Chairman’s letter to shareholders

AECI implemented a number of strategic initiatives in 2007. the Group is focused on growing its core businesses of providing specialty product and service solutions to customers in the manufacturing and mining sectors, supported by a substantial land holding. In line with this focus, the Dulux decorative coatings business was disposed of in the year and the process of exiting the unprofitable segments of the SANS Fibres (Pty) Limited (SANS) business commenced. At the same time, the Group is investing substantial sums in its future growth.

Construction is in progress on four significant projects related to the mining sector and two in consumer chemicals. The capital expenditure on these projects will be approximately R1.4 billion in total, most of which will be spent in 2008. The cash generated in the business and a strong balance sheet mean that these projects can be financed without additional borrowing facilities. The Board has declared a final dividend for the year of 141 cents per share (2006: 141 cents). In addition, following the receipt of R745 million from the sale of Dulux, the Board has announced a share repurchase programme and will seek further authority to repurchase shares at the forthcoming annual general meeting.

trAdInG PErForMAnCE

Growth in the mining sector, particularly platinum, and a strong South African economy supported demand for the Group's products in 2007. However, gross margins were under pressure for most of the year with high oil prices impacting on oil-based raw material costs. The Group's results were also affected by lower detonator volumes as some market share was lost to competitors. These factors, and delays in operating new equipment to design capacity, resulted in trading profit from continuing operations of the Group being lower than in 2006.

Unlike in 2006, there was no large property deal to boost the Group's results in 2007, but much detailed sales preparation work was carried out and good progress made in further communicating the value of the property portfolio to investors.

Chemical Services Limited (Chemserve) continued to grow at a fast pace although, with increased raw materials costs due to high oil prices, the rate of growth in the second half of the year was slower than in the first half. Trading profit was up by 13 per cent compared with the previous year with the mining chemicals and consumer-driven sectors showing substantial growth. R670 million has been budgeted in 2008 for capital projects to meet additional demand in these sectors, particularly mining chemicals. The projects are due for commissioning from early 2009. Chemserve's joint venture in Brazil has bedded down well and provides the base for further opportunities in the region. Chemserve continues to review a number of bolt-on acquisition targets.

African Explosives Limited (AEL) faced intense competition from local and Chinese-sourced shocktube initiators in the South African narrow reef market and lost some market share. Results were also adversely affected by delays in reaching design capacity in the new production facility at Modderfontein. Known as the "Factory of the Future", this facility will be completed by 2010. It will entrench AEL's position as a world-leading supplier of cost-effective quality and safety-enhanced explosives and initiating systems through automation and re-engineering. In the interim, and so as to meet customer demand, some of the old facilities were kept in operation in 2007. Effectively, this resulted in a duplication of some operating costs to meet demand. In other areas, AEL performed well and achieved growth in surface operations and key African countries as well as establishing a foothold in Indonesia. Trading profit for the year was down by some 37 per cent. The key for AEL is to complete and successfully commission its capital programme, thereby lowering costs significantly and restoring initiating systems margins.

The property portfolio, managed by Heartland, delivered lower sales than the previous year but still contributed R75 million of trading profit, after R83 million of remediation costs. The vast land holdings that the Group owns at Modderfontein and Somerset West are very valuable assets, not only because of their proximity to the largest urban centres in South Africa, but also because of the Company's ability to control their development. Carefully planned, balanced mixed use development can take place and the value of the land will be maintained by releasing supply to the market at appropriate times.

In line with AECI's remediation strategy whereby projects are prioritised to ensure legal compliance and to facilitate eventual land re-use, the Group invested R83 million in environmental improvements at Modderfontein, Somerset West and Umbogintwini.

After failing to find a partner or purchaser for the SANS business as a whole, the decision was taken to exit the nylon high decitex industrial (HDI), the polyester HDI and the polyester light decitex industrial (LDI) yarn manufacturing businesses by the end of December 2007. The polyester businesses have not been profitable for some time, owing largely to competition from the Far East and the continued strength of the rand. The situation was aggravated by the closure of a large nylon HDI customer in South Africa. The nylon LDI and the polyethylene terephthalate (PET) plants will continue to operate normally whilst discussions with potential partners or purchasers for these businesses are pursued.

