Chairman’s Report 2009

Overview

Delta EMD’s underlying performance remained strong notwithstanding the global economic crisis and reduced global demand for electrolytic manganese dioxide. The Group’s strengthened management team successfully managed the EMD business in more difficult market conditions, initiated significant operational improvements and charted a strategic course for further improvement and development of the business.

2009 Results

Revenue at the Group’s South African plant recorded an 18% improvement over 2008, with improved selling prices more than offsetting marginally lower sales volumes. With sales from the Group’s former Australian operation concluding during 2008, the Group’s total revenue reduced from R648.5 million to R478.1 million, a 26% reduction.

2009 operating profit benefited substantially from the reversal of R81.7 million of rehabilitation provisions previously established for the Group’s Australian plant and disposal sites (2008:R28.9 million charge), as well as from the reversal of impairment provisions of R7.2 million related to those sites (2008:R4.0 million charge). Including those provision adjustments, 2009 operating profit improved to R218.1 million (2008:R104.0 million). Excluding those provision adjustments, 2009 operating profit totalled R129.2 million, down from 2008 operating profit of R136.9 million, which benefitd from the sale of remaining Australian inventory.

Net interest received of R17.1 million ended lower than the R22.2 million received in 2008, because of lower interest rates and reduced cash balances.

Profit before taxation of R235.2 million was recorded for the year compared with R126.2 million in 2008. Excluding the provision adjustments noted above, profit before taxation for the year totaled R146.3 million (2008: R159.1 million).

The 2009 taxation charge of R67.5 million (2008: R36.8 million) included Secondary Taxation on Companies of R24.6 million (2008: R5.2 million) relating to the R245.6 million of special dividends paid during the year.

Profit after taxation for the year totaled R167.7 million (2008:R89.4 million), and earnings per share improved to 341.6 cents (2008: 182.6 cents), whilst headline earnings per share improved to 323.6 cents (2009: 184.5 cents).

2009 cash inflow from operating activities improved to R238.3 million (2008: R168.3 million). The collection of Australian trade debtors and of a substantial account that was outstanding at year end 2008, changes in terms of sale, and planned reductions in stock levels contributed to the favorable cash flow for the year.

Cash balances at year end totaled R216.8 million, after having paid R245.6 million of special dividends and R24.6 million of Secondary Taxation on Companies.

Following the Group’s 2005 disposal of its industrial services businesses, a Group subsidiary company discontinued business and filed final tax returns. A tax assessment received by the subsidiary company during 2007 resulted in a tax refund as reported in the Group’s 2007 accounts. Thereafter the subsidiary company satisfied its outstanding liabilities and distributed its assets. A revised assessment of R27.2 million was recently issued by SARS for additional capital gains taxation in respect of the 2005 disposal. An objection to the revised assessment has been filed, and no provision has been raised for this revised assessment in the 2009 year end results.

Performance and Prospects for the EMD Business

2009 was a very good year for the Delta EMD business: a substantially strengthened senior management team relocated to the Delta EMD facility in Nelspruit, significant operational improvements were initiated, overhead costs were reduced, and financial performance remained strong notwithstanding reduced volumes sold.

Global demand for electrolytic manganese dioxide reduced during the year as consumer demand for batteries weakened with the global recession. Sales volumes did not meet expectations and production at the Group’s South African plant was limited substantially to reduce stocks to desired levels. The global market nonetheless remained well balanced and selling prices afforded the margins necessary to compensate for the underrecovery of overheads and to provide an acceptable return.

The majority of the Group’s sales during the year were made in Rand denominated selling prices, effectively protecting the Group’s margins from foreign exchange movements. This marks an important change from historic practice and assures more certain financial performance. The strengthening of the Rand during the year did, however, reduce the competitiveness of the Group’s selling prices.

The Group’s product range and stocks were rationalised during the year to reduce stock levels and to assure more responsive delivery to key customers. Our terms of sale also were changed to provide that ownership of goods transfers at the port of loading, also reducing the Group’s stock levels. These efforts together with effective collection of outstanding debtors provided reduced working capital levels and very good cash flow.

The operational improvements underway at the Nelspruit facility will provide further efficiencies and cost savings as well, perhaps more importantly, the opportunity to participate in market segments requiring higher performance EMD. Production trials of EMD suitable for higher drain applications were successful during the year, and a substantial volume of lithium EMD was produced and sold for use in specialised batteries. These developments highlight the opportunities for development of the EMD business.

