer industry will develop over the next few years. Sasol Nitro has also announced the closure and possible sale of its Phosphoric Acid plant in Phalaborwa. Omnia Fertilizer remains as the only integrated producer and retailer of fertilizer in South Africa.

In our 2009 annual report reference was made to the requirement to invest in new production plants in order to achieve the targets set for our fourth five-year strategic plan. Omnia is in the position that it is short of nitric acid production and has, over several years, been forced to supplement its own production by the purchase of materials from its competitors as well as large scale imports of LAN and urea. The growth in demand for ammonium nitrate, produced from nitric acid, for the explosives sector has exacerbated the situation significantly, to the point where the Board had to give serious consideration to the building of a second nitric acid complex. This would substantially reduce imports and provide BME with the ammonium nitrate required to ensure that the division maintains its strong position in the explosives sector as mining develops in southern Africa.

The downturn in the economies of Europe as well as the relative strength of the rand to the euro signalled that the time is right for such an investment. Through judicious engineering and procurement, Omnia Fertilizer has presented a project for the construction of a nitric acid complex for the capital sum of R1,4 billion, which the Board believes to be very competitively priced. Funding of the project relies on a rights offer to shareholders of 20 million shares at R50 each and appropriate debt finance.

A major consideration for the Board was the delay in the implementation by the DTI of incentive policies, provided for by Section 12(I) of the Income Tax Act, specifically aimed at assisting companies with projects such as this one. The Omnia Board has approved the project, even though the regulations have not yet been published and will approach the DTI for its favourable consideration of an investment that is of such strategic importance to our country. Project completion is scheduled for the end of the first quarter of 2012.

The approval of this project represents a significant milestone in the history of Omnia and demonstrates the faith that the board has in the development of mining and agriculture in the southern African region.

I offer my sincere thanks to our shareholders and financiers who have received the project positively and have indicated their willingness to participate in raising the necessary capital.

Transformation and empowerment

Omnia has always believed in incentivising management and staff to produce earnings and develop the company in such a way as to achieve the objectives set by shareholders. The Board has followed an aggressive remuneration policy that offers incentives to employees, both short-term and long-term in nature.

In addition, the Group regards transformation and employee empowerment as integral to our sustainability as a company operating in South Africa. We have always believed in the value of employee ownership, and aim to deepen our partnership with the people whose hard work and dedication directly contribute to the success of the company. With this goal in mind, we created in 2007, the initial empowerment partner – Sakhile 1 – as a share incentive scheme for our employees, thereby offering all of them the opportunity to share in the growing wealth of the Group, and addressing historical disparities in income and social well-being of all South Africans. Subsequently, additional structures have been put in place to continue to develop long term transformation initiatives and the essence of the newly created long-term policies is summarised below:

		Sakhile 1: created in 2007 offering shares in Omnia to employees other than employees participating in the Third Partnership with Management Scheme;
		Sakhile 2: created in 2009 with the intention of retaining senior black employees as well as attracting talented black individuals to join the Group;
		Partnership with Management Scheme no. 4: Omnia has had several schemes over more than 20 years designed to incentivise management to achieve targets set by shareholders for periods of five years. Scheme no. 4 continues the philosophy for the financial periods 2010 to 2014; and
		Executive Scheme (Nanotron): for the first time a scheme has been introduced with the specific aim of offering a limited group of the top management team the opportunity to participate in the share ownership of the Group.

Grain price history

Participants were required to invest their own capital in the scheme and are subject to the same performance conditions as the Partnership with Management Scheme.

The latter two schemes are based on the Group growing earnings at a compound real rate of 8% off a starting point of profit after tax of R383 million for a five-year period starting in financial year 2010.

Moving forward

The disappointing results for 2010 have resulted in the need for considerable work to be done in order to meet the Group’s five-year strategic plan. Fortunately, strong cash flow generation of R1 045 million in the year positions the Group to continue with its planned acquisitions and other business development activities in the current year.

The strength of the rand continues to negatively impact on earnings in Protea Chemicals and it will be challenging to produce a meaningful improvement in performance in 2011. However, the reorganisation of the division is expected to reduce costs, optimise the allocation of resources and focus the business, and this will positively impact the Chemicals division in the year ahead.

BME is well positioned in a sector that is showing increasing activity, and is expected to show a significant improvement in earnings from both sales of shocktube and the new electronic detonator going to market for the first time.

The Fertilizer division is expected to recover to its normal profitability, but the impact of a maize surplus may negatively affect plantings in the coming summer season. We will continue to add value to our customers by utilising our Nutriology® concept to maximize farmers’ profitability.

Overall, the Group is expected to return to its historical earnings pattern in financial year 2011.

The Board decided not to pay a dividend in 2010, given the poor financial results as well as the coming capital expenditure programme associated with the nitric acid complex. This policy will be reviewed later in the year, but it is probable that the preservation of capital in order to fund the large capital expansions envisaged, could lead to this approach to dividends continuing in the 2011 financial year.

We are confident that despite the poor earnings in 2010, our management teams are incentivised to find innovative ways to deal with the challenges of the next few years.

The long running (seven-year) investigation by the Competition Commission into alleged collusion between members of the fertilizer industry is not yet resolved. The costs associated with legal counsel and ineffective use of management time is taking its toll on the company and it is hoped that this matter can be brought to a conclusion during the coming financial year.

Appreciation

It is not easy to appreciate the difficult circumstances that affect managers in South African businesses faced with extreme volatility in commodity prices, fluctuating exchange rates and pressures on expenses from increased governance requirements, wage demands and environmental matters. The Omnia management team, under the leadership of Rod Humphris, has grappled with these challenges throughout the past financial year and I wish them the fortitude and the degree of luck they need to bring their business units back to the levels of performance that we know they are capable of achieving.

Omnia’s decision to invest significantly in new production capacity will create a platform for the development of the Group into the future – a platform that supports our agricultural and mining customers into the next decade. This decision was not easy and my colleagues on the Board deserve a vote of thanks for standing up against the growing trend in South Africa of de-industrialisation, a trend that would result in the country becoming increasingly dependent on imported products. We appreciate the effort and hope that we can rely on their support in the coming years.

Johan Pretorius chose to retire during the year. During his tenure of 24 years on our Board, he has participated in all the major decisions that have shaped the company Omnia is today, both as chairman for a few years as well as non-executive director. His wit and wisdom are missed.

Raisaka Masebelanga regretfully suffered from ill health during the year and resigned his position as executive director. We hope that he makes a full and rapid recovery.

Delwin Eggers will retire as Group finance director and as executive director of Omnia with effect from 31 August 2010. Noel Fitz-Gibbon has been appointed as Group finance director – designate with immediate effect. Delwin will be remembered for his exemplary service to the Group, and most recently, for the extremely successful capital raising exercise he conducted to fund the newly approved nitric acid complex. He will be sorely missed, and our heartfelt thanks and warm wishes go to him as he enters retirement.

Financial year 2010 has been one of extremes, a year to forget and yet also to remember, a year of disappointment and courage, but above all a year in which the decision was made to create a new platform for the Group to grow into the future, which reaffirmed that we are a strong organisation that has a role to play in developing our people and our country.

NJ Crosse
Group chairman