CHAIRMAN'S LETTER TO SHAREHOLDERS

I am pleased to report that, after a very challenging year, the AECI Group as a whole achieved satisfactory financial results in 2009. Our customers in the core business sectors of mining and manufacturing experienced an extremely turbulent trading environment.

Most sectors in the mining industry experienced a significant downturn in activity. In the first half of the year some mines in South Africa and the rest of the continent reduced production or, in some cases, suspended their operations. It was only in the latter part of 2009 that the mining sector improved, as did commodity prices.

Demand from the manufacturing sector in South Africa declined by 13% overall, owing to the global economic crisis and exacerbated by a strong R/US$ exchange rate which had a negative effect on the country's exports.

Notwithstanding these challenging trading conditions AECI's management, with the Board's support, maintained its focus on completing the strategic capital programme embarked on since 2007. I am pleased to report that all the strategic investments in Chemical Services Limited (Chemserve), as well as AEL Mining Services' (AEL's) Initiating Systems Automation Programme (ISAP), were mechanically complete by the end of the year. Furthermore, cash management was excellent and delivered more than R1 billion in cash by reducing working capital.

TRADING PERFORMANCE

The effects of the global economic crisis and the strong rand/US$ currency exchange rate, in particular, had a severe effect on AECI's sales volumes and results.

Furthermore, the Group's performance was adversely impacted by the following:

• inventory and foreign exchange revaluations of R125 million, primarily in the first half-year;
• restructuring costs of R51 million;
• the effects of a major bad debt of R163 million in respect of sulphur sales to the mining industry in the Zambian copper belt region; and
• a depressed property development market as demand fell away due to the recession and credit approvals by banks became tighter as a consequence of the banking crisis. Also, Heartland experienced some cancellations of and defaults on prior sales.

Revenue from continuing operations, at R10,7 billion, was 16,8% lower than that achieved in the prior year. Headline earnings were R370 million, 16% lower than the previous year and headline earnings per share of 346 cents were achieved.

AEL

AEL delivered improved results, particularly noteworthy if viewed in the context of the poor start to the year by its mining customers. Revenue was unchanged at R4,1 billion as lower ammonia prices and a stronger R/US$ exchange rate offset other cost-driven price increases. Profit from operations increased by 20% to R298 million and an improved profit margin of 7,3% was achieved.

The margin improvement is attributable to restructuring of the business, a change in product mix and a shift in focus from merely supplying products to offering customers a performance-enhancing services package. The continued conversion in initiating systems from capped fuse to shocktube technology also contributed to the improvement. An additional 18 million holes a year were switched to the safer shocktube system. By year-end 85% of the conversion programme had been completed, with the balance planned for 2010.

In the South African business, the slow decline in narrow reef mining was offset by the coal sector's growth. Long-term contract renewals for industrial ammonium nitrate sales to non-mining and construction customers lifted prices off a very low base.

The Africa business was negatively affected by the stronger rand and by depressed diamond and copper markets in the first half of the year. Better than expected sales in surface gold and a recovery in the copper markets in Central Africa assisted in offsetting this.

The International business gained pleasing momentum with AEL being awarded four coal on-mine full service tenders in Indonesia. The necessary plant was deployed quickly and efficiently and all start-up targets were met. Additional sales channel partnerships were developed in Europe and South America. AEL's technology and know-how will impact positively on revenue going forward as the international strategy evolves.

The DetNet joint venture's products have proved to be reliable, effective and highly competitive globally. However, the downturn in the US construction sector and in the African diamond and platinum sectors had a serious negative impact on the operation's performance for the year.

With ISAP mechanically complete, the focus in 2010 will be on ramp-up and the completion of peripherals. By end-2009, the plant had already produced more than 65 million detonators and more than 280 million metres of tubing.

AEL invested R439 million in capital projects in the year. R170 million was spent on ISAP, with the balance for the start-up of bulk sites in Indonesia, further support for African mining projects and various replacement-type projects.

