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FORM 6-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16

under the Securities Exchange Act of 1934

For the month of July, 2009

Commission file number: 1-14872

SAPPI LIMITED

(Translation of registrant’s name into English)

48 Ameshoff Street
Braamfontein
Johannesburg 2001

REPUBLIC OF SOUTH AFRICA

(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b) (1): o

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b) (7): o

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-

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INCORPORATION BY REFERENCE

Sappi Limited’s information below is furnished by the Registrant under this Form 6-K is incorporated by reference into (i) the Registration Statements on Form S-8 of the Registrant filed December 23, 1999 and December 15, 2004 in connection with The Sappi Limited Share Incentive Scheme, (ii) the Section 10(a) Prospectus relating to the offer and sale of the Registrant’s shares to Participants under The Sappi Limited Share Incentive Scheme, (iii) the Registration Statements on Form S-8 of the Registrant filed December 15, 2004 and December 21, 2005 in connection with The Sappi Limited 2004 Performance Share Incentive Plan and (iv) the Section 10(a) Prospectus relating to the offer and sale of the Registrant’s shares to Participants under The Sappi Limited 2004 Performance Share Incentive Plan.

FORWARD-LOOKING STATEMENTS

In order to utilize the “Safe Harbor” provisions of the United States Private Securities Litigation Reform Act of 1995 (the “Reform Act”), Sappi Limited (the “Company”) is providing the following cautionary statement. Except for historical information contained herein, statements contained in this Report on Form 6-K may constitute “forward-looking statements” within the meaning of the Reform Act. The words “believe”, “anticipate”, “expect”, “intend”, “estimate “, “plan”, “assume”, “positioned”, “will”, “may”, “should”, “risk” and other similar expressions which are predictions of or indicate future events and future trends which do not relate to historical matters identify forward-looking statements. In addition, this Report on Form 6-K may include forward-looking statements relating to the Company’s potential exposure to various types of market risks, such as interest rate risk, foreign exchange rate risk and commodity price risk. Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors which are in some cases beyond the control of the Company, together with its subsidiaries (the “Group”), and may cause the actual results, performance or achievements of the Group to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements (and from past results, performance or achievements). Certain factors that may cause such differences include but are not limited to: the highly cyclical nature of the pulp and paper industry; pulp and paper production, production capacity, input costs including raw material, energy and employee costs, and pricing levels in North America, Europe, Asia and southern Africa; any major disruption in production at the Group’s key facilities; changes in environmental, tax and other laws and regulations; adverse changes in the markets for the Group’s products; any delays, unexpected costs or other problems experienced with any business acquired or to be acquired; consequences of the Group’s leverage; adverse changes in the South African political situation and economy or the effect of governmental efforts to address present or future economic or social problems; and the impact of future investments, acquisitions and dispositions (including the financing of investments and acquisitions) and any delays, unexpected costs or other problems experienced in connection with dispositions. These and other risks, uncertainties and factors are discussed in the Company’s Annual Report on Form 20-F and other filings with and submissions to the Securities and Exchange Commission,

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including this Report on Form 6-K. Shareholders and prospective investors are cautioned not to place undue reliance on these forward-looking statements. These forward-looking statements are made as of the date of the submission of this Report on Form 6-K and are not intended to give any assurance as to future results. The Company undertakes no obligation to publicly update or revise any of these forward-looking statements, whether to reflect new information or future events or circumstances or otherwise.

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USE OF TERMS AND CONVENTIONS

Unless otherwise specified or the context requires otherwise in this document:

·                  references to “Sappi”, “Sappi Group”, “Group”, “we”, “us” and “our” are to Sappi Limited together with its subsidiaries excluding, prior to December 31, 2008 or unless otherwise indicated, the Acquired Business (as defined below);

·                  references to the “Acquired Business” are to the coated paper business and certain related uncoated paper business activities of M-real Corporation, or M-real, acquired by us on December 31, 2008;

·                  references to the “Acquisition” are to the acquisition of the Acquired Business by us;

·                  references to the “Refinancing” are to the issuance of debt securities and the use of the proceeds therefrom, together with a portion of our available cash, to repay the drawings under our

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existing €600 million Revolving Credit Facility, transaction costs and other indebtedness, the establishment of a new Revolving Credit Facility in an assumed amount of € 250 million (which amount may be increased up to €400 million), and a new (or amended and restated) OeKB Term Loan Facility in an assumed amount of €400 million, which will repay, replace or restate our existing term loan with the OeKB;

·                  references to the “existing Revolving Credit Facility”, “new Revolving Credit Facility”, “existing OeKB Term Loan Facility”, “new OeKB Term Loan Facility”, “Bank Austria Facility”, the “SPH Notes” and “vendor loan notes” are to the facilities and notes described in the section entitled “Description of Certain Financing Arrangements” included elsewhere herein;

·                  references to “IFRS” are to the International Financial Reporting Standards, as issued by the International Accounting Standards Board (“IASB”);

·                  references to “net operating assets” are to total assets (excluding deferred taxation and cash and cash equivalents) less current liabilities (excluding interest-bearing borrowings and bank overdraft);

·                  references to “southern Africa” are to the Republic of South Africa, the Kingdom of Swaziland, the Kingdom of Lesotho, the Republic of Namibia and the Republic of Botswana;

·                  references to “North America” are to the United States, Canada and the Caribbean;

·                  references to “Latin America” are to the countries located on the continent of South America and Mexico;

·                  references to “Rand”, “ZAR” and “R” are to South African Rand and references to “SA cents” are to South African cents, the currency of South Africa;

·                  references to “US dollar(s)”, “dollar(s)”, “US$”, “$” and “US cents” are to United States dollars and cents, the currency of the United States;

·                  references to “euro”, “EUR” and “€” are to the currency of those countries in the European Union that form part of the common currency of the euro;

·                  references to “UK pounds sterling” and “GBP” are to United Kingdom pounds sterling, the currency of the United Kingdom;

·                  references to “m2” are to square meters and references to “hectares” or “ha” are to a land area of 10,000 square meters or approximately 2.47 acres;

·                  references to “tonnes” are to metric tonnes (approximately 2,204.6 pounds or 1.1 short tons);

·                  references to “market share” are based upon sales volumes in a specified geographic region during the fiscal year ended September 30, 2008;

·                  references to “NBSK” are to northern bleached softwood kraft pulp frequently used as a pricing benchmark for pulp;

·                  references to “groundwood” or to “mechanical” are to pulp manufactured using a mechanical process, or where applicable to paper, made using a high proportion of such pulp;

·                  references to “woodfree paper” are to paper made from chemical pulp, which is pulp made from wood fiber that has been produced in a chemical process; and

·                  references to “PM” are to individual paper machines.

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Except as otherwise indicated, in this document the amounts of “capacity” or “production capacity” of our facilities or machines are based upon our best estimates of production capacity at the date of this document. Actual production by machines may differ from production capacity as a result of products produced, variations in product mix and other factors.

Certain market share information and other statements presented herein regarding our position relative to our competitors with respect to the manufacture or distribution of particular products are not based on published statistical data or information obtained from independent third parties, but reflect our best estimates. We have based these estimates upon information obtained from our customers, trade and business organizations and associations and other contacts in our industries.

Except as otherwise indicated in this document, any reference to capacity, production capacity, market share information and data of a similar nature include the impact of the Acquired Business, which was acquired on December 31, 2008.

Unless otherwise provided in this document, trademarks identified by ® are registered trademarks of Sappi Limited or our subsidiaries.

FORWARD-LOOKING STATEMENTS

Except for historical information contained herein, statements contained herein may constitute “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995.

