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 2011.

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 auditors’ report.

The principal policies used in the preparation of the results for the year ended 31 March 2011 are consistent with those applied for the year ended 31 March 2010, unless otherwise stated.

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

Group revenue rose 6% to R9 368 million (2010: R8 827 million) on the back of volume increases in the Mining and Agriculture divisions and overall commodity price increases, partially offset by rand strength. No CER revenue was generated this year (2010: R50 million) due to a delay in the certification of the CERs that were generated.

Gross profit increased 41% to R1 965 million (2010: R1 389 million) and rose to 21% of revenue (2010: 15,7%) due to improved gross margins in the Mining division and the avoidance of a repeat of the previous year’s R350 million abnormal downward valuation of inventory in the Agriculture division. Adjusting the previous year’s gross profit for the R350 million abnormal downward valuation of inventory, this year’s gross profit margin of 21% is a credible improvement of 1,3% on last year’s pre‑downward valuation of inventory adjusted gross profit margin of 19,7%.

Other operating income of R85 million (2010: R77 million) included an insurance claim receipt of R44 million (2010: R32 million), while other operating income of the previous year included a profit of R20 million on the transfer of businesses to our Nalco associate.

Administration overheads increased by 3% to R532 million. Included in administration expenses is share-based payment charges of R15 million (2010: R42 million) and a higher level of provision for incentive bonuses. Taking these into account, administration costs were well controlled. Distribution overheads increased by 15% to R790 million primarily due to higher volumes in the Mining and Agriculture divisions. Other expenses comprise mainly foreign exchange profits and losses on trading – a loss of R30 million (2010: R44 million profit) was incurred due to the continued strength of the rand.

Operating profit increased 146% to R687 million (2010: R279 million). After adjusting last year’s operating profit for the R350 million abnormal downward valuation of inventory, operating profit of R687 million increased 9,2% on a 6,1% rise in revenue. This was due to a substantial improvement in the operating margin in our Mining division as operating leverage kicked in, a small improvement in operating margin in our Agriculture division on the back of higher volumes and higher commodity prices, partially offset by a reduced operating margin in our Chemicals division due to a decline in gross profit while overheads were similar to the previous year. There was no contribution this year to operating profit from sale of CERs, whereas last year, sale of CERs contributed a net R43 million.

Finance cost of R122 million comprises interest paid and foreign exchange gains or losses on conversion of foreign bank balances. Finance cost reduced from R217 million to R122 million due to a reduction in debt following receipt of the net proceeds of R971 million from the rights offer that was received on 14 September 2010, lower overall cost of debt due to lower interest rates, a reduction of R29 million in the loss on conversion of foreign bank balances, partially offset by higher average working capital requirements as a result of higher commodity prices and the very late agriculture summer sales season due to the unusually late start to summer season rains in South Africa. Taxation increased to R151 million (2010: R51 million) incurring an effective tax rate of 25% (2010: 47%).

Total assets increased by 21,5% from R5 187 million to R6 304 million due to increased capex spend on the new nitric acid complex and higher levels of working capital. Property, plant and equipment increased by R643 million to R1 938 million mainly as a result of R546 million spent on the new nitric acid complex.

Inventory increased 13% from R1 315 million to R1 488 million due to higher unit costs as a result of higher commodity prices in our Agriculture division and a degree of restocking in the Agriculture division off the unusually low physical stockholding at the end of the previous year. Trade and other receivables increased 26% from R1 365 million to R1 722 million due to the very late agriculture summer sales season that resulted in a higher than normal level of Agriculture division trade debtors, late receipt of USD12 million receivable and an earlier than normal advance payment of USD22,5 million made to secure supply of product for a fertilizer tender.

Equity increased by 69% from R1 973 million to R3 338 million as a result of the net proceeds of R971 million from the rights offer received on 14 September 2010, retained current year earnings of R448 million, partially offset by a R67 million reduction in foreign currency translation reserve due to the impact of the strong rand on our US dollar denominated equity.

Cash flow utilised by operations was R109 million compared to cash generated from operations of R1 045 million in the previous year primarily due to the changes in cash flow attributable to working capital, partially offset by better cash generated through operating profits. In the previous year working capital reduced by R805 million, mainly in inventory reduction, due to lower unit costs caused by the lower commodity prices and the reduction in the physical inventory of the Agriculture division from the high levels carried over from the 2009 financial year to lower than normal levels at the end of the 2010 financial year. This year working capital increased by R755 million due to higher inventory and receivables and lower payables. Cash outflow from investing activities increased by R317 million to R783 million (2010: R466 million) due primarily to capex on the nitric acid complex. After taking into account the cash inflow from finance activities of R852 million (2010: R180 million) to which the rights offer contributed R971 million, there was a net cash outflow of R40 million (2010: R719 million inflow).

The year ended with a very strong balance sheet with net debt of R342 million (2010: R404 million) and a debt:equity ratio of 10% (2010: 20%). In looking at the net debt of R342 million, it should be borne in mind that capex expended to date on the nitric acid complex is R621 million out of the R971 million equity raised for that purpose. The balance of R350 million has been temporarily utilised to reduce short-term debt and will be utilised to fund capital expenditure on the nitric acid complex in 2012.

DIVIDEND

Given the need to preserve 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 is R1 289 million following the rights issue in September 2010.

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 2011, net of treasury shares, stood at 66 307 176 shares (2010: 46 490 987 shares), an increase of 19 816 189 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 R784 million (2010: R367 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 R17 million (2010: R18 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 new nitric acid complex is currently under construction adjacent to Omnia’s existing plant, which for some time has operated at full capacity, and will produce some 1 000 tons per day, which equates to about 140% of the existing plant’s capacity.

DIRECTORS AND SECRETARY

Details regarding the directors and secretary in office at the date of this report appear on pages 8 and 9 of the annual report.

In terms of the company’s articles of association, Mr R Havenstein, Ms HH Hickey and Mr NJ Crosse will retire at the forthcoming annual general meeting. Being eligible, they offer themselves for re-election.

Mr JJ Dique and Mr SW Mncwango were appointed as independent non-executive directors with effect from 13 August 2010. Mr DL Eggers retired as an executive director on 31 August 2010. Ms DC Radley resigned and Mr TR Scott retired as independent non-executive directors with effect from 3 December 2010. Mr JJ Dique resigned as independent non-executive director with effect from 8 February 2011. Ms D Naidoo was appointed as an independent non-executive director on 31 March 2011.

During the year, the following changes to the audit committee took place:

› Ms DC Radley stepped down as chairperson and audit committee member effective 30 September 2010.
› Ms HH Hickey was appointed chairperson on 30 September 2010.
› Mr JJ Dique was appointed a member on 30 September 2010 and resigned on 8 February 2011.
› Ms D Naidoo was appointed as a member on 22 June 2011.

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 28 to the financial statements.

SHAREHOLDER SPREAD

A summary of shareholder spread as at 31 March 2011 has been included on page 151.

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 2011.

Subsidiaries, joint ventures and associates

Details of the company’s principal subsidiaries, joint ventures and associates are set out on page 145. 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 to the financial statements.

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 in office in accordance with section 270(2) of the Companies Act, 1973.