CHEMSERVE

Chemserve's results were negatively affected by the recession and the resultant, sharp decline in volumes. Most of Chemserve's customers operate in the mining, manufacturing and automotive sectors where the effects of the crisis were most evident. Revenue declined by 23% to R6,5 billion and profit from operations was 43% lower at R483 million. It is management's view that the automotive sector will take much longer to recover than other sectors and therefore Duco Speciality Coatings and Plastamid, which serve the automotive market, were restructured.

On the positive side Chemserve Perlite, Crest Chemicals, Industrial Oleochemical Products, Lake International and Specialty Minerals SA achieved excellent results and Senmin demonstrated good resilience against the downturn notwithstanding the slowdown in platinum mining in the first half-year.

Strong cash management in a declining revenue environment generated over R1 billion in cash, through reductions in working capital.

The capital expansion programme neared completion. R801 million was invested in capital expenditure, with R567 million of this being spent on the strategic growth projects.

Two acquisitions and the repurchase of TISO Capital's 25,1% shareholding in ImproChem were concluded during the year at a total cost of R96 million. Both acquisitions, namely Cobito and CH Chemicals, were integrated into existing Chemserve businesses and their performances exceeded expectations.

Chemserve's challenging year was exacerbated by a bad debt in Chemical Initiatives. The full impact of this debt was R163 million. Management has fully appreciated the seriousness of the write-off and has implemented the necessary risk management measures to prevent a similar occurrence in future.

HEARTLAND

Heartland manages the Group's property portfolio. The property market remained severely depressed. Furthermore, Heartland reversed R104 million in revenue and R52 million in operating profit recognised in 2008.

The reversals were as a result of defaults on deals resulting from banks becoming far more stringent in granting credit to their property development clients, exacerbated by adverse trading conditions in the property market.

As a consequence, Heartland's operating performance was sustained primarily by the leasing and services segments. Operating results, net of environmental management costs, declined by 27% to R33 million. Environmental management expenditure was R13 million.

The business continued preparing land for sale and investing in infrastructure so as to be optimally placed once the market recovers from its current depressed position. R86 million was invested in bulk infrastructure in the year and 57 hectares of land are ready for sale.

SANS TECHNICAL FIBERS

SANS Technical Fibers (STF), based in North Carolina in the USA, had a challenging start to the year as the global automotive market deteriorated sharply. The business relies primarily on the US automotive industry, and incurred a loss from operations in the first six months. However, STF repositioned itself and developed export markets in Asia and Europe, thereby limiting its volume decline. Revenue declined by 25% to US$27 million and an operating profit of US$1,1 million was delivered for the year.

The company spent US$1,4 million on capital projects while a further US$3 million has been approved for the installation of plant transferred from SANS Fibres' Bellville site, subsequent to the latter's closure. The business remained cash positive and generated cash through the liquidation of working capital. It is AECI's intention to optimise and grow the business going forward.

DISCONTINUED OPERATION:
SANS FIBRES

SANS Fibres' operations in Bellville in the Western Cape ceased in March 2009. All the working capital has been liquidated and the remaining plant and equipment not transferred to the US has been sold. 60% of the site has already been sold to a Cape Town-based developer.

REVIEW OF 2009'S FOCUS AREAS

In my letter to shareholders last year, I indicated that the Board had requested AECI's management to focus on some key areas to steer the Company through the economic crisis. Specifically, progress in the year under review in this regard was as follows:

CONTROL WORKING CAPITAL AGGRESSIVELY

The Company reduced its net working capital ratio to sales in all businesses, with each business having been given set cash targets. The success achieved was due to a concerted effort by all members of management and specific mention must be made of the Chemserve team which delivered more than a R1 billion in cash from the reduction in the business' working capital.

PROGRESS KEY PROJECTS, WHILE CAREFULLY REVIEWING ALL OTHER CAPITAL EXPENDITURE

During the year, management reduced its capital budget by R250 million by delaying some replacement and less urgent capital expenditure projects. Of the R1,2 billion spent on capital expenditure, R738 million was invested in the strategic capital programme.

