Financial Review.

Exchange Rates

The main impact of exchange rates on the group’s results comes from the translation of foreign subsidiaries’ profit into sterling. Approximately 40% of the group’s underlying operating profit derives from sterling denominated entities but around a quarter is made in North America, mainly in the USA. The average rate for the US dollar for the six months to 30th September 2011 was $1.62/£ compared with $1.52/£ for the same period last year. This decreased reported underlying operating profit by £2.4 million. A further 15% of the group’s underlying operating profit comes from euro based countries. The euro was slightly stronger in the period averaging €1.14/£ compared with €1.19/£ in the first half of 2010/11 and this increased the group’s underlying operating profit by £1.1 million.

Interest

The group’s net finance cost increased from £9.7 million to £11.7 million as a result of higher average borrowings during the period.

Taxation

The group’s underlying tax rate reduced from 26.5% to 24%, mainly due to the reduction in the main rate of UK corporation tax from 28% to 26% with effect from 1st April 2011.

Cash Flow

In the six months to 30th September 2011, the group generated net cash flow from operating activities of £172.1 million, well ahead of the same period last year (£47.7 million). This was despite a further increase in working capital as the businesses grew strongly. The group’s working capital days, excluding the component that relates to precious metals, increased from 60 days at the start of the year to 69 days at 30th September 2011. This resulted from an increase in the value of rare earth inventories and a higher proportion of sales to customers in China where payment terms are longer. Working capital in respect of precious metal decreased substantially, by £78.5 million, primarily due to lower precious metal prices during the latter part of our first half.

During the period our capital expenditure was £50.4 million (of which £54.6 million was cash spent in the period), which represents 0.8 times depreciation. Capital expenditure in the second half of the year is expected to increase as we invest in our manufacturing facilities, particularly in Asia to extend capacity for our Environmental Technologies Division, and we currently expect that the ratio of capital expenditure to depreciation for the year as a whole will be approximately 1.3 times. The group’s free cash inflow (i.e. net cash inflow from operating activities plus dividends received from associate less net purchases of non-current assets and investments and net interest paid) was £105.7 million compared with an outflow of £15.4 million in the same period last year. The cost of last year’s final dividend payment was £71.2 million.

Pensions

The group’s total pension charge for the period to 30th September 2011 was £13.8 million, a decrease of £1.9 million.

In order to reduce the deficit on the company’s principal UK defined benefit pension scheme, in 2010 the company agreed a plan with the Trustees which requires it to contribute £23.1 million per annum for the ten year period to 31st March 2020. The next actuarial valuation of the scheme will take place as at 1st April 2012 but the results will only be known towards the latter part of 2012.

The IAS 19 post tax deficit of the group’s pension schemes at 30th September 2011 is £140.2 million (30th September 2010 £141.3 million; 31st March 2011 £70.0 million). The increase in the deficit of the UK scheme since the year end is principally due to a decrease in asset values and the reduction in the discount rate used as bond yields have fallen during the period.

Net Debt

Net debt at 30th September 2011 was £617.1 million, a reduction of £22.3 million since the year end. This was, however, £91.2 million higher than the same time last year.

The group’s net debt (including the group’s post tax pension deficit) to EBITDA for the last 12 months at 30th September 2011 was 1.4 times, the same as at 31st March 2011.