The words “believe”, “anticipate”, “expect”, “intend”, “estimate”, “plan”, “assume”, “positioned”, “will”, “may”, “should”, “risk” and other similar expressions, which are predictions of or indicate future events and future trends, which do not relate to historical matters, identify forward- looking statements. In addition, this document includes forward-looking statements relating to our potential exposure to various types of market risks, such as interest rate risk, foreign exchange rate risk and commodity price risk. You should not rely on forward-looking statements because they involve known and unknown risks, uncertainties and other factors which are in some cases beyond our control and may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements express or implied by such forward-looking statements (and from past results, performance or achievements). Certain factors that may cause such differences include but are not limited to:

·                  the highly cyclical nature of the pulp and paper industry;

·                  the impact on our business of the global economic downturn;

·                  pulp and paper production, production capacity, input costs (including raw materials, energy and employee costs) and pricing levels in North America, Europe, Asia and southern Africa;

·                  any major disruption in production at our key facilities;

·                  changes in environmental, tax and other laws and regulations;

·                  adverse changes in the markets for our products;

·                  any delays, unexpected costs or other problems experienced with any business acquired or to be acquired and achieving expected savings and synergies;

·                  consequences of our leverage, including as a result of adverse changes in credit markets that affect our ability to raise capital when needed;

·                  adverse changes in the political situation and economy in the countries in which we operate or the effect of governmental efforts to address present or future economic or social problems;

·                  the impact of future investments, acquisitions and dispositions (including the financing of investments and acquisitions) and any delays, unexpected costs or other problems experienced in connection with dispositions; and

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·                  the risk that the Acquisition will not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected; that expected revenue synergies and cost savings from the Acquisition may not be fully realized or realized within the expected time frame; that revenues following the Acquisition may be lower than expected; or that any anticipated benefits from the consolidation of the business may not be achieved.

These factors are discussed elsewhere herein. You are cautioned not to place undue reliance on these forward-looking statements. These forward-looking statements are made as of the date hereof and are not intended to give any assurance as to future results. We undertake no obligation to publicly update or revise any of these forward-looking statements, whether to reflect new information or future events or circumstances or otherwise.

PRESENTATION OF FINANCIAL INFORMATION

With regard to Sappi, unless otherwise specified, all references herein to a “fiscal year” and “year ended” of Sappi Limited refer to a twelve-month financial period. All references herein to fiscal 2008, fiscal 2007, fiscal 2006 or fiscal 2005, or the years ended September 2008, 2007, 2006 or 2005 refer to Sappi Limited’s twelve-month financial periods ended on September 28, 2008, September 30, 2007, October 1, 2006 and October 2, 2005, respectively. References to the six months ended March 2009 and 2008 refer to the periods from September 29, 2008 to March 29, 2009 and October 2, 2007 to March 30, 2008, respectively. References to the quarters ended March 2009 and June 2009 refer to the periods from December 29, 2008 to March 29, 2009 and from March 30, 2009 to June 28, 2009, respectively. References herein to fiscal 2009 refer to the period beginning September 29, 2008 and ending September 27, 2009. References to March 2009, September 2008, March 2008, September 2007, September 2006 and September 2005 represent amounts as at, respectively, March 29, 2009, September 28, 2008, March 30, 2008, September 30, 2007, October 1, 2006 and October 2, 2005. Our Group annual financial statements have been prepared in conformity with IFRS.

The financial data presented herein with respect to the Acquired Business have been prepared on a “carve-out” basis from the consolidated financial statements of M-real using the historical results of operations, assets and liabilities attributable to the Acquired Business, and include allocations of expenses and assets from M-real. With regard to the Acquired Business, all references herein to the years ended December 2008 and 2007 refer to the 12-month periods ended December 31, 2008 and 2007, respectively. All references in herein to the three months ended December 2008 and 2007 refer to the periods ended December 31, 2008 and December 31, 2007, respectively. The financial statements for the Acquired Business have been prepared in conformity with IFRS.

Certain numerical figures set out herein, including financial data presented in millions or thousands, have been subject to rounding adjustments and, as a result, the totals of the data herein may vary slightly from the actual arithmetic totals of such information.

The unaudited condensed combined pro forma financial statements and pro forma financial information presented herein have been prepared on the basis described in the pro forma financial statements and related notes of the Sappi Group.

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CURRENCY OF PRESENTATION AND EXCHANGE RATES

We publish our Group annual financial statements and all financial data presented herein in US dollars on a nominal (non-inflation adjusted) basis. The following table sets forth the average and closing exchange rates for the Rand and euro against the US dollar used in the preparation of our financial statements:

For further information regarding the conversion to US dollars, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Impacting on Group Results—Currency Fluctuations”.

The historical financial data of the Acquired Business are presented in euro on a nominal (non-inflation adjusted) basis.

The pro forma combined financial information included herein is presented in US dollars on a nominal (non-inflation adjusted) basis. For information regarding the conversion to US dollars of the financial data of the Acquired Business presented in the pro forma combined financial information, see the introduction to the pro forma financial statements included elsewhere herein.

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RISK FACTORS

Risks Related to Our Industry

We operate in a cyclical industry, which has in the past resulted in substantial fluctuations in our results.

The markets for our pulp and paper products are commodity markets to a significant extent and are significantly affected by changes in industry capacity and output levels and by cyclical changes in the world economy. As a result of periodic supply / demand imbalances in the pulp and paper industry, these markets historically have been highly cyclical, with volatile pulp and paper prices. In addition, recent turmoil in the capital and credit markets has led to decreased availability of credit, which is having an adverse effect on the world economy and consequently has already affected, and may continue to adversely affect the markets for our products. The timing and magnitude of price increases or decreases in the pulp and paper market have generally varied by region and by type of pulp and paper.

Despite a relatively high level of pulp integration on a Group-wide basis, a significant increase in the prices for pulp or pulpwood could adversely affect our non-integrated and partially integrated operations if they are unable to raise paper prices sufficiently to offset the effects of increased costs. Other input cost increases including energy and chemicals may affect our operations if we are unable to raise paper prices sufficiently.

The majority of our woodfree paper sales consist of sales to merchants. However, the pricing of products for merchant sales can generally be changed between 30 to 90 days’ advance notice to the merchant. Sales to converters may be subject to longer notice periods for price changes. Such notice periods generally would not exceed 6 to 12 months. In southern Africa, we have entered into longer-term fixed-price agreements of between 6 to 12 months duration for primarily packaging paper and newsprint sales with domestic customers. Such agreements accounted for approximately 5% of consolidated sales during fiscal 2008.

Most of our chemical cellulose sales contracts are multi-year contracts. However, the pricing is generally based on a formula linked to the NBSK price and reset on a quarterly basis.

As a result of the short-term duration of paper and chemical cellulose pricing arrangements, we are subject to cyclical decreases in market prices for these products. A downturn in paper or chemical cellulose prices could have a material adverse effect on our business, results of operations and financial condition.

Global economic conditions could adversely affect our business, results of operations and financial condition.

A global recession is currently underway. This could be the deepest and longest recession in over a generation. Despite the aggressive measures taken by governments and central banks thus far, there is still a significant risk that these measures may not prevent the global economy from falling into an even deeper and longer lasting recession, and even a depression. This recession is due to credit conditions impacted by the subprime mortgage crisis and other factors, including slower economic activity, inflation and deflation concerns, reduced corporate profits, reduced or canceled capital spending, adverse business conditions and liquidity concerns, resulting in significant recessionary pressures, increased unemployment and lower business and consumer confidence. These factors have led global demand for coated woodfree paper to decline in the second half of fiscal 2008 and during the six months ended March 2009, and pulp demand and pulp prices to decrease in the latter part of fiscal 2008 and during the six months ended March 2009. These trends have negatively impacted our results of operations during the six months ended March 2009 and have continued in the quarter ended June 2009. We may continue to experience a

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slowing in demand in all our major markets and downward pressure on pricing in many markets, which could adversely affect our business, results of operations and financial condition, including difficulties in maintaining previous operating performance. In anticipation of slowing demand, we took production downtime in the six months ended March 2009 and have temporarily suspended production at our Muskegon mill effective April 1, 2009. We will consider taking further downtime in fiscal 2009 to balance supply and demand. While the full impact of the downturn may not occur until later in 2009 or beyond, we cannot predict the timing or the duration of this or any other downturn in the economy.

The markets for pulp and paper products are highly competitive, and some of our competitors have advantages that may adversely affect our ability to compete with them.

We compete against a large number of pulp and paper producers located around the world. A recent trend towards consolidation in the pulp and paper industry has created larger, more focused pulp and paper companies. Some of these companies benefit from greater financial resources or operate mills that are lower cost producers of pulp and paper products than our mills or are government subsidized. Some of our competitors have advantages over us, including lower raw material, energy and labor costs and fewer environmental and governmental regulations to comply with. As a result, we cannot assure you that each of our mills will remain competitive. Furthermore, we cannot assure you that we will be able to take advantage of consolidation opportunities which may arise, or that any failure to exploit opportunities for growth would not make us less competitive. Increased competition, including a decrease in import duties in accordance with the terms of free trade agreements, could cause us to lose market share, increase expenditures or reduce pricing, any of which could have a material adverse effect on the results of our operations. In addition, competition may result in our inability to increase selling prices of our products sufficiently or in time to offset the effects of increased costs without losing market share and aggressive pricing by competitors may force us to decrease prices in an attempt to maintain market share.