The following Chemserve plants were commissioned:

• the second (and final) xanthate reactor, at Senmin;
• a sulphonation plant for Akulu Marchon;
• Senmin's carbon disulphide plant;
• an oleochemical plant at Resitec.

The polyacrylamide plant at Senmin was mechanically complete by the end of 2009 and is being commissioned. Benefits have already been derived from projects that were brought on line in the year and, in 2010, the focus will be on ramping-up these plants to specified capacities.

AEL's ISAP plant is also mechanically complete and ramp-up will continue in 2010 as ancillary equipment is installed.

APPLY COST LEADERSHIP PRINCIPLES

Where necessary, areas of the business were restructured and, regrettably, this resulted in some retrenchments. Wherever possible, staff were redeployed into other areas. R51 million was spent on restructuring. The Group Office was also restructured across all levels of employees.

MAINTAIN MARKET SHARE AND MARGINS THROUGH CONTINUED EXCELLENT SERVICE

It was most pleasing that Chemserve maintained its market share through the crisis. Although the business' margins were depressed in the first six months, performance in the second half was more in line with that of previous years.

Chemserve's full service model has been replicated by AEL in certain areas of the latter's business. AEL grew market share thanks to its international expansion which included the award of a 50% supply tender from the largest thermal coal miner in the world, based in Indonesia. AEL deployed the necessary plant and equipment for this large contract successfully and all start-up targets were met. The entire project was completed in less than three months, considered to be a world first!

DIRECTORATE

At the end of 2009 André Parker, who served on the AECI Board for two years in the capacity of non-executive director, resigned. I would like to thank André for his contribution over that time. Another non-executive director is being sought.

Frank Baker, managing director of the Chemical Services group since 2003, will retire from this position on 31 March 2010 after a 34-year career with the AECI Group. At the same time, he will also retire as an executive director of AECI Limited, having served on the Board in this capacity since 2007. My fellow directors join me in thanking him for his contribution to the affairs of the Company and the Board over many years.

Mark Dytor, an executive director of Chemserve, has been appointed acting managing director of this company.

ETHICS AND GOVERNANCE

AECI remains committed to maintaining its high standards of corporate citizenship, a high level of ethics and integrity, and proactive management of corporate responsibility issues. Safety, health, and environmental issues are the first item on the agenda of management meetings of every business and of AECI's Executive Committee. Community awareness and support are guided and monitored by the Corporate Citizenship Committee of the Board.

The Group adheres to best practices in corporate governance. The Board has formed a separate Risk Committee which will be active from 2010. Previously, the Risk Committee formed part of the Group's Audit and Risk Committee.

The requirements of the third King Report on Governance for South Africa, 2009, will be implemented during 2010 and the Group will report accordingly from 2011.

BBBEE TRANSACTION

The Group intended to embark on a BBBEE transaction involving employees and communities through structured trusts in 2009. This transaction was put on hold due to economic uncertainties. AECI will review its position in this regard towards the end of 2010.

Management has nonetheless made progress on BBBEE matters on other fronts, with each business having been set specific targets for achievement in specified time frames.

OUTLOOK AND STRATEGIC FOCUS

The slow turnaround in manufacturing and continued recovery in the mining sector should assist in improving volumes in 2010. However, a strong local currency could pressurise margins and dampen this improvement.

Delivery and consolidation will be the focus in the next financial year. Specifically, the Group will aim to:

• ramp-up strategic capital projects;
• grow volumes to support the delivery of these projects;
• maintain working capital ratios in a range between 16% and 18%, thus preserving cash;
• enhance its sales focus on opportunities outside South Africa; and
• curtail business risks in a volatile trading environment.

The successful execution of the above should facilitate the delivery of an improved financial performance in 2010.

I would like to thank all our shareholders, employees, business partners and other stakeholders for their continued support. I would also like to express my appreciation to AECI's management for their sustained efforts and to my colleagues on the Board for their wise counsel.

Fani Titi

Chairman
Woodmead, Sandton

30 March 2010