MINING DIVISION – REVIEW

OPERATIONAL HIGHLIGHTS   Prospects for base mineral mining increase   Major contract signed with SA’s largest coal mining company   Mining industry looks to new BME technology   Shocktube assembly plant begins production

Overview of Mining

The Mining division is a leading supplier of explosives, initiating systems, blasting technology and mining chemicals to the open cast and deep level mining industries in South Africa. The division is highly regarded for its expertise in creating solutions for the industry through the specialist technical support it offers customers within the mining sector.

Financial performance

Revenue reduced by 16% to R1,8 billion (2009: R2,1 billion), the main driver being the reduction in prices compared to those that prevailed during the previous financial year and the strong rand. Annual volumes declined only marginally due to volume recovery towards the end of the financial year. Operating profit, at R212 million (2009: R269 million), is 21% below that of the extraordinary 2009 year, with the operating margin showing a marginal decrease from 12,7% for the year ended 31 March 2009, to 11,9% for the year under review.

Operational performance

The impact of the ongoing global recession and declining demand for commodities acted negatively on the production levels of the division’s customers, and, in turn, on the Omnia Mining division. Lower commodity prices and a strong rand impacted negatively on both international and local sales of explosives and allied products for the year under review. Against this background increasing overhead costs put further pressure on operating margins.

Demand for explosives in most mining sectors reduced substantially. The exception was coal, uranium and gold mining where the increased demand buffered the effect of the overall slower market. Demand for products was reduced by many major national infrastructure projects coming to an end. Sales volumes, especially in underground mines were further impacted by extended mine closure by government due to mining accidents.

The situation began to improve towards the end of the financial year when improved commodity prices started to filter through to increased mining activity in most mining sectors.

Locally, BME won a major contract with Xstrata Coal, one of South Africa’s largest coal mining companies. This will contribute to increased volume sales in the year to come. Several other contracts are being finalised and will contribute to what is anticipated to be a better year for BME.

BME’s core market has long been explosives for open cast mines where operators favour the use of shocktube and electronic detonation systems. Deep level miners have favoured the traditional “fuse and ignitor cord” system and have been slow to accept shocktube initiation systems. However, this has begun to change as underground miners have come to appreciate the advantages of modern shocktube initiation systems which include better safety for miners, more controlled blasts in confined areas and improved fragmentation of ore bearing rock.

BME’s reputation as a leading technical partner with specialist expertise in blast technology based on high customer service levels, will be a major benefit as the drive to increase BME’s share of the underground market gains impetus. BME’s in-house expertise, which is complemented by sophisticated computer-based tools, is welcomed by new customers who often do not have the required skills within their own workforces.

BME adds further value as a technical partner by offering mini-seminars for customers on explosives and explosives techniques. An annual conference, the only one of its kind in the local industry, enlightens customers on new developments in products and their application, while a regular technical newsletter offers customers practical information and updates.

A new training centre near Emalahleni (previously Witbank) is reinforcing in-house skills by providing BME staff with advanced training in the safe use of BME products. In due course, these facilities will be opened to customers.

Research into the development of improved explosives solutions is ongoing and has resulted in a number of innovative products and services being introduced in the South African market.

BME has been a world leader in the use of used oil in emulsion explosives and substantial progress has been made in further increasing the content of used oil.

Pumpable emulsion technology, a viable alternative to long established ammonium nitrate and fuel oil based (ANFO) explosives in underground mining, also provides innovative, safer solutions for traditional mining challenges. BME has developed lightweight small pumps for use in narrow-reef stopes coupled with easily transportable emulsion bladders for transferring emulsion into the stopes. The emulsion is only sensitized when it is pumped into the blastholes. This presents miners with significant safety benefits, particularly when they are working in confined stopes on narrow underground reefs of ore. The risks normally associated with storing and transporting ANFO explosives are avoided, as is the risk of theft.

A major research and development milestone was reached during the year with the completion of BME’s unique electronic delay detonator (EDD) project. Entirely developed by BME mining engineers, the new EDD system is currently undergoing rigorous field testing with selected customers. Results recorded by the end of the year under review were pleasing. A major customer reported that ongoing use of the EDD technology has resulted in more accurate, better controlled blasts that have produced improved fragmentation, and reduced mining costs.

A new generation of BME’s widely accepted BlastMap software is under development. The new package will further enhance the planning of effective blasts, thus producing better blast results and improved productivity and profitability for our clients.

Across the borders of South Africa, the Mining division remained active in the Namibian uranium sector. An emulsion explosives facility was commissioned in Zambia where it is strategically situated to take advantage of local requirements in a competitive market. The division also expanded its penetration of West African markets, and began looking towards Mozambique where increased activity in the mining sector is being driven by exploration of new coal deposits.

The trading environment for Protea Mining Chemicals was difficult and was compounded by start-up problems experienced at newly constructed plants of some customers. Customer projects that were delayed or suspended also impacted negatively on short-term prospects.

The re-engineering of Protea Chemicals during the year has put the business focus firmly on adding value to customers by extending the “Protea Process™” to include services. Identifying synergies between Protea Mining Chemicals and BME on key accounts, and optimising the supply chain, product applications and support to these customers will also reinforce this strategy.

Outlook

The Mining division is ideally placed to benefit from increased activity in the mining sector as it emerges from the recession. Increasing demand for key commodities such as coal, platinum and uranium will have a positive impact on sales volumes.

The burgeoning market in deep-level mining as shocktube technology is more widely adopted will also drive sales. We also expect demand to pick up following the successful testing of BME’s new generation EDDs, which will bring a host of benefits to mining customers when they become available in 2010. As the benefits, which include increased mining production and better blast controls become apparent to customers, we are confident that sales in this sector will increase significantly over the short term.

The Mining division has built relationships with major customers through its ability to provide technical advice and assistance which have differentiated the division’s service delivery from that offered by competitors.

This service, combined with our reputation for the promotion of safe practices both within the division and on customers’ sites, are regarded as the foundation for our future growth and success.