The cost of complying with environmental, health and safety laws may be significant to our business.

Our operations are subject to a wide range of environmental, health and safety laws in the various jurisdictions in which we operate. Such laws govern, among other things, the control of emissions, the management of hazardous substances and wastes, the purchase and use of safety equipment, workplace safety training and the monitoring of workplace hazards.

Although we strive to ensure that our facilities comply with all applicable environmental laws, we have in the past been and may in the future be subject to governmental enforcement action for failure to comply with environmental requirements. Impacts from historical operations, including the land disposal of waste materials, may require further investigation and cleanup. In addition, we could become subject to environmental liabilities resulting from personal injury, property damage or natural resources damage. Expenditures to comply with future environmental requirements and the cost related to any potential environmental liabilities and claims could have a material adverse effect on our business and financial condition.

We expect to continue to incur significant expenditures and may face operational constraints to maintain compliance with applicable environmental laws, to upgrade equipment at our mills and to meet new regulatory requirements, including those in the United States, South Africa and Europe.

The alternative fuel mixture tax credit provided by the U.S. Internal Revenue Code may expire by its terms at the end of 2009, may be repealed with an earlier effective date or may be amended in a manner that would eliminate or reduce its benefits for pulp and paper companies.

The U.S. Internal Revenue Code allows an excise tax credit to taxpayers for the use of alternative fuel mixtures. In order to benefit from this tax provision, in 2009 we began to use an alternative fuel mixture containing diesel fuel and “black liquor,” a by-product of pulp production, at our Somerset and Cloquet mills. During the second calendar quarter of 2009, we were approved by the IRS as an alternative fuel mixer and we filed for approximately US$33 million in tax credits, net of fees and expenses, covering the period from March 28 to June 21, 2009, for the Somerset mill,

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and the period from May 5 to June 21, 2009, for the Cloquet mill. Although we cannot provide any assurance of the timing, we expect to receive these credits in the third calendar quarter. The tax credit related to this type of fuel mixture is scheduled to expire on December 31, 2009. In the past several months, certain members of the U.S. Congress, environmental groups, and foreign pulp producers and pulp-producing nations have voiced their opposition to U.S. pulp and paper companies receiving the tax credit, and they have called for the amendment of the tax credit to eliminate or reduce its benefits for pulp and paper companies. In line with this opposition, legislation has been introduced in the U.S. Congress which, if enacted, could repeal or otherwise reduce the benefit of this tax credit for pulp and paper companies, which legislation could be in effect at any time prior to December 31, 2009. In response to this opposition, several members of the U.S. Congress and other interested parties have stated their support for maintaining the availability of the tax credit for all taxpayers, including pulp and paper companies. Because of these uncertainties, there can be no assurance that we will receive tax credits for additional refund filings, and any amendment of the tax credit that eliminates or reduces its benefits for pulp and paper companies, or the scheduled expiration of the tax credit without extension or renewal, could have an adverse effect on our financial condition and results of operations.

The availability and cost of insurance cover can vary considerably from year to year as a result of events beyond our control, and this can result in our paying higher premiums and periodically being unable to maintain the levels or types of insurance carried.

Although the insurance market has been stable for the last three to four years, it remains cyclical and catastrophic events can change the state of the insurance market, leading to sudden and unexpected increases in premiums and deductibles and unavailability of coverage due to reasons totally unconnected with our business. In addition, recent turmoil and volatility in the global financial markets may adversely affect the insurance market. This may result in some of the insurers in our insurance portfolio failing and being unable to pay their share of claims.

Although we have successfully negotiated the renewal of our 2009 insurance cover at rates similar to those of 2008 and self-insured deductibles for any one property damage occurrence have remained at US$25 million, with an unchanged aggregate limit of US$40 million, we are unable to predict whether past or future events will result in less favorable terms. For property damage and business interruption, there generally does not seem to be cost effective cover available to full value; however, we believe that the loss limit cover of US$1 billion should be adequate for what we have determined as the reasonably foreseeable loss for any single claim.

While we believe our insurance programs provide adequate coverage for reasonably foreseeable losses, we continue working on improved risk management to lower the risk of incurring losses from uncontrolled incidents. We are unable to assure you that actual losses will not exceed our insurance coverage or that such excess will not be material.

New technologies or changes in consumer preferences may affect our ability to compete successfully.

We believe that new technologies or novel processes may emerge and that existing technologies may be further developed in the fields in which we operate. These technologies or processes could have an impact on production methods or on product quality in these fields. Unexpected rapid changes in employed technologies or the development of novel processes that affect our operations and product range could render the technologies we utilize or the products we produce obsolete or less competitive in the future. Difficulties in assessing new technologies may impede us from implementing them and competitive pressures may force us to implement these new technologies at a substantial cost. Any such development could materially and adversely impact our results of operations.

Consumer preferences may change as a result of the availability of alternative products or of services including less expensive product grades, electronic media or the internet, or as a result of environmental pressure from consumers, all of which could negatively impact consumption of our products.

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Risks Related to Our Business

Our significant indebtedness may impair our financial and operating flexibility.

Our significant level of indebtedness and the terms of our indebtedness could negatively impact our business and liquidity. As of March 2009, on a pro forma basis after giving effect to the Refinancing, our interest bearing debt (long-term and short-term interest bearing debt plus overdraft, less cash on hand) would have been US$2,735 million. While reduction of our indebtedness is one of our priorities, opportunities to grow within our businesses will continue to be evaluated, and the financing of any future acquisition or capital investment may include the incurrence of additional indebtedness.

The level of our debt has important consequences, including:

·                  our ability to obtain additional financing may be limited, which could limit, among other things, our ability to exploit growth opportunities;

·                  a substantial portion of our cash flow from operations may be required to make debt service payments;

·                  we are exposed to increases in interest rates because a portion of our debt bears interest at variable rates;

·                  we may be more leveraged than certain of our competitors;

·                  we may be more vulnerable to economic downturns and adverse changes in our business;

·                  our ability to withstand competitive pressure may be more limited; and

·                  certain of our financing arrangements contain covenants and conditions that may restrict the activities of certain Group companies.

As a result of the Refinancing, assuming that it is completed, we will refinance or replace our existing Revolving Credit Facility, our existing OeKB Term Loan Facility and repay other indebtedness. We also expect to be able to continue to refinance other renewable facilities that mature under our funding arrangements and bilateral banking facilities.

Our ability to refinance our debt, incur additional debt, the terms of our existing and additional debt and our liquidity could be affected by a number of adverse developments. In the third quarter of fiscal 2008, the global debt markets were subject to significant pressure triggered by the collapse of the sub-prime mortgage market in the U.S. This liquidity crunch continued through and worsened in the remainder of calendar 2008 and in calendar 2009, leading to unprecedented volatility in the financial markets, an acute contraction in the availability of credit, including in interbank lending, and the failure of a number of leading financial institutions. Changes in investment markets, including changes in interest rates, exchange rates and returns from equity, property and other investments, have resulted in worsening general economic conditions. As a result, certain government bodies and central banks worldwide have undertaken unprecedented intervention programs, the effects of which remain uncertain. In addition, since 2006 the Group’s credit ratings have been downgraded to sub-investment grade by Standard & Poor’s (S&P) and Moody’s. These adverse developments in the credit markets and in our credit rating, as well as other future adverse developments, such as further deterioration in the financial markets and a worsening of general economic conditions, may negatively impact our ability to issue additional debt as well as the amount and terms of the debt we are able to issue. Our liquidity will be adversely affected if we must repay all or a portion of our maturing debt from available cash or through use of our existing liquidity facilities. In addition, our results of operations will be adversely impacted to the extent the terms of the debt we are able to issue are less favorable than the terms of the debt being refinanced. It is also possible that we will need to agree to covenants that place additional restrictions on our business.

