Commentary

Performance

The Group’s performance strengthened further in the first six months of 2010 with recovery in the mining and manufacturing sectors from the 2009 economic crisis contributing significantly to the Group’s improved results. Revenue from continuing operations increased by 3% to R5 425 million (2009: R5 263 million), with further growth being curtailed by the strong rand. Overall volumes grew by about 15% for continuing operations compared to the first half of 2009. Headline earnings of R255 million (2009: R112 million) increased by 128% and profit from continuing operations improved by 48% to R484 million (2009: R328 million). Headline earnings per share increased to 238 cents (2009: 105 cents).

Headline earnings were also positively impacted by a lower interest charge. Net financing costs, after capitalising borrowing costs, were R85 million (2009: R138 million).

The Board has declared an interim cash dividend of 70 cents per ordinary share (2009: 28 cents per ordinary share in scrip or cash alternative). The dividend declaration is published in full elsewhere.

Mining services

Revenue for the period was R2 286 million, 18% up on 2009’s R1 945 million. Volumes grew by 11%, mostly due to strong growth in Botswana, Indonesia and Zambia. Profit from operations doubled to R185 million (2009: R92 million). The growth in volumes, along with product mix improvements, had a positive effect on the operating margin, which is at 8,1% (2009: 4,7%).

The Narrow Reef gold business in South Africa was impacted by shaft closures at some of AEL Mining Services’ “AEL” customers. This was offset by growth in the Platinum, Surface and Massive business sectors. The Coal business in South Africa was negatively affected by rains in the second quarter.

AEL’s businesses in the rest of Africa showed a strong recovery. This was particularly evident in diamond and copper mining in Botswana and Zambia, respectively, while the gold sector in East and West Africa remained strong. Central African projects in the DRC are in start-up phases and are gaining momentum as customers ramp up their operations.

The International business benefited from the full six months’ trading in respect of the business gained in Indonesia last year. AEL has now established itself as a viable alternative supplier to the Indonesian coal mining market, and is focusing on consolidating its position.

In line with its international footprint expansion strategy, AEL continues to explore further opportunities in Africa, Asia Pacific and South America.

R155 million (2009: R245 million) was invested in capital expenditure, with R43 million of this spent on the Initiating Systems Automation Programme “ISAP” at Modderfontein. The balance of the investment was for scheduled maintenance, support for the Indonesian business and normal plant replacement activities.

Ramp-up of ISAP is progressing well, with the auto and robotic assembly machines both in commercial production and running on a three shift cycle.

Specialty chemicals

Revenue declined by 6% to R3 039 million (2009: R3 233 million), with the strong rand depressing prices. Volumes increased by 17%. Profit from operations showed a 45% improvement to R349 million (2009: R241 million), delivering an operating margin of 11,5% (2009: 7,5%).

The recovery in mining and in certain manufacturing sectors, off the low base established in the first half of 2009, facilitated the volume growth. Continued strong performances from Crest Chemicals, Industrial Oleochemical Products and Lake International, and a solid contribution from Senmin secured pleasing results for the period.

R25 million of the Zambian-based debt, previously reported and fully provided for, was recovered.

A provision of R17 million has been made and an impairment of R4 million recognised in the period for the restructuring of Plastamid. This company was reliant on raw material from SANS Fibres in Bellville, which ceased operations in March 2009. Plastamid will be consolidated into Industrial Urethanes.

R133 million was invested in capital expenditure, with R82 million of this being spent on strategic growth projects.

No acquisitions were finalised during the period.

Property

The environment for property development remained challenging. Heartland’s performance for the half-year was underpinned by the leasing and services components of its portfolio. Consequently, operating profit declined by 36% to R29 million (2009: R45 million).

The outlook for Heartland’s industrial property development is more promising for the second half of 2010, with some interest being noted in this sector. Both the office and residential markets, however, continue to be curtailed by the lack of end-user finance.

Filling of the pipeline of land available for sale continues so as to ensure that Heartland is well placed when market conditions improve. This process is sufficiently flexible to accommodate all land uses.

Specialty fibres

SANS Technical Fibers “STF” (USA) reported an operating profit of R10 million (2009: loss of R7 million). Revenue increased by 29% to R129 million (2009: R100 million), whilst volumes grew by 59%. Operating margins were under pressure on the back of increasing raw material prices and operating costs incurred in preparing to install equipment relocated from Bellville. This capital project is progressing well and is expected to be completed ahead of schedule. The resulting additional capacity has already been sold for the remainder of 2010.

STF remains cash positive and self-sustaining.

Financial

As the Group’s strategic growth capital programme nears completion, expenditure reduced to R305 million in the period (2009: R675 million). It is anticipated that total expenditure for the year will be approximately R650 million.

Net working capital increased by R265 million to 18,7% of gross revenue (2009: 17,2%). In 2009, working capital reduced following the closure of SANS Fibres. The increase in working capital is also attributable to a longer supply chain in respect of sales to geographies outside of South Africa.

Borrowings increased by R178 million to R2 321 million, from R2 143 million at December 2009, and the increase is due largely to the movement in working capital. Cash interest cover improved to 4,8 times (2009: 2,8 times) as a result of improved profitability. Gearing was 54% of shareholders’ funds, in line with December 2009’s position of 53%.

Corporate restructuring

In April, the Board announced a restructuring of the Group. This process included the integration of the AECI and Chemical Services executive teams into a single management structure, and the consolidation of the two head offices. The objective of the consolidation was to support delivery of AECI’s strategic growth strategy, and to enhance risk management, financial controls, transparency and decision-making timeframes throughout the Group.

Board changes

Mr FPP (Frank) Baker retired on 31 March 2010. The Board thanks Frank for his contribution to the Group over 34 years.

Mr AJ (Allen) Morgan and Advocate R (Rams) Ramashia were appointed to the Board as non-executive directors with effect from 1 July 2010.

Outlook and strategic focus

The Group delivered pleasing results for the half-year, on the back of a solid recovery in global resources markets. This recovery had a positive impact on market volumes and on commodity prices and was of substantial benefit to the Group. However, the strong rand remains a challenge for AECI’s mining and manufacturing customers, and hence could impact profitability across all its businesses in the next six months.

Recent global reports highlight the potential for a financial slow-down, and AECI does not expect to see the same level of volume improvement in the second half-year as it did in the first half. However, the Group expects to achieve continued benefit from the ramp-up of its capital projects in the second half of the year, although it will be affected by deterioration in the macroeconomic environment should this materialise. The results for the six months to 30 June 2010 are indicative of a new base level of performance for AECI and, provided economic conditions do not change significantly, AECI expects a gradual but sustained improvement in performance as its growth projects come fully on-line over the next six to twelve months.

Woodmead, Sandton
27 July 2010