The Group expects the global EMD market to strengthen somewhat during the year as global economic conditions improve. Nonetheless, we do not expect to sell sufficient volumes during 2010 to fully utilise our plant, and consequently will continue to suffer from poor overhead recoveries. Pricing pressure is likely to continue whilst market demand is relatively soft, and our price competitiveness will be partly shaped by foreign exchange rates and the Rand, which remains relatively strong. Nonetheless we remain confident in our competitive advantages -favourable ore supply arrangements and relatively low conversion cost – and expect improved market demand and participation in new market segments to provide attractive prospects over the medium term.

Disposal of the Group’s Australian Plant and Residue

Disposal Sites

An environmental assessment was concluded successfully during the year at the Group’s former Australian plant site, and a site audit statement confirming that the site is suitable for commercial and industrial uses without further remediation or rehabilitation was issued. This statement will facilitate the sale of the site, and a demolition contractor has been contracted to demolish the structures remaining on the site. Earlier efforts to sell the site with those structures proved unsuccessful, and the site will now be marketed as a vacant site.

An amendment to the environmental license governing the rehabilitation of the Kooragang Island residue disposal site was agreed with regulatory authorities during the year and allows a more cost effective rehabilitation of the site. Negotiations toward the sale of the Kooragang Island site are underway.

The net asset value of the Australian assets reflected on the Group’s balance sheet at year end totalled R34.7 million, and included creditors of R6.9 million, Australian cash balances totalling R77.0 million, and provisions for the closure and rehabilitation of the Group’s Australian sites totalling R51.4 million. During the year, R14.7 million of costs were incurred managing the site, net of gains realised on the sale of sundry assets. At year end 5 employees and contractors were employed at the site overseeing security and the disposal of remaining assets.

Planned Disposal of the Delta EMD Business

Shareholders were advised by a cautionary announcement dated 18 January 2010 that the Group had commenced a process intended to realise shareholder value through a disposal of the Delta EMD business, the Group’s last remaining operation. The board decided upon this course of action having concluded the following. Firstly, that the Group’s substantially improved financial performance had not provided appropriate additional shareholder value, most likely because the Group remains a relatively small listed company with essentially no broker or analyst coverage, and with poor liquidity and tradability of its shares. And secondly, that the Delta EMD business does not benefit from ownership through a publicly listed Group, nor does it enjoy the benefits of private ownership or of being part of a larger Group with related businesses.

The disposal process is now well underway with considerable interest indicated in the Delta EMD business. The board does not expect the disposal process to conclude until the second half of the year, and will advise shareholders appropriately during the process.

Sustainability

As reported in the Sustainability Report on page 14, the Group continues to make progress with respect to employment equity and skills development, as well as improve its occupational health, safety and environmental policies and practices.

Corporate Governance

The Group continues to endorse the requirements of King II on Corporate Governance. As explained in the report of Corporate Practices and Conduct on pages 11 through 13, the Group complies with the King II Report on Corporate Governance for South Africa 2002.

Directorate

As announced on 4 December 2009, Mr. Johan Seymore joined the board as an executive director with effect from 3 December 2009. Johan also serves as financial director of the Delta EMD business.

At the board meeting on 18 February 2010, Mr. Seymore was appointed Financial Director of the group, succeeding Chris Jacobs, who will remain on the board as a non-executive director. We thank Chris for his 24 years of service to the Group and for agreeing to continue supporting the Group, particularly in connection with the disposal process, as a consultant.

Dividend

The Group is pleased to announce the declaration of a final dividend of 80 cents per share, which represents an appropriate payout from the Group’s underlying 2009 earnings. It shall be paid from existing cash balances. The salient dates for the payment of the dividend will be as follows:

The dividend is declared in the currency of the Republic of South Africa. Share certificates may not be dematerialised or rematerialised between Monday 8 March 2010 and Friday 12 March 2010, both days inclusive.

The board also anticipates payment of special dividends when the 2005 tax matter noted above is favourably resolved and when value is realised through the sale of the Group’s Australian EMD production and residue disposal sites.

T.G. AtkinsonChairman
19 February 2009