We are subject to South African exchange controls, which may restrict the transfer of funds directly or indirectly between our subsidiaries or between the parent company and our subsidiaries and can restrict activities of our subsidiaries. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—South African Exchange Controls”. We may also incur tax costs in connection with these transfers of funds. These exchange controls have affected the geographic distribution of our debt. As a result, acquisitions in the United States and Europe

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were financed with indebtedness incurred by companies in those regions. As a consequence, our ability or the ability of any of our subsidiaries to make scheduled payments on its debt will depend on its financial and operating performance, which will depend on various factors beyond our control, such as prevailing economic and competitive conditions. If we or any of our subsidiaries are unable to achieve operating results or otherwise obtain access to funds sufficient to enable us to meet our debt service obligations, we could face substantial liquidity problems. As a result, we might need to delay investments or dispose of material assets or operations. The timing of and the proceeds to be realized from any such disposition would depend upon circumstances at the time.

The current global liquidity and credit crises could have a negative impact on our major customers which in turn could materially adversely affect our results of operations and financial position.

The current global liquidity and credit crises are having a significant negative impact on businesses around the world; the impact of these crises on our major customers cannot be predicted and may be quite severe. A disruption in the ability of our significant customers to access sources of liquidity could cause serious disruptions or an overall deterioration of their businesses which could lead to a significant reduction in their future orders of our products and the inability or failure on their part to meet their payment obligations to us, any of which could have a material adverse effect on our results of operations and financial position.

We require a significant amount of cash to fund our business and our ability to generate sufficient cash depends on many factors, some of which are beyond our control.

Our ability to fund our working capital, capital expenditure and research and development requirements, to engage in future acquisitions, to make payments on our debt, to fund post-retirement benefit programs and to pay dividends will depend upon our future operating performance and our ability to generate sufficient cash. Our principal sources of liquidity are cash generated from operations and availability under our credit facilities and other debt arrangements. Our ability to generate cash depends, to some extent, on general economic, financial, competitive, market, regulatory and other factors, many of which are beyond our control. Our cash flow from operations may be adversely impacted by the downturn in worldwide economic conditions, which has resulted in a decline in global demand for our products and a softening of prices for some of our products. The availability of debt financing has also been negatively impacted by the global credit crisis.

Our business may not generate sufficient cash flow from operations and additional debt and equity financing may not be available to us in a sufficient amount to enable us to meet our liquidity needs. If our future cash flows from operations and other capital resources are insufficient to fund our liquidity needs, we may be required to obtain additional debt or equity financing, refinance our indebtedness, reduce or delay our capital expenditures and research and development or to decrease the amount of the annual dividend. We may not be able to accomplish these alternatives on a timely basis or our satisfactory terms. The failure to do so could have an adverse effect on our business, results of operations and financial condition.

Fluctuations in the value of currencies, particularly the Rand and the euro, in relation to the US dollar, have in the past had and could in the future have a significant impact on our earnings in these currencies.

Exchange rate fluctuations have in the past, and may in the future, affect the competitiveness of our products in relation to the products of pulp and paper companies based in other countries.

Fluctuations in the exchange rate between currencies, particularly the Rand and euro, in relation to the US dollar have in the past significantly affected and could in the future significantly affect our earnings.

Since the adoption of the euro by the European Union on January 1, 1999 (when the euro was trading at approximately US$1.18 per euro), it has fluctuated against the US dollar, reaching a low of approximately US$0.83 per euro in October 2000 before trading at approximately US$1.46, US$1.42 and US$1.27 per euro at the end of fiscal 2008, 2007 and 2006, respectively, and rising to a high of US$1.60 per euro in April 2008. On July 2, 2009, it was trading at approximately US$1.39

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per euro. A significant weakening of the US dollar in comparison to the euro could redirect a significant amount of imports from Europe.

In recent years, the value of the Rand against the US dollar has fluctuated considerably. It has moved against the US dollar from a low of approximately R13.90 per US dollar in December 2001 to approximately R8.08, R6.87 and R7.77 per US dollar at the end of fiscal 2008, 2007 and 2006, respectively. More recently, the Rand has been declining against the US dollar and was trading at approximately R7.87 per US dollar on July 2, 2009.

For further information, see “Management’s Discussion and Analysis—Currency Fluctuations”.

There are risks relating to the countries in which we operate that could impact our earnings or affect your investment in the notes.

We own manufacturing operations in six countries in Europe, four states in the United States, South Africa and Swaziland, and have an investment in a joint venture in China. These risks arise from being subject to various economic, fiscal, monetary, regulatory, operational and political factors that affect companies generally and which may change as economic, social or political circumstances change. See “Management’s Discussion and Analysis—South African Economic and Political Environment”.

Our southern African operations have in recent years accounted for a disproportionate percentage of our operating profits. In fiscal 2008, 46% of our sales originated from Europe, 28% from North America and 26% from southern Africa, and as of September 2008, 37% of our net operating assets were located in Europe, 23% in North America and 40% in southern Africa. However, in fiscal 2008, our operations in Europe had an operating loss of US$64 million and our operations in North America and southern Africa had an operating profit of US$92 million and US$279 million, respectively. In the six months ended March 2009, 52% of our sales originated from Europe, 26% from North America and 22% from southern Africa. As of March 2009, 45% of our net operating assets were located in Europe, 20% in North America and 35% in southern Africa (excluding Corporate and other), but in the six months ended March 2009 our operations in Europe and North America had an operating loss of US$8 million and US$31 million, respectively, whereas our operations in southern Africa had an operating profit of US$101 million (excluding Corporate and other). Adverse developments in the economic, fiscal, monetary, regulatory or political circumstances in southern Africa could negatively affect our results of operations and the value of an investment in the notes.

We face certain risks in dealing with HIV / AIDS which may have an adverse effect on our southern African operations.

There is a serious problem with HIV / AIDS infection among our southern African workforce, as there is in southern Africa generally. The HIV / AIDS infection rate of our southern African workforce is expected to increase over the next decade. The costs and lost workers’ time associated with HIV / AIDS may adversely affect our southern African operations.

For further information, see “Management’s Discussion and Analysis—South African Economic and Political Environment”.

The inability to recover increasing input costs through increased prices of our products has had, and may continue to have, an adverse impact on our profitability.

The selling prices of the majority of the products manufactured and the purchase prices of many of the raw materials we use generally fluctuate in correlation with global commodity cycles. In addition, although certain input costs have recently been decreasing, we have in the past experienced, and may in the future experience, increasing costs of a number of raw materials due to global trends beyond our control. The global warming and carbon footprint imperatives are causing the increased use of sustainable, non-fossil fuel, sources for electricity generation. Electricity generation companies are competing for the same raw material, namely wood and wood chips, in the same markets as us, driving prices upwards, especially during winter in the Northern hemisphere. In addition, the price of crude oil recently reached historically high levels. Although oil

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prices have since decreased, they could return to high levels in the foreseeable future because of, among other things, political instability in the oil-producing regions of the world. This impacts the oil-based commodities required by our business in the areas of energy (including electricity), transport and chemicals.

As occurred during the 2006, 2007 and 2008 fiscal years, a major potential consequence of the increase in the price of input commodities is our inability to counter this effect through increased selling prices. This results in reduced operating profit, and has a negative impact on business planning.

While we are in the process of implementing steps to reduce our cost of commodity inputs, other than maintaining a high level of pulp integration, the hedging techniques we apply on our raw materials and products are on a small scale and short-term in nature. Moreover, in the event of significant increases in the prices of pulp, our non-integrated and partially integrated operations could be adversely affected if they are unable to raise paper prices by amounts sufficient to maintain margins.

If we are unable to obtain energy or raw materials at favorable prices, or at all, it could adversely affect our operations.

We require substantial amounts of oil-based chemicals, fuels and other raw materials for our production activities and transport of our timber products. We rely partly upon third parties for our supply of the energy resources and, to a certain extent, timber, which are consumed in our operations. The prices for and availability of these energy supplies and raw materials may be subject to change or curtailment, respectively, due to, among other things, new laws or regulations, imposition of new taxes or tariffs, interruptions in production by suppliers, worldwide price levels and market conditions.

Environmental litigation aimed at protecting forests and species habitats and regulatory restrictions may cause in the future significant reductions in the amount of timber available for commercial harvest. In addition, future claims and regulations concerning the promotion of forest health and the response to and prevention of wildfires could affect timber supplies in the jurisdictions in which we operate. The availability of harvested timber may further be limited by factors such as fire, insect infestation, disease, ice and wind storms, droughts, floods and other nature and man-made causes, thereby reducing supply and increasing prices.

The prices of various sources of energy supplies and raw materials may increase significantly from current levels. An increase in energy and raw material prices could materially adversely affect our results of operations, plantation valuation and financial condition.

