Group managing director’s report

In the aftermath of the global financial crisis, in the previous year we posted disappointing profits of R58 million. It is pleasing that we generated normalised earnings this year, ending the period with profit of R451 million.

The environment in which these earnings were achieved was extremely challenging as both the Group and our customers were pressured by the continued strength of the rand. This was especially evident in our Chemicals division, where the impact of the stronger rand and stagnant volumes were acute. The manufacturing and industrial sector of our country has not yet recovered from the global financial crisis, evident in the South Africa Manufacturing Index – during calendar 2010, year-on-year growth in manufacturing activity was 4,9% against the year-on-year decline of 12,9% in calendar 2009.

In line with the move to an integrated annual report, I will focus on operational issues as the chairman focused on strategic issues. The Group finance director will focus on financial issues.

Chemicals

The sales environment for our products has been extremely challenging, and the division performed well by maintaining volumes. The cost structures of the Chemicals division were critically examined during the year and improvements are being implemented which will result in a lower operational cost per ton going forward. This exercise is not yet complete and will be continued into the next year.

The outlook for increased chemical sales next year is steadily improving as the manufacturing industry of South Africa is by all indications steadily improving, albeit slowly. The deflation in selling prices experienced over the past two years has ceased, and US dollar prices for chemicals are increasing as the rand:US dollar exchange rate appears to be stabilising. This will provide the platform for a greatly improved performance from the Chemicals division next year.

Mining

As discussed in the chairman’s report, the mining sector has recovered substantially and sooner than expected after the global financial crisis. As a result, the environment in which our Mining division operates is booming.

Locally, concern and uncertainty on the nationalisation of mines is affecting the possible growth in mining. As mentioned by our chairman, comments on nationalising the mining industry, together with growing debate on regulating the industry and complex laws on mining rights, have led to reduced interest by multinational companies in South Africa. This could hamper the South African mining industry, resulting in job losses and lost export revenue. Fortunately, our Mining division has diversified exposure to many mineral types across a broad geographic spread throughout southern and West Africa, which will reduce the risk of local factors negatively impacting the business.

The steady recovery of the global economy, together with continuing infrastructural developments in China and India, has resulted in growing demand for metals and minerals. Demand is being driven by exponential growth in the world’s population, which is expected to rise from 6,8 billion people in 2010 to an estimated 9 billion by 2050. In addition, demand for energy products such as coal and uranium is increasing. The possible effects of the Japanese nuclear crisis on growth in uranium mining remain to be seen. The alternative of coal-fired power stations is beset by environmental concerns.

In South Africa, coal mining is being driven by the construction of two coal-fired power stations. The Mozambique coalfields are being developed. However, that country’s infrastructure will require upgrading and modernisation if it is to benefit from the opportunity.

During recent years, BME has addressed deficiencies in its overall product offering. Traditionally the business has been weak in terms of the correct mix of products supplied to the underground mining sector. However, following the start-up last year of the shocktube (an advanced initiation product) plant, the market has welcomed the product and sales are steadily increasing.

In addition to the shocktube product offering, BME has invested in research and development on a new generation of electronic detonators. The product is user-friendly, accurate and greatly assists in reducing mining costs. Product sales are expected to increase in the next year.

BME has made substantial progress with research into the increased use of old oil in its production processes. This has improved product margins, and provides an important environmental outlet for used oil.

Protea Mining Chemicals achieved higher volumes but lower selling prices, resulting in a marginal increase in profit. Anticipated growth continues to be affected by delays in a number of customers’ expansion projects, especially those in the uranium industry.

Agriculture

The year was one of fundamental changes in the southern Africa fertilizer industry, with two major suppliers exiting the retail arena.

Sasol Nitro, following a settlement with the Competition Commission, agreed to not participate in the retail fertilizer market, although it will remain active in the wholesale market and continue with fertilizer production. Yara, the world’s leading nitrogen fertilizer producer, sold its interests after downscaling its operations in southern Africa.

These changes have provided a major opportunity to the remaining fertilizer companies. Omnia Fertilizer reacted immediately and has successfully sold larger volumes into the marketplace. This increase would have been more substantial if not for the contraction of the fertilizer markets, in turn a result of the overhang of surplus agriculture products.

