omnia holdings annual report 2010 omnia holdings annu

24 OMNIA ANNUAL REPORT 2010 GROUP FINANCE DIRECTOR’S REPORT continued
net working capital reduced by 67% to R514 million (2009:
R1 542 million) contributing significantly to the cash generation
from operating activities of R1 045 million (2009: R143 million
utilised) as reflected in the cash flow statement.
Cash outflow from investing activities increased by 81%
to R466 million (2009: R257 million) of which R309 million
represents the net investment in property, plant and equipment
with the balance being mainly corporate activity from the
acquisitions of Petroleum Fine Products and Protea Polymers
Eastern Africa, and the associate with Nalco.
Arising from the excellent cash generation, net interest-bearing
debt has reduced to R404 million (2009: R952 million) resulting
in a debt:equity ratio of 20% compared to the 45% that
prevailed at the end of the prior year.
Non-current interest bearing borrowings have increased by
a net R134 million to R804 million (2009: R670 million) with
the injection of term loans following the Nanatron and Sakhile 2
transactions relating to management and staff participation plans
that were approved by shareholders on 11 December 2009.
The impact of changes in international markets
To illustrate what has occurred in international fertilizer markets
over the years, a historic comparative cost graph is supplied.
The gap between the two lines is, in broad terms, a proxy for
the gross margin that Omnia Fertilizer could earn if adjusted
for timing differences.
As the graph illustrates, raw material prices remained stable
for many years and then began to climb in about January 2005
when it became evident that there was a shortage of urea
and ammonia in world markets. This set the scene for the
extraordinary market conditions referred to above which saw an
explosion in fertilizer commodity prices followed by a dramatic
fall in these prices, a significant change in buying patterns and
with it unusually high volumes of fertilizer stocks, particularly
potash, on hand at the end of that 2009 financial year.
Potash prices, which had remained stable until March 2009,
succumbed to market pressures and fell during the first half
of the current financial year. Combined with the rand’s strength,
the falling potash price was the main cause for a R350 million
stock adjustment taking place by September 2009 within
the Fertilizer division.
By September 2009, fertilizer margins had been reduced by
almost R500 million over the preceding 12-month period.
Despite the prevailing economic conditions, fertilizer volumes
in South Africa for the year ended March 2010 increased by
23% over the previous year. However, due to the significant
drop in prices and the persistent strength of the rand, fertilizer
revenue is some 17% below that of the previous financial year.
Chemicals and Mining
While the Agriculture Division provided the most dramatic
example of the impact of the global financial crisis and
exponential increases in commodity prices, Omnia’s chemical
and mining activities also could not escape the impact of
the market changes.
The price of explosives, the main ingredient of which is
ammonium nitrate, rose in the first half of the 2009 financial
year, only to drop dramatically in the latter half of that year,
back to levels that prevailed some two years earlier. The volatile
raw material prices and the strong rand also impacted on
the operations of the Mining Division. Although there was only
a marginal drop in volumes, operating profits in the division for
the current 2010 financial year are some 21% below those
of that extraordinary 2009 year.