A limited number of customers account for a significant amount of our revenues.

We sell a significant portion of our products to several major customers, including PaperlinX, Igepa, xpedx and Antalis. For Sappi Fine Paper products, PaperlinX and Igepa represented individually more than 10% of our total sales during both fiscal 2008 and the six months ended March 2009. Any adverse development affecting our principal customers or our relationships with our principal customers could have an adverse effect on our business and results of operations.

Because of the nature of our business and workforce, we may face challenges in the retention of staff and the employment of skilled people that could adversely affect our business.

We are facing an aging demographic work profile among our staff due to the mature nature of our industry and the rural and often remote location of our mills, together with generally long tenure of employees at the mills. As a result, we are likely to experience groups of employees leaving the company within a relatively short space of time of one another and may have difficulty attracting qualified replacements. The potential risks we face are a loss of institutional memory, skills, experience and management capabilities. We may be unable to attract and retain sufficient qualified replacements when and where necessary to avoid an adverse impact on our business.

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Continued volatility in equity markets and declining yields in the bond markets could adversely affect the funded status and funding needs of our post employment benefit funds.

The general outlook for the forthcoming financial years is that bond and equity markets could move in very uncertain and unusual ways, which in turn could result in significant swings in yields on corporate bonds and government bonds as well as continued volatility within the equity markets. The risk exists that equity and property markets will not recover to the level of recent highs for many years as the global economic climate could further worsen. Consequently, it is very difficult for us to predict which key factors, and how the interaction of these key factors, will change the post employment benefit funds’ balance sheet funding status. As a result of the recent and continued risk of negative movements in the global equity and bond markets, the funded status of our post employment benefit arrangements might have worsened during the six months ended March 2009.

Existing and potential changes in statutory minimum funding requirements may also affect the amount and timing of funding to be paid by us. Most funding requirements consider yields on assets such as government bonds or interbank interest rate swap curves, depending on the basis. If these yields remain at the current low level experienced in the six months ended March 2009, we might need to pay additional contributions to meet minimum funding targets.

Catastrophic events affecting our plantations, such as fires, may adversely impact our ability to supply our southern African mills with timber from the region.

The southern African landscape is prone to, and ecologically adapted to, frequent fires. The risk of uncontrolled fires entering and burning significant areas of plantation is high, but under normal weather conditions this risk is managed through comprehensive fire prevention and protection plans. In 2007 and 2008, southern Africa experienced a number of abnormal weather events (hot, dry conditions fanned by extremely strong winds), which resulted in disastrous plantation fires across vast areas of eastern South Africa and Swaziland affecting 14,000 hectares and 26,000 hectares, respectively, of our plantations. There is some cause for concern that these abnormal weather conditions may be occurring more frequently as a result of the potential impact of climate change. In addition, because the transformation of land ownership and management in southern Africa has been moving ownership and management of plantations to independent growers, we have less ability to directly manage fire risk, as well as risks of other catastrophic events, such as pathogen and pest infestations. As a consequence, the risk of plantation fires or other catastrophic events remains high and may be increasing. Continued or increased losses of our wood source could jeopardize our ability to supply our mills with timber from the region.

A large percentage of our employees are unionized and wage increases or work stoppages by our unionized employees may have a material adverse effect on our business.

A large percentage of our employees are represented by labor unions under collective bargaining agreements, which need to be renewed from time to time. In addition, we have in the past and may in the future seek, or be obligated to seek, agreements with our employees regarding workforce reductions, closures and other restructurings. We may not be able to negotiate acceptable new collective bargaining agreements or future restructuring agreements, which could result in labor disputes. Also, we may become subject to material cost increases or additional work rules imposed by agreements with labor unions. This could increase expenses in absolute terms and/or as a percentage of net sales. Although we believe we have good relations with our employees, work stoppages or other labor disturbances may occur in the future which could adversely impact our business.

The effects of climate change may have an impact on our business

The global warming and carbon footprint imperatives are causing the increased use of sustainable, non-fossil fuel, sources for electricity generation. Electricity generation companies are competing for the same raw material, namely wood and wood chips, in the same markets as us, driving prices upwards, especially during winter in the Northern hemisphere.

The increased emphasis on water footprint in southern Africa is causing increased focus on the sustainable use of water by our plants, on ensuring the quality of water released back into the water systems and on the control of effluent.

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Climate change is also causing the spread of disease and pestilence into our plantations and fiber sources, far beyond their traditional geographic spreads.

Risks Related to the Acquisition

We may not be able to successfully integrate the Acquired Business into our business.

We may experience unforeseen operating difficulties as we integrate the Acquired Business into our existing operations. These difficulties may disrupt our operations and require significant management attention and financial resources that would otherwise be available for day-to-day operations or the ongoing development or expansion of existing operations. The Acquisition involves risks, including:

·                  unexpected losses of customers or suppliers of the Acquired Business;

·                  challenges in integrating IT systems and administrative services;

·                  difficulties in retaining management and key personnel and in working cooperatively with the employees of the Acquired Business;

·                  difficulties in integrating the financial, technological and management standards, processes, procedures and controls of the Acquired Business with those of our existing operations;

·                  the performance by M-real Corporation and its parent company of their obligations under various agreements they have entered with us, including supply agreements, and potential claims and liabilities among the parties under such agreements;

·                  any inability of our management to cause our best practices to be applied to the Acquired Business;

·                  challenges in managing the increased scope, geographic diversity and complexity of our operations; and

·                  difficulties in mitigating contingent and assumed liabilities.

If we are unable to successfully meet the challenges associated with the Acquisition, this could have a material adverse effect on our business, financial condition and results of operations.

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The historical financial information for the Acquired Business and our pro forma financial information may not be representative of our results as a combined company.

The financial data included herein with respect to the Acquired Business have been prepared on a “carve-out” basis from the consolidated financial statements of M-real using the historical results of operations, assets and liabilities attributable to the Acquired Business, and includes allocations of expenses and assets from M-real. Our unaudited pro forma financial information presented herein is based in part on certain assumptions regarding the Acquisition and the Refinancing. We cannot assure you that our assumptions will prove to be accurate over time. Accordingly, the historical, pro forma and other financial information included herein may not reflect what our results of operations and financial condition would have been had we been a combined entity during the periods presented, or what our results of operations and financial condition will be in the future.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis together with our Group financial statements, including the notes, and the other financial information herein. Certain information contained in the discussion and analysis set forth below and elsewhere herein includes forward-looking statements that involve risk and uncertainties. See “Forward Looking Statements” and “Risk Factors” and the notes to our Group financial statements for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein.

The consolidated financial information of the Sappi Group contained herein have been prepared in accordance with IFRS.

Our fiscal years operate on a 52 accounting week cycle, except every 6th fiscal year which includes an additional accounting week. Fiscal 2008, 2007 and 2006 operated on a 52 accounting week cycle.

Company and Business Overview

We are a global company which through acquisitions in the 1990s has been transformed into one of the global market leaders in coated woodfree paper. Two acquisitions were pivotal in establishing us as a global company, namely the acquisition in 1994 of S.D. Warren Company, now known as Sappi Fine Paper North America, and the acquisition in 1997 of KNP Leykam, now integrated into Sappi Fine Paper Europe. The woodfree paper acquisitions have been integrated into a single woodfree paper business, which operates under the name Sappi Fine Paper. On December 31, 2008 we acquired the coated paper business of M-real Corporation.

Further opportunities to grow within our core businesses will continue to be evaluated.

Our Group is organized into two operating segments: Sappi Fine Paper and Sappi Forest Products. We also operate a trading network, called Sappi Trading, for the international marketing and distribution of chemical cellulose and market pulp throughout the world and of our other products in areas outside the core operating regions of North America, Europe and southern Africa.

Sales by source and destination for the six months ended March 2009 and each of fiscal 2008, fiscal 2007 and fiscal 2006 were as follows:

Sappi Fine Paper has a total paper production capacity of approximately 6.1 million tonnes per annum. Our Group is one of the global market leaders in the coated paper business with a capacity of approximately 5.3 million tonnes of coated woodfree and coated mechanical paper per annum.