Using its own internally developed technologies, Omnia Fertilizer is steadily increasing its production of nitrophosphate which replaces some of the more expensive raw materials being used. Due to increased offtake by our Mining division of our ammonium nitrate production, there is a growing shortage of ammonium nitrate available to the Agriculture division which is filled by purchasing more expensive nitrates from third parties and which is, as expected, affecting margins. It is for this reason that we have started construction of a new nitric acid complex.

The nitric acid complex has a capacity of 1 000 tons per day of nitric acid. This will supplement the current plant capacity of 700 tons, which will continue to operate. This bodes well for the future as historically we have been forced to purchase expensive nitrates to meet demand for our mining and agricultural products. Much of the supply from our own-produced nitrates has been diverted from Omnia Fertilizer to BME, resulting in pressure on the Agriculture division’s profit margins. Once the new nitric acid complex addresses the growing nitrate shortages, these profit margins should be restored to a normalised level. Market demand is exceeding our expectations and the plant is expected to start up at over the original projected 60% capacity utilisation.

No carbon credits were sold during the year. Although credits were generated at the expected level, the issue of the audited CER certificate was delayed by a revision request from the UN body. The CER credits will be sold during the next year.

Charges of collusion brought against Omnia Fertilizer by the Competition Commission, noted in prior annual reports, have been dismissed in a judgement handed down by the Competition Appeal Court. The Competition Commission has lodged an application with the Competition Appeal Court for leave to appeal against the judgement. The case has led to a greater understanding of the many nuances of competition law. We have for many years conducted mandatory competition compliance training which all relevant staff are required to undergo annually. All staff members are also required to annually declare that they are abiding by the Competition Act.

Global agriculture produce prices remain buoyant, reflecting the shortages in global grain stocks. Although South Africa currently has a grain stock surplus, resulting in export parity pricing, pricing is sufficiently positive and will encourage farmers to plant at current or slightly increased levels during the coming season. With the drawdown of nutrients from the soil being high as a result of increased yields and nutrient leaching from extensive rainfall, demand for fertilizer is expected to be greater than in the previous season. Omnia Fertilizer will seek to continue improving its market position following the withdrawal of Sasol Nitro and Yara from the retail market.

Investing in sustainable growth

We aim to reduce and optimise the energy consumed by our various operations. A number of projects have been introduced to achieve our short-term goal of a 10% reduction in energy consumption. In the longer term, however, the announced and anticipated increases in electricity tariffs are expected to be well above inflation, with the corresponding negative impact on expenses. The new nitric acid complex design has taken energy efficiency into account – the complex will be completely self-sufficient in its electricity requirements, and supply a substantial portion of electricity to the remaining Sasolburg plants.

In recent years, we have conducted extensive reviews of our business processes and practices to improve customer service, drive operational excellence and lower the cost of doing business. These reviews have led us to implement a number of IT solutions including new ERP software called QAD, demand/supply forecasting, transport management and a corporate performance/business intelligence tool, all designed to revolutionise the way we conduct our business. These IT solutions have been implemented in our Chemicals and Mining divisions, and have shown potential to improve both our competitive advantage and our levels of customer service. Implementation in the Agriculture division has begun.

We have always regarded transformation as fundamental to the sustainability of our business. The availability of suitably qualified black individuals remains a challenge to our Group, although we have recruited a number of talented individuals who, as they gain experience, will undoubtedly add value to our Group. In addition, we have contributed to the field of maths and science education by providing bursaries for tertiary education and have used our knowledge in agriculture to assist developing farmers to become proficient and sustainable.

This year, we were rated by National Empowerment Rating Agency (NERA) at a Level 4 rating based on the financial results of the 2010 financial year.

Safety

It is with great sadness and regret that I report on a tragic incident in our Mining division when an explosion at its cartridge manufacturing plant resulted in the deaths of three employees. This incident is the first of its kind in 25 years of operating our explosives business. Before this, the cartridge manufacturing plant had operated successfully without incident since it was commissioned 15 years ago. The incident was reported to the Department of Labour and various other authorities, who are investigating the incident. The cause will not be known for some time. May Jacob Thekiso, Dikgang Khasu and Zane (Ariel) Phajane rest in peace. We will not forget you.

Appreciation

I again extend my sincere thanks to my colleagues on the Board, and to my management team, who have assisted and supported the Board during the year.

RB Humphris
Group managing director