InVEstInG In GrowtH

2007 was a year in which the Group concentrated on refocusing and building a platform for growth. The same trend will continue in 2008. Mining is a key focus for the future development of the Group, with Chemserve and AEL having long-established positions in South Africa and other countries in Africa. In support of this drive, AECI invested R373 million in new projects in 2007 and will be investing over R1 billion in capital projects in 2008. R370 million is planned for AEL, mainly for bedding down the first phase of the "Factory of the Future" and then doubling capacity, but also for mobile manufacturing plant for some of the new surface contracts that have been won. R670 million has been budgeted for Chemserve projects, mainly at Senmin in Sasolburg, where capacity is being expanded to meet the growing demand for mining chemicals. R75 million is also included for a new sulphonation plant to supply the thriving consumer-related chemical products sector, and R80 million for a fractionation column in Brazil.

More detail on the operational performance of Group businesses is included in the review of operations section of this annual report.

In 2008, AECI's challenges will be to deliver its capital projects on time and within budget, and to bring further to account the value of the property portfolio. Transformation also remains high on the agenda. In line with the Group's desire to see real and sustainable change, management is investigating a broad-based black empowerment initiative in addition to the ownership structures that are already in place in AEL and Chemserve's ImproChem.

dIrECtorAtE

A number of changes to the Board took place in the year. Alan Pedder retired as chairman in May and Colin Brayshaw stepped down at the same time after many years of service. I would like to thank them both for their exceptional contribution over a combined period of almost 25 years. In their place we appointed André Parker and Zellah Fuphe. André is the recently retired managing director of SABMiller Africa & Asia (Pty) Limited and served on the executive committee of SABMiller plc. He has extensive experience in establishing, consolidating and growing wholly-owned businesses and joint ventures internationally and in developing countries in particular. Zellah is managing director of Worldwide African Investment Holdings ("Worldwide"). She is responsible for driving that group's strategy and investment opportunities in sub-Saharan Africa. Under her leadership, Worldwide has restructured into the only South African black-owned and managed investment holding company focusing exclusively on the broader energy sector. I welcome them and look forward to their input to the Board.

Schalk Engelbrecht retires in March 2008 after five years as chief executive and 28 years with the Group. We will miss his energy, clear thinking and leadership skills and I thank him for his valuable input to the Group and the Company over many years. He will remain on the Board as a non-executive director. Schalk is being succeeded by Graham Edwards with effect from 1 March 2008. Graham joined AEL in 1978 and was that company's managing director from 1999 until February 2008. He has also been an executive Board member of AECI, a non-executive director of Chemserve and chairman of the DetNet joint venture.

We also said farewell to Neale Axelson who retired in August. Neale was with the Group for 35 years and his dedication and valuable contribution are much appreciated. He was succeeded as chief financial officer and as an AECI executive director by Roger Williams who joined us after 10 years' involvement in African mining and international equity markets.

Martin Potgieter, Company secretary for 20 of his 26 years' service, retired owing to ill health in April. The Board thanks him for his valuable contribution to the Company over his long career.

Alma Kennedy was appointed Group legal advisor and Company secretary following Martin's retirement. Prior to her AECI appointment, Alma had gained local and international experience at a global mining company across a broad spectrum of disciplines including legal and company secretarial, corporate governance, mining law, mergers and acquisitions and corporate communications.

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. Health and safety are the first item on the agendas of management meetings of the Group businesses and AECI's executive committee. Community involvement and support are guided and monitored by the Board's corporate citizenship sub-committee.

The Group adheres to best practices in corporate governance. In line with this, new procedures and several other improvements were put in place during the year to enhance existing Board sub-committees.

oUtlooK

The trading outlook in 2008 appears to be reasonably tough with high oil prices, a higher interest rate environment, a weaker rand and uncertainty regarding power supply in South Africa. A weaker rand puts immediate pressure on our import bill but assists with exports. Inflationary pressures are evident in many countries. Therefore, pressure on margins will continue and hence AECI's continued focus on containing operating costs. We will seek to recover increased input costs in the market where we can. The Group will also have to contend with the impact of the country's ongoing skills shortage and an unacceptable, debilitating national environment of violent crime.

In view of the energy crisis facing South Africa, we are researching a co-generation project which will use natural gas to supply steam to our plants as well as generate electricity. The project could involve capital of over R200 million.

AECI is well positioned and well funded to grow both organically and by acquisition. 2008 should see improved results compared with 2007, particularly from Chemserve and Heartland. Beyond 2008, the benefits of capital investments are expected to start delivering significantly improved results in 2009 and 2010.

In conclusion, I would like to thank all our stakeholders: shareholders, employees and business partners, for their continued support. I would also like to express my appreciation to the Group's management for their efforts under sometimes difficult circumstances and to my colleagues on the Board for their wise counsel.

Fani Titi
Chairman

Sandton, 25 February 2008