On an historical basis our Group was approximately 103% integrated for net pulp usage, and including the Acquired Business our Group is 92% integrated on a net pulp basis. This means that while some facilities are market buyers of pulp and others are market sellers, in the aggregate we produce less pulp than we use. By region, the South African operations are net sellers of pulp, Sappi Fine Paper North America produces slightly more pulp than it uses and the European operations are approximately 45% integrated. The expansion of our Saiccor mill in South Africa,

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when operating at the total expanded capacity, will increase pulp production by circa 200,000 tonnes. Approximately 72% of the wood requirements of the South African businesses are from sources either owned or managed by us. Both the North American and European operations are dependent on outside suppliers of wood for their pulp production requirements.

Principal Factors Impacting on Group Results

Our results of operations are affected by numerous factors. Given the high fixed cost base of pulp and paper manufacturers, industry profitability is highly sensitive to changes in sales prices. Prices are significantly affected by changes in industry capacity and output levels, customer inventory levels and cyclical changes in the world economy. Profitability in the industry is, however, also influenced by factors such as sales volume, the level of raw material, energy, chemicals and other input costs, exchange rates, and operational efficiency.

The principal factors that have impacted the business during the financial periods presented in the following discussion and analysis and that are likely to continue to impact the business are:

(a)                                 Cyclical nature of the industry and its impact on sales volume;

(b)                                 Movement in market prices for products and for raw materials and other input costs of manufacturing;

(c)                                 Sensitivity to currency movements and inflation rates; and

(d)                                 New acquisitions, expansions, restructuring, cost-reduction initiatives, our ability to maintain and continuously improve operational efficiencies and performance, and other significant factors impacting costs.

Because many of these factors are beyond our control and certain of these factors have historically been volatile, past performance will not necessarily be indicative of future performance and it is difficult to predict future performance with any degree of certainty.

Cyclical Nature of the Industry and Movement in Market Prices, Raw Materials and Input Costs

The markets for pulp and paper products are cyclical, with sales prices significantly affected by factors such as changes in industry capacity and output levels, customer inventory levels and changes in the world economy. The pulp and paper industry has often been characterized by periods of imbalances between supply and demand, causing prices to be volatile. Prices also vary significantly by geographic region and product. Coated woodfree paper, our core product used for many types of publications, is susceptible to the highly cyclical advertising market, a major driver in our business. See “—Markets” for a further discussion of the cyclical nature of the pulp and paper industry and movements in market prices. In addition, the purchase prices of many of the raw materials we use generally fluctuate in correlation with global commodity cycles. Other input costs, such as energy and fuel costs, vary depending on various factors, including local and global demand and seasonality.

Worldwide economic conditions have recently experienced a significant downturn, resulting in significant recessionary pressures and lower business and consumer confidence. As a result, although the full impact of the downturn may not occur until later in fiscal 2009, we have experienced a slowing in demand in all our major markets and downward pressure on pricing in many markets, which has adversely affected our business and financial condition.

In anticipation of continued slowing demand, during the six months ended March 2009 we took production downtime and we will consider taking further downtime during the remainder of fiscal 2009 to balance supply and demand.

Currency Fluctuations

The principal currencies in which our subsidiaries conduct business are the US dollar (US$), euro and South African Rand (ZAR). Although the reporting currency is the US dollar, a significant portion of the Group’s sales and purchases are made in currencies other than the US dollar. In Europe and North America, sales and expenses are generally denominated in euro and US dollars, respectively; however, pulp purchases in Europe are primarily denominated in US dollars. In South Africa, costs incurred are generally denominated in Rand, as are local sales. Exports, which are

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denominated primarily in US dollars from the combined Southern African businesses to other regions, in local currency represented approximately 44% and 43%, respectively, of net sales, in the six months ended March 2009 and 2008 (43% and 47%, respectively, of net sales in fiscal 2008 and fiscal 2007).

The appreciation of the Rand or the euro against the US dollar tends to diminish the value of exports from South Africa and Europe in local currencies, while depreciation of these currencies against the US dollar has the opposite impact. Since expenses are generally denominated in local currencies, the depreciation of the US dollar has a negative effect on gross margins of exports and such domestic sales which are priced relative to international US dollar prices. The appreciation of the US dollar has the opposite impact. In North America, the depreciation of the US dollar against the euro or Asian currencies has a positive effect on sales volumes and margins, due to high levels of imports of coated woodfree paper in the market, which are adversely affected by such depreciation, and the favorable impact on exports of coated woodfree paper and release paper. The Group’s consolidated financial position, results of operations and cash flows may be materially affected by movements in the exchange rate between the US dollar and the respective local currencies to which subsidiaries are exposed. The principal currencies in which subsidiaries conduct business that are subject to the risks described in this paragraph are the euro and the Rand. The following table depicts the average and year end exchange rates for the Rand and euro against the US dollar used in the preparation of our financial statements in the six months ended March 2009 and 2008, fiscal 2008, fiscal 2007 and fiscal 2006:

The profitability of certain of our South African operations is directly dependent on the Rand proceeds of their US dollar exports. Prices in the local South African market are also influenced by pricing of foreign currency imports.

The translation of our annual and interim results into the reporting currency (US$) from local currencies tends to distort comparisons between financial periods when currencies are volatile. In the six months ended March 2009, the euro weakened against the US dollar to an average of US$1.33 / euro, from an average of US$1.48 / euro in the six months ended March 2008, and the Rand weakened against the US dollar to an average of ZAR9.90 / US$ in the six months ended March 2009, from an average of ZAR7.15 / US$ in the six months ended March 2008. The impact on sales for the six months ended March 2009 was to decrease sales by US$354 million compared to the same period in fiscal 2008. The euro strengthened substantially against the US dollar to an average of US$1.51 / euro in fiscal 2008 (from an average of US$1.33 / euro in fiscal 2007 and an average of US$1.23 / euro in fiscal 2006), while the Rand weakened on average against the US dollar to ZAR7.43 / US$ in fiscal 2008 (from an average of ZAR7.17 / US$ in fiscal 2007 and an average of ZAR6.60 / US$ in fiscal 2006). The net impact of these currency movements increased reported sales in US dollars by US$259 million in fiscal 2008 and US$61 million in fiscal 2007. These impacts of currency translation effects on our historic results of operations are further described below.

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Inflation and Interest Rates

The graph below summarizes the South African inflation and interest rates, as well as the South African Reserve Bank lending rate (repo rate).

South African Inflation and Interest Rates

Source: South African Reserve Bank and Statistics South Africa

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.

With regard to interest rate 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 hedging relationships to swap the fixed rate on its public bonds to a variable rate.

The Group has a current policy of not hedging translation risks. The South African and European operations use the Rand and the euro as their respective functional currencies. Any translation of the value of these operations into US dollars results in foreign exchange translation differences as the Rand and the euro exchange rates move against the US dollar. These changes are booked to the foreign currency translation reserve account. 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.

Acquisitions, Expansions, Restructurings and Cost-reduction Initiatives

We continually evaluate the performance of our assets by maintaining a focus on profitability and we actively manage our asset base on a regional basis, including by directing or closing non-performing assets and by pursuing an investment policy that is focused on high-return projects. Some of these recent developments include the following:

Completion of the Sappi Saiccor expansion project

In August 2006, we announced the expansion of the capacity at our Saiccor mill in South Africa, where chemical cellulose products are produced. The capacity of the mill was approximately 600,000 tonnes per annum. The expansion has increased capacity to approximately 800,000 tonnes per annum. Originally scheduled for completion in the first half of calendar 2008, the project has been subject to delays and cost increases. The increased capacity came on-line in September 2008 and became fully operational in April 2009. As a result of the rapid decline in demand for chemical cellulose experienced since November 2008, we are not utilizing all of the additional capacity at present and are curtailing production in certain elements of the old plant while utilizing the new

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plant to improve efficiencies. To the extent that demand for the plant’s products is improving we expect the plant to operate at a rate close to the total expanded capacity by the end of fiscal 2009.

Blackburn mill closure and cessation of production from PM 5 at Maastricht mill

In August 2008 we announced that we had undertaken a review of our European production activities in response to overcapacity and significant input cost pressure, and in accordance with our strategy of maintaining an efficient asset base. In that context, we reached an agreement with labor representatives at our Blackburn mill on September 22, 2008, pursuant to which the mill permanently closed on November 12, 2008 as no buyer could be found before that date. Production at the Blackburn mill stopped on October 17, 2008. On December 19, 2008 we also ceased production from PM 5 at our Maastricht mill. As a result of the closure of our Blackburn mill and upon cessation of production from PM 5 at our Maastricht mill, our coated woodfree paper capacity has been reduced by 180,000 tonnes. Profitable products have been moved to other facilities in Europe. See “—Mill Closures, Acquisitions, Dispositions, Impairment and Joint Venture”.

