SAPPI LIMITED

The fiscal period average three-month Euribor interest rate in Europe is depicted below. The low
short-term interest rates in the United States and Europe continue to represent a significant interest rate
differential when compared to South Africa’s 6% repurchase rate as determined by the South African
Reserve Bank, and could result in further short-term strengthening of the ZAR.
With regard to interest rate and currency swaps, hedge accounting is permitted when the hedging
relationship between the hedging instrument and the underlying debt meets the relevant requirements
of IFRS. For example, the Group has entered into a hedging relationship to swap the fixed rate on one of
its US$ public bonds to a euro fixed rate, and to swap the US$ portion of the bonds to euro.
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5
4
3
2
1
0
%
European 3 Month Average Euribor
2003 2004 2005 2006 2007 2008 2009 6DEC201017492702 2010
The Group is exposed to interest rate risk as it borrows funds at both fixed and floating interest rates.
The Group monitors market conditions and may utilize approved interest rate derivatives to alter the
existing balance between fixed and variable interest rate loans in response to changes in the interest rate
environment. Hedging of interest rate risk for periods greater than one year is only allowed if income
statement volatility can be minimized by means of hedge accounting, fair value accounting or other
means. As at September 2010 no fixed to floating interest rate swaps were in place and one floating to
fixed interest rate swap was in place to hedge the funding provided by the South African securitization
program.
The Group has a current policy of not hedging translation risks. The South African and European
operations use the ZAR and the euro as their respective functional currencies. Any translation of the
value of these operations into US$ results in foreign exchange translation differences as the ZAR and the
euro exchange rates move against the US$. These changes are booked to the foreign currency
translation reserve via other comprehensive income. Borrowings taken up in a currency other than the
functional currency of the borrowing entity are specifically hedged with financial instruments, such as
currency swaps and forward exchange contracts.
For further information, see note 29 to our Group Annual Financial Statements included elsewhere
in this Annual Report for a detailed explanation.
South African Economic and Political Environment
Sappi Limited is a public company incorporated in South Africa. We have significant operations in
South Africa, which accounted for 24% of our net sales in fiscal 2010, 22% of our net sales in fiscal 2009
and 25% of our net sales in fiscal 2008. See’’Operating Results’’ for the proportion of South African
operating profit to total profit.
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