Acquisition of M-real Corporation’s coated paper business

On December 31, 2008, we acquired the coated woodfree and coated mechanical paper business from M-real Corporation. See “Risk Factors—Risks Related to the Acquisition”.

Production curtailments and suspensions to address challenging market conditions

During the last two quarters, our business has been adversely impacted by difficult global market conditions, resulting in a weak operating result for the six months ended March 2009. In light of these challenging market conditions and the continued lack of visibility about future market conditions, each of our operating businesses has implemented production curtailments to minimize the impact of current weak market conditions. As part of this effort, during the second quarter of fiscal 2009 Sappi Fine Paper Europe curtailed production by approximately 30%, representing approximately 300,000 tonnes, across all its European mills and Sappi Fine Paper North America curtailed coated paper production by approximately 9%, representing approximately 100,000 tonnes. In addition, Sappi Fine Paper North America temporarily suspended operations at its Muskegon mill in March 2009. During the same period, other producers in Europe and North America have curtailed coated woodfree paper production or permanently closed production facilities.

South African Operations

Sappi Limited is a public company incorporated in South Africa. We have significant operations in South Africa, which accounted for 22% and 25% of our net sales in the six months ended March 2009 and 2008, respectively, and 25% and 27% of our net sales in fiscal 2008 and fiscal 2007, respectively. See “—Operating Results” for the proportion of South African operating profit to total profit and “—South African Economic and Political Environment” for a description of the South African economic and political environment.

Environmental Matters

We operate in an industry subject to extensive environmental regulations. Typically, we do not separately account for environmental operating expenses but do not anticipate any material expenditures related to such matters. We do separately account for environmental capital expenditures.

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Operating Results

Financial Condition and Results of Operations

Our operations are organized into two main business segments and Corporate:

I.                                         Sappi Fine Paper consists of Sappi Fine Paper North America, Sappi Fine Paper Europe and Sappi Fine Paper South Africa; and

II.                                      Sappi Forest Products consists of Sappi Kraft (Kraft), Sappi Saiccor (Saiccor) and Sappi Forests (Forests). Kraft and Saiccor are jointly referred to as the Pulp and Paper business of Sappi Forest Products and Forests comprises the forests business for purposes of this discussion and analysis. The volume, revenue and cost relationship within the Forests business is substantially different to that of the pulp and paper business.

III.                                   Corporate includes all other non-manufacturing and trading sectors of the business not included above.

The analysis and discussion which follows should be read in conjunction with our annual financial statements.

The key indicators of the Group’s operating performance include sales and operating profit.

Operating profit represents sales after operating expenses, which are comprised of cost of sales, selling, general and administrative expenses, other operating expenses (income) and share of (profit) loss from associates and joint ventures. As described in more detail in the discussion and analysis which follows, the key components of the Group’s operating expenses can be characterized as variable costs (primarily variable manufacturing costs) or fixed costs (the fixed cost components of cost of sales and selling, general and administrative expenses).

Cost of sales is comprised of:

·                  variable costs, which include raw materials, energy and other direct input costs, including:

·                  wood;

·                  energy;

·                  chemicals;

·                  pulp;

·                  delivery charges; and

·                  other variable costs;

·                  fixed costs, which include:

·                  employment costs allocated to cost of sales;

·                  depreciation expense allocated to cost of sales; and

·                  maintenance;

·                  fair value adjustment on plantations, representing an accounting fair value adjustment of the timber assets of the Forestry operation of Forest Products, which is mainly impacted by timber selling prices, costs associated with standing timber values, costs of harvesting and delivery, the estimated growth rate or annual volume changes in the plantations and discount rates applied; and

·                  other overheads.

Selling, general and administrative expenses are comprised of:

·                  employment costs not allocated to cost of sales;

·                  depreciation expense not allocated to cost of sales;

·                  marketing and selling expenses; and

·                  administrative and general expenses.

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Other operating expenses (income) are comprised of:

·                  net asset impairment (reversal);

·                  (profit) loss on sale and write-off of property, plant and equipment; and

·                  restructuring provisions raised (released) and closure costs.

Comparison of the Six Months ended March 2009 and 2008

Overview

This overview of the Group’s operating results is intended to provide context to the discussion and analysis which follow. General trends are being highlighted with detailed discussion and analysis in separate sections below. The Group’s operating results reflect the Acquired Business from December 31, 2008, the date of the closing of the Acquisition. The Acquired Business contributed revenues of US$280 million, a net operating loss of US$3 million and a net loss of US$7 million to the Group from the date of the closing of the Acquisition to the end of the second fiscal quarter of 2009.

Segment contributions to operating profit are as follows:

Operating profit for the six months to March 2009 was US$63 million as compared to US$312 million for the comparative period, mainly due to a decline in sales volumes and pulp prices in the Group’s major markets, which was driven by decreased demand for all major products.

Operating profit in the six months to March 2009 was positively impacted by a favorable plantation price fair value adjustment, which was partly offset by a restructuring provision raised in our North American business.

The movements in the sales, variable costs and fixed costs are discussed below. Items not dealt with in separate sections are as follows:

Plantation fair value:  This relates to an accounting fair value adjustment of the timber assets of the Forestry operation of Forest Products. This fair value adjustment is mainly impacted by timber selling prices, costs associated with standing timber values, costs of harvesting and delivery, the estimated growth rate or annual volume changes in the plantations and discount rates applied. All parameters applied in the calculation of the fair value adjustment are market related. The plantation price fair value adjustment impact was positive US$69 million and positive US$117 million in the six months to March 2009 and 2008, respectively.

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Impairment:  In the six months to March 2009 operating profit was adversely impacted by a restructuring charge relating to our North American business and asset impairment charges. The restructuring charge was US$8 million and the asset impairment charges were US$5 million. In the six months to March 2008, a restructuring provision of US$3 million was released and asset impairment charges were US$2 million.

Fire and Flood Damage:  In the six months to March 2009, the cost of fire and flood damages was US$2 million.

Sales

Group

An analysis of sales movements follows:

In the six months to March 2009, sales were US$2,500 million, a decrease of 12% from the comparative period last year. This decrease was driven by a decline in sales volume, lower average prices, mainly for pulp products, and exchange rate effects.

In the six months to March 2009, sales volume for the Group (including the Acquired Business in both periods for comparability) declined by approximately 17% compared to the comparative period last year, as a result of a decline in demand for coated paper and pulp in the Group’s major markets. Actual sales volumes, including the Acquired Business, were approximately 93% of volumes for the six months ended March 2008. On a standalone basis, the Acquired Business’ sales volumes for the six months ended March 2009 decreased by 19% from 916,000 tonnes in the March 2008 period to 745,000 tonnes in the March 2009 period.

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Average prices realized by the Group in the six months ended March 2009 were 6% lower in US dollar terms than a year ago, mainly as a result of the sharp fall in pulp prices, which fell 23% relative to the prior year. Prices realized for coated paper were higher than in the corresponding period for 2008.

The table below shows the impact of volume, price and exchange rates on the Group’s sales in the six months to March 2009 when compared to the previous year:

Sappi Fine Paper North America

Demand for paper and pulp declined sharply during the six months ended March 2009 compared to the corresponding period last year, leading to a 20% decline in sales volumes. The average selling price realized of US$1,073 / tonne was 3% higher than the average selling price realized in the six months ended March 2008 due to paper price increases achieved in fiscal 2008, while pulp prices collapsed in line with NBSK prices.

Sappi Fine Paper Europe

Market conditions were exceptionally weak during the six months ended March 2009 compared to the same period last year. Sappi Fine Paper Europe experienced a sales volume decline of approximately 21% compared to the same period last year (including the Acquired Business in both periods for comparability), as a result of a decline in demand for coated paper in the region’s major markets. Actual sales volumes including the Acquired Business were approximately 103% of volumes reported a year ago. Average selling prices realized in US dollar terms for the six months ended March 2009 were US$987 per tonne compared to US$1,042 per tonne for the six months ended March 2008. This reduction in US dollar price realization was due to the strengthening of the US dollar against the euro from an average of US$1.48 / euro for the six months ended March 2008 to US$1.33 / euro for the six months ended March 2009. Average realized prices in euro terms increased from € 704 per tonne in the half year ended March 2008 to €742 per tonne in the six months ended March 2009.

Sappi Fine Paper South Africa

Sales decreased in US dollar terms by 16% in the six months ended March 2009 compared to the six months ended March 2008 mainly due to the weakening of the Rand against the US dollar from an average of ZAR7.15 / US$ to ZAR9.90 / US$. The sales in local currency terms increased by 16%, despite a 4% decline in sales volumes. Average selling prices increased by 22% in ZAR terms compared to the six-month period ended March 2008.

Forest Products

Timber volumes at Forest Products declined as the business was reducing external sales in order to conserve and build timber supply inventories in anticipation of the completion of the Saiccor upgrade. A major determinant of sales and sales pricing in the Forest Products businesses

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is the NBSK market price. The NBSK prices declined from US$863 per metric tonne at the end of fiscal 2008 to US$577 per metric tonne in March 2009.

This decline had a negative effect on sales pricing of our chemical cellulose. Local sales benefited from the weaker Rand to the US dollar which reduced import substitution and improved both local pricing and volumes. The commercial benefit achieved as a result of the relatively weaker Rand in the six months ended March 2009 compared to the six months ended March 2008 was slightly offset by an adverse impact on the translation of Forest Products’ financial results into the US dollar presentation currency.

Operating expenses

In the analysis which follows cost per tonne has been based on sales tonnes. An analysis of the Group operating expenses is as follows:

See “—Overview” for the line items plantation fair value pricing adjustment, impairment, restructuring and fire and flood damage. Variable and fixed costs are analyzed in more detail below.

Variable manufacturing costs

Group

The table below sets out the major components of the Group’s variable manufacturing costs.

*              Pulp includes only bought-in fully bleached hardwood and softwood.

Variable manufacturing costs relate to costs of inputs which vary directly with output. The other costs component relates to inputs such as water, fillers, bought-in pulp (other than fully bleached hardwood and softwood) and consumables. The Group’s variable costs are impacted by sales volume, exchange rate impacts on translation of European and South African businesses into US dollars, and the underlying costs of inputs. In the analysis and discussion of variable costs, “usage” reflects the changes in cost attributable to volume changes and raw material usage,

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“price” refers to changes in input costs and “exchange rate” relates to the impact of the movement in exchange rates on the translation from local currency to US dollars for reporting purposes at Sappi Fine Paper Europe and the South African operations. The major contributors to variable cost movements at a Group level have been the impact of the exchange rates on translation of the European and the South African operations into the US dollar presentation currency and actual input cost movement. See “—Principal Factors Impacting on the Group Results—Currency Fluctuations” for a discussion of exchange rate movements. Input cost movements are mainly driven by international commodity price changes.

*              Pulp includes only bought-in fully bleached hardwood and softwood.

A further analysis of variable cost developments by region is as follows:

Sappi Fine Paper North America

Raw materials and energy costs per tonne increased in the six months ended March 2009 compared to the comparative period last year, due to a time lagged impact of the increase in international oil prices towards the end of calendar 2008 on chemical and energy input costs. These input cost increases were exacerbated by the inefficiencies of stopping and starting operations as the region curtailed a significant amount of output during the six months ended March 2009 to match the reduced demand.

Sappi Fine Paper Europe

During the period under review the region has undertaken specific cost reduction projects which have contributed to cost reductions through process as well as product reengineering initiatives. A large part of the target synergies from the Acquisition consist of variable cost reduction initiatives.

Variable costs per tonne declined during the six months ended March 2009 compared to the six months ended March 2008, due to a reduction in global commodity prices, in particular market pulp, and realization of cost synergies from the Acquisition.

Sappi Fine Paper South Africa

Input costs per tonne declined in the six months ended March 2009 compared to the corresponding period last year, due to the reduction in global commodity prices, particularly market pulp.

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Forest Products

Variable input costs per tonne in local currency terms increased significantly in the six months ended March 2009 compared to the six months ended March 2008, mainly due to increases in wood and energy costs. Wood costs increased significantly in 2009, due to the impact of a wood shortage after the worst forest fires in South African history that occurred in 2007 and 2008. Energy costs experienced a sharp increase in South Africa in the first quarter of fiscal 2009 due to an increase in electricity costs. The increase in electricity costs reflect price increases instituted by the electricity utility in South Africa, Eskom, required to finance urgent capacity expansion to match electricity demand growth.

Fixed costs

Group

A summary of the Group’s major fixed cost components is as follows:

The regional analysis which follows excludes corporate fixed costs and consolidation adjustments which are not material. Fixed costs include all personnel costs, as well as maintenance, depreciation and other costs, including selling, general and administrative expenses.

Sappi Fine Paper North America

The region has engaged in restructuring and cost reduction processes in recent years. The impact of the region’s restructuring actions and focus on a reduction of overheads is reflected in the reduction of US$25 million in fixed costs in the six months to March 2009 as compared to the corresponding period in 2008. In addition to permanent restructuring actions, the region curtailed paper production in the six months ended March 2009, due to weak demand, and also suspended operations at its Muskegon mill for at least six months. These actions resulted in fixed cost savings, mainly from temporary personnel lay-offs.

Sappi Fine Paper Europe

In the six months ended March 2009, cost saving initiatives remained a key focus area of the region. Fixed costs in the six months ended March 2009 reflect a €69 million increase as compared to the six months ended March 2008, due to the integration of the Acquired Business into the European business in the second fiscal quarter of 2009. Fixed costs excluding the Acquired Business remained flat in the six months ended March 2009 compared to the corresponding period

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last year. The US$45 million increase in fixed costs in US dollar terms in the six months ended March 2009 as compared to the corresponding period last year reflects the strengthening of the US dollar against the euro.

South Africa

Personnel cost is the largest component of fixed costs and remains under pressure in South Africa due to a high inflation environment and the impact of a skills shortage on labor rates, particularly in skilled technical functions. As in the case of the other regions, the South African businesses focus on management of fixed cost.

Sappi Fine Paper South Africa

Fixed costs decreased in US dollar terms by US$15 million, due to the weakening of the Rand against the US dollar during the six months ended March 2009 compared to the corresponding period last year. Fixed costs in Rand terms increased by 3% in the six months ended March 2009 compared to the corresponding period last year mainly, due to personnel cost increases of approximately 3%.

Forest Products

Fixed costs decreased in US dollar terms by US$34 million, due to the weakening of the Rand against the US dollar during the six months ended March 2009 compared to the corresponding period last year. Fixed costs in Rand terms increased by 15% in the six months ended March 2009 compared to the corresponding period last year, mainly due to personnel cost increases of approximately 10%.

Net Finance Costs

Finance costs may be analyzed as follows:

Net interest paid (interest expense less interest earned) in the six months to March 2009 was US$72 million compared to US$63 million in the comparative period in 2008. The increase was the result of increased debt.

The finance costs capitalized in the six months ended March 2008 relate to the Saiccor expansion project in South Africa. After the plant was commissioned during fiscal 2008, capitalization of finance costs for the project ceased.

The US$11 million net foreign exchange gain in the six months to March 2009 was due to the timing of the netting process of foreign exchange exposure. The Group’s policy is to identify foreign exchange risks immediately when they arise and to cover these risks to the functional currency of the operation where the risk lies. The majority of the Group’s foreign exchange exposures are covered centrally by the Group Treasury which nets the internal exposures and hedges the residual exposure with third party banks.

Net fair value loss on financial instruments relates to the net impact of currency and interest rate movements after hedge accounting for certain interest rate and currency swaps the Group has entered into in order to swap fixed rate debt to floating rate and in order to manage the interest and currency exposure on cross-border intercompany loans.

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Taxation

Although profit before taxation was US$2 million for the six months ended March 2009, the total tax charge to the income statement was US$14 million for the period. The high rate of taxation is due to a tax expense in South Africa (US$14 million) and the Group not taking substantial relief on the losses in North America and Europe (losses before taxation US$127 million).

Net Profit

There was a net loss for the six months ended March 2009 of US$12 million compared to a net profit of US$197 million for the six months ended March 2008. The main reason for this change was the impact on sales volumes and selling prices of a significant decline in demand for all major products due to the slowdown in world economies.

Comparison of Fiscal 2008, 2007 and 2006

Overview

This overview of the Group’s operating results is intended to provide context to the discussion and analysis which follow. General trends are being highlighted with detailed discussion and analysis in separate sections below.

Segment contributions to operating profit are as follows: