Thank you for standing by, and welcome to the Orica Limited acquisition of Cyanco and Equity Raise presentation. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I'll now hand the conference over to Mr. Sanjeev Gandhi, Managing Director and Chief Executive Officer. Please go ahead.
Thank you, everyone. Before I hand it over to Sanjeev, thank you all for joining us at such short notice. I take it it's a very busy day for most of you, but it's a very exciting day for Orica. Without further ado, I'll hand it over to Sanjeev to run through the presentation, and we'll have plenty of time for Q&As after that. Sanjeev?
Thank you, Delphine, and good morning to everyone from my side. Again, thank you for joining at short notice. We really appreciate it. Earlier today, we announced the acquisition of Cyanco, a U.S.-based leader in the manufacture and distribution of sodium cyanide, primarily serving the gold mining industries in the U.S., Canada, Mexico, Latin America, and Africa. I will run through the key points of the transaction, Cyanco's business, and how it fits into our strategy and complements our mining chemicals business vertical. And Kim will then cover the equity raising before leaving plenty of time for your questions. You can find the disclaimers in the next few slides. I'm now turning to slide number nine. The acquisition of Cyanco supports our stated strategy to grow our mining chemicals vertical. Mining chemicals, and specifically the production and supply of sodium cyanide, is one of Orica's key strengths.
We've been producing and supplying sodium cyanide safely and securely to our customers for more than 30 years. This is an industry and a product we know extremely well. By adding Cyanco, we are adding significant scale in our manufacturing and distribution network to better serve our global mining customers, first, by doubling or more than doubling our existing sodium cyanide production capacity, then by gaining access to cost-competitive U.S.-based natural gas manufacturing, a key consideration as energy price inflation continues. Number two, by creating a leading global sodium cyanide producer with world-class supply capabilities and established customer relationships. Through Cyanco, Orica's network will expand to the highly attractive U.S. and Canadian gold markets, which Orica does not serve today. Sodium cyanide has a strong outlook.
Global demand is expected to grow at around 4%, while North America's growth is expected to be around 5% over the next five years. Importantly, as it is with our established mining chemicals business, Cyanco is a quality business with a high margin and attractive cash generative, financial profile and a fantastic team. In summary, Cyanco is a perfect fit for the Orica portfolio. I will expand on some of these key points shortly. Turning now to slide 10 and the transaction summary. Orica has signed this morning the agreement to acquire Cyanco for $640 million. The purchase price in US dollars represents an implied multiple of 7.5x the 2023 EBITDA. When we include the expected net cost synergy benefits, the implied multiple is 6.7x.
The acquisition will be largely funded from Orica's existing cash and undrawn committed debt facilities, alongside Australian dollar 400 million underwritten institutional placement. We expect the acquisition to be completed by the end of financial year 2024, which for us is September, as there are certain regulatory requirements and conditions to work through. We've had the opportunity to get to know Cyanco's business and management through a comprehensive due diligence program. We've been extremely impressed by their operational expertise and the quality of the business that they have been running. We are very excited about welcoming the Cyanco team into the Orica family and integrating them into our business post-closing. Now moving on to slide 11. With good margins and strong cash flow generation, Cyanco is a good addition to Orica's business, and we expect it will deliver attractive financial returns.
We expect the acquisition and placement to be mid-single digits earnings per share accretive from the first full year of ownership. Since the two businesses are highly complementary, cost synergies of approximately $10 million per year are expected by the end of year three. This represents more than 10% of Cyanco's 2023 EBITDA and will come from head office and network optimization and improvements in manufacturing and supply chain. The return on net assets contributed from the acquisition placement is expected to be within Orica's stated guidance of 12 in the medium term. Orica's balance sheet remains prudent, with pro forma gearing expected to be at the lower end of Orica's stated range of 30%-40%.
We remain committed to delivering on our existing climate change targets and ambitions, and we will integrate Cyanco's emission profile into our inventory and public targets and ambitions. Moving on to slide 13. The acquisition of Cyanco plays firmly into our strategy, both in terms of our broader Orica strategy of growth beyond blasting and growth in our established mining chemicals business vertical. We intend to start reporting a mining chemicals segment from FY 2025. On slide 14, the acquisition of Cyanco enables Orica to establish a leading global mining chemicals business serving our mining business. In terms of sodium cyanide manufacturing capacity, we will more than double our existing capacity at Yarwun, in Queensland, to approximately 240 kilotons per annum, with the addition of two manufacturing plants in Nevada and in Texas, in the U.S....
Importantly, we will gain access to cost-competitive US natural gas-based feedstock for our manufacturing assets there. Our global integrated network will be enhanced and highly differentiated. We will have three points of manufacturing globally, improving the security of supply to customers and strengthening our competitiveness. We will have a global network of 6 transfer stations, reaching customers in top gold mining regions, both established and emerging. The majority of the sodium cyanide volume could be distributed by land into 4 of the top 10 global mining countries in the world, namely Australia, Canada, United States, and Mexico, with the balance distributed by sea across Orica's existing global network of gold mining customers. We will expand our patented Sparge technology and operational expertise to ensure the safe and responsible handling and transportation of sodium cyanide across the entire network.
Orica's global footprint and extensive range of solutions will also enhance our ability to service mining customers with a broader suite of products and services across the mining value chain, from exploration to processing. That's what our strategy is all about. Demand for sodium cyanide is attractive to Orica, and it is a product we know very well and have succeeded in for more than three decades. It is often regarded as countercyclical, stemming from its close ties to the gold mining industry. We expect global demand for sodium cyanide to grow at 4% per annum in the next five years, with the North American demand growing at a higher rate of around 5% per annum. This is due to a strong pipeline of gold mining projects coming online and decreasing ore grades. Basically, you need more sodium cyanide to extract the same amount of gold.
The growth in demand, at least in the near term, is therefore expected to outpace supply, as suppliers for sodium cyanide take time to scale supply in a complex operating environment, including very high CapEx spends, complying with regulatory requirements, and long lead times, as well as a small number of technology providers in this industry. There tends to be a strong correlation between sodium cyanide price and industry utilization. This acquisition will enable Orica to support growing demand. Moving on to slide 16. This slide shows the pro forma view of how the Cyanco acquisition, in addition to the acquisition of Terra Insights, further increases Orica's exposure to attractive market segments and further diversifies our business for growth. Firstly, our mining chemicals vertical contribution to group revenue is expected to more than double from 5% to 11%.
Secondly, the acquisition will help us to further diversify our commodity mix into gold. Our gold exposure is expected to grow from 21% today to 25% after the acquisition. Finally, given Cyanco's current business is predominantly focused on North America, the contribution will increase our North American segment from 22% to 25% as Orica increases exposure to attractive gold mining regions in the U.S., Canada, and Mexico. You can see just how compelling the acquisition of Cyanco is in continuing to grow our exposure in attractive markets and to diversify our business in line with our strategy for profitable growth. Cyanco has a leading market position in North America. In the U.S., a lot of the gold mines are serviced by Cyanco.
It's a good margin business, delivering around 22% EBITDA margin over the past three years and has strong cash generation capability, with free cash flow at approximately 90%. Capital expenditure is well managed at around $10 million annually, focusing on maintenance and safety improvement spend. Cyanco also has strong commercial discipline embedded in its business model, including customer contracts with pass-through structures for cost increases and automatic term renewal mechanisms. Moving on to slide 19. As I mentioned earlier, Cyanco has two manufacturing assets that are well located to service North American customers and have the flexibility to serve customers internationally via seaborne markets. Both plants are well-maintained and operating at high utilization. They have good and stable access to feedstock, including hydrogen cyanide. The facility in Nevada has around 95 kilotons capacity and can produce both solution and solid sodium cyanide.
The plant is the only facility located in the Nevada gold region, and given close proximity, Cyanco can transport products to customers by road. Nevada produces more than 70% of U.S. gold production, so this is a critical asset to support the local industry in that region. The Texas facility can produce up to 50 kilotons of solid sodium cyanide per year. Cyanco has a long-term agreement for the site and a third-party arrangement for manufacturing. Since the plant is located close to the Port of Houston, Cyanco is able to transport solid sodium cyanide through a variety of channels, including road and rail, and can serve a varied seaborne market across the Americas and globally. I now pass on to Kim to talk about the equity raise.
Thanks, Sanjeev. Now on to slide 21. As Sanjeev mentioned earlier, the acquisition of Cyanco and associated transaction costs will be partly funded through a fully underwritten institutional share placement of $400 million. The number of new shares issued is expected to represent about 5.5% of the total Orica's existing issued share capital at a price of $15.84 per share. This represents a discount of 6% to the last traded price of $16.85. The placement will be open to eligible institutional shareholders. We intend that Orica's existing shareholders who bid for an amount less than or equal to their pro rata share of new shares will be allocated their full bid on a reasonable endeavors basis. We will also conduct a non-underwritten share purchase plan, capped at $65 million, to facilitate participation for our eligible retail shareholders....
and which will be free of any brokerage, commissions, and transaction costs. Looking at the sources and uses table on slide 22. We will utilize our existing cash and undrawn committed debt facility to largely fund the acquisition purchase price and associated transaction costs, with the remainder to be funded by the institutional placement we have announced today. Turning to slide 23, where you can see the pro forma balance sheet. This table combines the balance sheets of the Terra Insights and Marlun acquisitions, Cyanco acquisitions, as well as the placement we have announced today, with the Orica's balance sheet as at 30th of September 2023. It shows gearing of 32.5% on a pro forma basis, which is at the lower end of the target range of 30%-40%. Our approach to funding this transaction has been underpinned by our capital management framework.
One of the key principles under this framework is the retention of our investment-grade credit rating, and we have sized the debt and equity split on this transaction in accordance with the maintenance of our rating. And finally, you can see the timetable for both the placement and the share purchase plan on slide 24. With that, I'll pass you back to Sanjeev for closing remarks.
Thank you, Kim. Thank you all for joining us today. I hope you've been able to get a good overview of the key points of the transaction, Cyanco's business, and how it fits into our strategy and complements our mining chemicals business vertical, and how we plan to fund this acquisition. In summary, this is a complementary strategic acquisition supporting our strategy to grow our mining chemicals business. It creates scale in our sodium cyanide manufacturing and distribution network in an industry we are very familiar with and have operated safely and securely for more than 30 years. The acquisition will enable us to capitalize on the strong outlook and growth profile for sodium cyanide, expand into highly attractive U.S. and Canadian gold industry, while maintaining Orica's prudent balance sheet and driving attractive financial return for Orica and our shareholders.
Cyanco is a perfect fit to the Orica portfolio. We will now go to the questions. Thank you very much.
Thank you. If you do wish to ask a question, please press star then one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two, and if you are on a speakerphone, please pick up the handset before asking your question. The first question today comes from James Wilson at Jarden. Please go ahead.
Morning, guys. Just a couple of questions from me. Firstly, are you able to run us through what drove the strong earnings performance in that 2023 EBITDA number relative to 2022, please?
Thanks, James. Yes, so, I mean, look, on the earnings profile of Cyanco, which we have disclosed, is very similar to the earnings profile of our own cyanide business. Now, we obviously do not, as yet disclose those numbers, so it was difficult for you to compare, but it was quite similar. We had a very strong 2023, and there were a couple of reasons for this. So the first one was that the gold demand was very strong. Gold pricing was at very, very high levels, and there was significant need for sodium cyanide and services, the gold industry. There was another factor that has come through in the Cyanco earnings for 2023.
If you recollect, in 2021 and 2022, we saw a significant surge in natural gas and ammonia pricing in the U.S., and in the latter part of 2022, this started to correct downwards. So there is some lag effect of spillovers because we have three monthly rise and falls within the contracts at Cyanco, and there was some spillover of 2022 earnings that came into 2023, which gave it a bit of tailwind. But overall, the earnings profile was very, very similar to the way we have been running our sodium cyanide business here.
Great. Thanks, guys. And, and just another one from me. On that mid-single digit EPS accretion that you've spoken to, are you able to give us some color on whether that's a pre-amortization number? And also maybe if that is the case, then the EBITDA and CapEx intensity of the business you're acquiring.
Yeah, for sure, James. So that number that we have announced, mid-single digit, it is before PPA, before the amortization. It does include depreciation. So Cyanco's been running a depreciation of around $20 million for the last couple of years, and we would expect that to go forward. I'll also call out that it is before synergies as well. From a CapEx perspective, I'll hand over to Andy.
Yeah, James, happy to talk to that. As we've published here, the sustenance capital for this business is $10 million per annum, and as a result of due diligence, we will add a further $6 million per annum till 2028. Beyond 2028, it drops back down to that sustenance capital level, which is very consistent with our Yarwun facility.
Okay, great. So that depreciation number was AUD 20 million, and the capital is, call it, $16 million per annum. Is that right, on a run rate basis?
Yeah. The depreciation was in U.S. dollars, $20 million. Both numbers were in U.S. dollars.
Okay, great. Thanks, guys. Just one final one from me. You've spoken to cost synergies of $10 million as a run rate after three years. Are you able to run us through what some of these are, particularly conscious, given that you're acquiring, you know, business from PE?
Absolutely. So in that net cost synergies , some cost to achieve as well, so we've netted those out. Really, there are three principal areas that those cost synergies will be achieved. First is in optimization of our corporate offices. We have a corporate head office in Denver, and they have one in Sugar Land, Texas, so we'll bring those two teams together. There'll obviously be some optimization in supply chain and procurement, and also some in manufacturing improvements.
Just one final one from me. Just on employee retention under, obviously, Orica's ownership, are there any incentives for management to stay on?
... No, there's not. It's a clean, as you'd imagine, a clean sale from PE. But we have engaged at the individual level with the key management folk, and clearly the manufacturing teams are located on the asset at site, and they're very geographically pleased to continue on, and we'll work through the corporate office in due course.
Thanks, guys.
Thank you. Your next question comes from Owen Berrill at RBC. Please go ahead.
Yeah, just a few questions from me. Just wanted to get a sense of whether there's, you know, other than the geographic reach and customer book that you're gaining from Cyanco. Just wondering if there's any technology or process benefits that you think Orica can leverage from that business?
Yes, Owen, there will be. Obviously, they have they have a very well-run assets. The Nevada asset has been running for nearly 30 years, so they have a lot of experience as we do. So there will be a lot of knowledge sharing between the manufacturing folks in terms of things like yields, like what catalysts we are using, what kind of consumption norms we have for feedstock, how are we handling effluent, how are we managing closed loop manufacturing. So there'll be a lot of intelligence sharing. Orica will learn from our new team. Obviously, we will share our knowledge and experience with them. So that's one obvious one.
The other one is, and I talked about it on the call, we have this patented Sparge technology, which is a specialized way of handling solution, a very tricky product to handle. So we will obviously share that with the team, with our new team there, and we'll see where those kind of synergies come. Now, one of the biggest synergies is obviously the fact that they do not have a blasting business. We clearly are number one in the world in blasting. So wherever there's opportunity to also upsell with the blasting at Cyanco customers and vice versa, we'll do that. And then clearly, we'll also introduce our new digital solutions into the Cyanco customer base and the other way around.
So there's quite a few in terms of technology sharing and in terms of best practices, but we'll work through it step by step after the closing.
Okay, that's excellent. Just another question from me. Just regarding the assets that you're acquiring in Nevada and Texas. You know, just get a sense of how old, I guess, the Texas asset is, and are there any major shutdowns or overhauls that are coming due in the next, call it, 5-10 years? And just wanted to get a sense as to whether there's any major, I guess, gas contracts that are coming due as well.
Yeah. So the Texas asset is relatively new. It's 10 years old. And obviously both assets are very well-maintained, and we've done our due diligence there, and we are very impressed at the operating skills and the maintenance plans of our new team there. In terms of shuts, these shuts are not as intensive as you've experienced with ammonium nitrate and ammonia. They are relatively smaller shuts, normally couple of weeks a year, and then you have the regulatory shuts every second year or third year, depending on the local regulation, which four weeks. So it's more routine. It's very similar because the technology is very similar to what we run in Yarwun, so we are very familiar with that.
Obviously, there is some room for optimization now because we have the flexibility in terms of scheduling our shuts to ensure there's supply security for our customers. We don't have unnecessary stock buildup because sodium cyanide has shelf life, so it's a product which is difficult to store and keep for long periods of time. And since we were single source, we were quite limited in terms of how we take our shuts, how do we plan that, and now that we have this network, we have much more flexibility in planning that going forward.
That's great. Thank you.
Thank you. Your next question comes from Reinhardt van der Walt from Bank of America. Please go ahead.
Good morning, folks. Thanks for taking my question. I've just got a basic one. Could you just remind us on the contracting structures that you've got with miners in this, in cyanide, duration, you know, terms of pass-through, repricing frequency, and maybe just sort of the linking between those cyanide prices and the global energy prices?
Thanks, Reinhardt. So the contracting strategy is very similar to what Orica does because obviously that's industry standard, that's an industry norm. Contracts normally duration or range from 12 months to, depending on, you know, how critical supply ability is for a certain customer in a certain region, and that's been normal standard on both sides at Cyanco, but also here with Orica. The contracts have normally quarterly rise and falls, and this includes the major cost inputs such as natural gas, for example, caustic soda, energy costs, CPI, and freight costs, and that triggers every quarter as we do. Now, the good part was when we looked at the commercial contracts, we saw very strong commercial discipline, as we have in Orica. That's been quite pleasing.
You know, that will obviously continue now, and we'll leverage off each other's skills here in terms of managing the commercial contract book.
Got it, understood. You're basically just getting a tolling margin through those plants, and you're passing through all of your costs?
That's correct. As we do with our ammonium nitrate business, that's kind of a standard in the industry.
Yep. Okay. And the mobility of product across borders, you know, I understand it's difficult to move. Do the markets tend to be generally quite geographically siloed?
Absolutely. So we are the largest seaborne trader of sodium cyanide in the world, because most of our Australian product goes overseas into all parts of the world. If you are selling liquid to the gold miner, which is the preferred solution for them, then you are limited by distance, so you cannot ship liquids over thousands of kilometers. It's just not possible. It's just too expensive. So there is a captive demand in the close proximity of your assets... And then if you have to ship it longer, then you have to first convert it into solids, then you know, box container it, ship it, and then again, melt it back. So there's significant costs there. So yes, there is geographical restrictions in terms of the ease of transporting the product across the globe.
It's not an easy product to handle.
Yep, got it. Understood. CapEx guidance, you know, is AUD 10 million + AUD 6 million for the next couple of years, then back down to AUD 10 million. Could you tell us, is that AUD 10 million CapEx, is that basically enough to sustain the asset in perpetuity, into perpetuity?
Yeah.
You know, what is your turnaround year CapEx look like? Just remind me again how frequent those are.
Yeah. So, it's quite similar to routine maintenance and sustenance we do at Yarwun, not much different. We have had a bit of a step up, as Andy mentioned earlier, you know, for things like cybersecurity at our manufacturing sites, operational technology, you know, upgrading some of the digital control systems of the plant. So there'll be a little bit of investment initially, and then it'll start to normalize that. Now, that obviously excludes any special spend for turnarounds. So, you know, when you do a turnaround, which happens every two or three years, depending on the local regulation, there is inspections, so there's regulatory turnarounds, and then you open up the equipment.
If there's a pump which has failed or if there is a compressor that has to be changed, that obviously comes on top as capital. On an average, that AUD 10 million is a pretty good number.
Got it. Thanks.
Thank you. Your next question comes from Brook Campbell-Crawford of Barrenjoey. Please go ahead.
Good morning. Thanks for taking my question. I'd just like to hear your views on on potential price risk for Cyanco in North America, particularly in places like Nevada, which I understand Cyanco's got very high market share. So I guess just given consolidation across the customer base in that gold market, how do you get comfortable that you don't sort of come under pressure from pricing and, you know, that position doesn't get dislodged by new players?
Yeah, thanks, Brook. Look, we've been doing this business for 30 years. We know very well the market dynamics. There are two aspects to it. So basically, the margin profile of the business, one is clearly supply, demand. So it depends on when gold customers are pulling more, and if there's not enough supply, then you get an impact. The other is the input factors, which is cost. So it all depends on where we are in the cost cycle. So both of these factors, like in any commodity, that they decide pricing, they also decide margin. Now, so sodium cyanide is globally traded. We are the largest. We have a pretty good view on the global markets.
We see that the demand outlook is pretty positive, as I mentioned earlier in my presentation. And then supply depends clearly on what kind of volumes are available, where they are available, how at what kind of cost competitive supply chains can you take it from one place to the other. So there's a lot of factors there. Given the fact that this business is extremely familiar to us, we feel pretty comfortable with the earnings profile.
Okay, great. Thanks. Can you talk about being familiar with the global dynamics, and can you talk about what the upcoming supply additions look like, I think in the Middle East, and how that compares to global demand for cyanide? And if at all, you're considering this with respect to your opportunity for global cyanide sales, both from Cyanco and your own business that you own.
Yeah, absolutely. So we obviously monitor any announcement made by competitors. There's one announcement of a debottlenecking happening here in this part of the world, so we are aware of that. Outside of that, there are a couple of projects that have been announced for one in the Middle East, but these are... If they come, we're a long way off, because, you know, what is interesting about sodium cyanide is there are two routes to produce it. One is on purpose, which is what we do at Yarwun, and the same thing we do also in Nevada. But you also get sodium cyanide as co-product when you make acrylonitrile.
Now, that capacity is, obviously limited as a side product, but if there is a new acrylonitrile plant somewhere in the world, those producers could decide to invest in converting that side product into sodium cyanide. Now, that capacity is restricted. It's obviously a very long value chain, and it's extremely capital intensive. So in future, maybe in five or 10 years, if there's a new, acrylonitrile plant, which goes predominantly into ABS manufacturing, which is an engineering plastic, then there might be a little bit more of capacity coming into the market. But we haven't heard too much, in terms of new announcements.
Great. And just one really quick final one. Can you just talk about the capacity utilization at the plant, and are you able to grow with that 4%-5% demand outlook you talked to over the next few years with your existing asset base? And if, if that is the case, does that drive margin expansion as you get more volume through your existing assets? Thanks.
Yeah, I mean, that's correct. We'll get the manufacturing folks together, of all the three assets, they'll share good practices. We'll see what we can do to squeeze capacity out, if that's possible. If it needs capital, it'll take a bit longer. If it is simple in terms of supply chain optimization, in terms of planning turnarounds better, so that we always have capacity, then we, clearly will get some volume short term. So that's the work to do, in terms of... We do need more capacity to grow, clearly. I mean, that's the whole point of, of supplementing our existing business here. So we'll do everything we can to squeeze more out of our plants. Now, Orica has had a pretty good record, track record of doing that. We've done that very successfully with our AN assets.
We have done that with sodium cyanide. You remember we announced an expansion in Yarwun in 2021. Those assets are running now at very high loads. So we'll continue to do, bring that same skill set into the two new assets that we've acquired.
Very good. Thank you.
Thank you. Your next question comes from Andrew Scott at Morgan Stanley. Please go ahead.
... Thanks. Good morning, Sanjeev. Obviously, if you look at the financials, only $200 million or thereabouts of, of PP&E. Given the age of the plant, I imagine there's been a fair amount of depreciation. How would you reassess- how would you assess replacement cost of this level of capacity?
Extremely high. This is a very, very challenging asset to build. I mean, if I would build today a new asset, greenfield in Yarwun, it would cost me triple, 3x or 4x , what we would have built, 30 years back. So it's not just the, the, the, the, the higher capital costs, the higher replacement values, it's a constrained technology. It's not easily available. So there's a lot of restrictions in terms of permitting and everything else, so the replacement value of these assets is extremely high. Also, the cost of debottlenecking, the specific, investment cost in debottlenecking per ton is extremely high. We experienced it ourselves when we expanded Yarwun, in 2021 and added 10% more capacity. This is an expensive exercise, and it's an expensive asset to build.
So would I extend that, that you believe that you're buying the capacity, you're buying below replacement cost?
We've got a great asset here. A very well-run, well-maintained. We are very happy with what we've got, and we are very happy that we have access to more tons today in very attractive markets.
Okay. And if I just think big picture, you, you've been busy over the last, I think, month, number of large acquisitions, seemingly a lot on your plate. How do you view the Orica, the business makeup, the suite of assets you've got? And do we expect a period of consolidation now, or are you still seeing some gaps out there?
I think the strategy was, when I elaborated in 2021, was, grow the core, which is blasting for mining, and then grow everything else. So we've now successfully developed a very, interesting and profitable digital business. We now have a mining chemicals business. Our Cyanco business is doing very well. So I'm mighty pleased now. I would say the heavy lifting is done. We'll now put our heads down. We'll integrate Terra Insights, we'll integrate Cyanco, and then we'll grow the business organically. That's going to be the focus in the next near future.
That's helpful. Thank you.
Thank you. Your next question comes from Richard Johnson at Jefferies. Please go ahead.
Thanks very much. Sanjeev, you touched briefly on the market balance, supply/demand balance for sodium cyanide. I was wondering more generally, if you could talk around how mature you think the current cycle is.
In terms of gold demand, I mean, that's a macro play. All of us follow the gold industry. We have seen the recent consolidation in the industry. People are looking for M&A, people want to invest. I've talked about ore quality degrading. I've talked about strong anti-cyclical demand for the business. So I do expect that the gold business will continue as a precious metal, but also into the jewelry business, as long as the Indians and our Chinese customers keep buying a lot of jewelry, so that's very positive. In terms of the mining cycle, given the fact that it's very difficult to access new ore of high quality, there will be a lot of effort in trying to extract more out of what you have today.
That means this is a direct translation of a very positive outlook for the sodium cyanide consumption.
Great, thanks. And on the capacity side, obviously, we know about the expansion in the west here in Australia. And I know, I know you've talked about debottlenecking Yarwun in the past. Is that something that you no longer need to do now?
That's correct. That's correct. We do not need to spend capital now in Yarwun. That would have been a plan C, if we won't manage to supplement our capacity here. So that capital we will save.
Yeah. And do you know, you know, how much... What the sort of quantum of that capital would have been to expand Yarwun?
That's it, it's significant because you can imagine we've been optimizing, Richard, that asset for 30 years, and then you reach a limit. So in terms of the quick wins, in terms of incremental capacity. After that, you need to do major changes, like changing out a reactor. That can cost $hundreds of millions. So, you know, we've reached a kind of a limit as to how much more we can do in terms of the front end of the plant, in terms of the back end of the plant. There's always possibility, but it's always about payback. How much capital are you willing, you know, to spend, and what's your payback on the incremental ton? So it's not cheap to do this kind of debottlenecking in this kind of process technology.
There's a reasonably significant strategic synergy there, which obviously isn't captured in the numbers you talked about today.
Absolutely.
Got it. And then just on the subject of earnings quality, I mean, you've got the very useful slide on 16 showing the split by revenue and the change. If we think about it from a profit perspective, I mean, does this transaction send you well on the way to, you know, a blasting, non-blasting split that's roughly even?
We're getting there, but you will know more FY 2025 when we start publishing the mining chemicals vertical.
Okay, great. And then finally, the—I just want to clarify the comments you made, and it's on the slide about the Texas plant. I'm just trying to understand what the operating backdrop to that is. Is it, it's—Am I right in thinking it's operated by a third party? And if that's right, is that something you can take in-house and again, generate a synergy?
So, the Texas asset is part of a chemical complex, where there are several different kind of manufacturers and tenants on the site. That's a very common thing in chemical industry. In the past, that chemical complex was owned by a single owner, and then people started divesting the businesses, companies split up, and now there are multiple owners, but it's an integrated manufacturing facility. So most of the feedstock is produced to make plastics, as I discussed earlier. And then the co-product that comes out of this is a raw material that is used to make sodium cyanide. Now, we own the asset, we built the asset, we operate that asset, but because this asset is a small part of a much bigger chemical complex-...
The manufacturing operations are run by the owners of the assets there, not by us. We have people there who supervise, who monitor on a day-to-day basis, but we do not physically operate the assets. We have a service level agreement with our raw material supplier. Since it's been an integrated asset in the past, it was not planned to be split up because then you have a lot of dis-synergies. So just to maintain the synergies and the efficiencies, we have kept the manufacturing model, even though the ownership has changed in the downstream business.
That's very clear. Thank you. And then just finally, can you remind me, what proportion of the gold mine's cost is sodium cyanide?
Roughly 4%-5%.
Okay, so very small.
Minor, minor, just like explosives. Small, but critical.
Yeah. Got it. That's fabulous. Thank you very much. That's very helpful.
Thank you. Your next question comes from Daniel Kang at CLSA. Please go ahead. Pardon me, Daniel, the line may be muted.
Oh, sorry, guys. Thanks, Sanjeev. Just a quick one, couple from me. Most of my questions have been asked. Just I'm wondering, how does Cyanco's business compare to Orica's own cyanide, sodium cyanide business?
Yeah, very similar. Similar technologies. Obviously, capacity 50% more than what we have. The big difference is that they do not have too much of international trade. So, as I mentioned earlier, most of the cyanide we produce here in Australia goes overseas, all over the world, to different parts of the world, as a solid. And then we have our handling stations, where we convert it into liquids and then cater to our customers on a daily basis. Their business is mainly within North America, predominantly in the U.S. market, so it's predominantly a liquid business. The Texas plant has solids only, and that's the one which has access to sea freight through the Houston port. So that business, that product then goes to Mexico.
It also goes into Latin America. But the big difference is, first of all, obviously, their cost base, so they're based off very competitive feedstock, Henry Hub natural gas pricing. So that's the one big advantage. Secondly, they have very short lead times to their customers. We have very long lead times out of Yarwun, so that's the second channel. And thirdly, they have predominantly their business as liquid because they have these short lead times to their customers. So very similar business, but obviously a different customer profile because they're not so much into international trading so far.
Right. So that, that would, from your points you've made, it would suggest that their margins are superior to, to Yarwun. Is, is that correct?
I don't like to talk down Orica margins, but, from a net back point of view, we have higher costs for, logistics and freight, and obviously, we pay Australian gas prices. We don't pay Henry Hub here.
Cyanco's 22% margins, how did that track over the last few years?
It's been pretty consistent. So there have not been significant spikes here, obviously, because the rise and fall mechanism works, so the margins are kind of in that range or ballpark. And then, we've looked at historical numbers, so there were no real surprises. A little bit of volatility that comes more from the lags, and I talked about the 23 positive lag. You could also have a negative lag if there's a significant decline in feedstock pricing, and then, you see that happen, but that's not unusual. Apart from that, the business has been, you know, quite stable and not that cyclical.
Thanks, Sanjeev. I might squeeze one more. Just in terms of customer overlap, yeah, if you can just discuss that opportunity.
Yeah. So obviously in sodium cyanide, zero overlap, because we don't sell anything in the U.S. market. In terms of our blasting and digital business, there is some overlap because we do blast at some Cyanco customers, so we have seen them in the market there. And then obviously with some of our blasting customers in the gold industry, in Canada and in the U.S., Cyanco is not a supplier, so we are obviously now going to start opening doors on both ends. And then clearly, the digital business is where we will overlap, both with the gold customers but also with the non-gold customers.
Thank you. Your next question comes from Scott Ryall at Rimor Equity Research. Please go ahead.
Hi. Thank you. Hopefully, two pretty quick questions. So if I look at slide 14, and I think just some comments you made to the question just now, Sanjeev, are you expecting not a huge amount of focus from U.S. antitrust perspective?
I mean, look, we will have to go through the regulatory process. Our market share in the U.S. is zero, so we do not expect any unpleasant surprises, but it'll take time, and that's why-
Regularly, okay.
Yeah. Closing is not before end of FY 2024 for us, which is September.
Okay. And then my second question refers to slide 16, and again, you've talked to this a little bit, but the one that really stands out to me is the shift up of exposure to gold, which you show in the middle set of bars. You talked about gold being, you know, macro and jewelry related, but I wonder, just sitting a bit higher level, can you just explain why the increase in gold to a quarter of your revenue is something positive for Orica, please?
We get a double benefit from gold industry. We do blasting in gold, and we do chemicals in gold. So that gives us that double benefit, that gives us that additional exposure, and that's why it is so attractive to us. And now we are starting to introduce our digital solutions into the gold industry. So all of three means that this particular segment, as for Orica, are very high value because we are able to, you know, offer multiple solutions out of the different business verticals for us. That's why that business is so attractive and interesting for us.
So is this, is this the end market then where, you know, things come together for you in terms of the strategy that you're, that you're driving here?
That's a beautiful example of the full service offering we are planning for most of our markets. So you come with blasting, which is our core business, you come with the digital, which is geology to mill, and then you come with the mining chemicals. So exactly, that's the point, right? To bring full solution Orica into the mining industry, not just as an explosives producer.
Okay, great. Thank you. That's all I have.
Thank you. Your next question comes from Nathan Reilly at UBS. Please go ahead.
Hey, Sanjeev. I think previously when you've put a spotlight on the global cyanide industry, you flagged that industry utilization was running around 90%. Can you give us an idea of what you think U.S. utilization is running at? I guess also, you know, in the context of what you've been able to achieve with your ammonium nitrate businesses in both North America and also the APAC region, just around commercial discipline on pricing, do you see some opportunities here to also extract some of the same benefits around increased commercial discipline focus from this acquisition?
Absolutely. So in this industry, utilization is still quite healthy. You know, anywhere between 80, 85%-90% in that range. Yarwun is sold out. I've already said that several times now. So that tells you, as a proxy for the global industry, that the industry utilization is quite high. Commercial discipline, we were very, very happy the way, Cyanco team has been running their business. They have been as sharp and focused as we have been in terms of managing commercial discipline. Now, we'll obviously learn from each other in terms of better practices, in terms of how we could do better in that, and there'll be some knowledge sharing and some value sharing there.
But, we've not seen any obvious challenges in the commercial contracts and the business that Cyanco has been running.
Okay, thanks very much.
Thank you. Your next question comes from Paul McTaggart at Citigroup. Please go ahead.
Hi, Sanjeev. Look, I just, there's a big intangibles number on that Cyanco balance sheet. So what is that? Is that relating to, you know, the previous acquisition where goodwill was kind of booked as intangible? What is that to the $90 million?
Yeah, sure. Thanks, Paul. So the math behind that is simply the acquisition price, less the physical assets that we're purchasing, such as the plant and equipment. If you can then think about what does that number represent, Sanjeev gave a really good overview earlier on around the value of those assets that we've got in those two locations. They're over 30 years old, which is relatively new in the chemicals industry, but it's still a 30-year-old asset that's producing significant profit and significant cash flow. So the value of that intangible really represents the value coming out of that plant, the customer contracts that we've got, the stickiness nature coming through that business.
Yeah, thank you.
Thank you. Your next question comes from Ray David at Blackwattle. Please go ahead.
Thank you. I'm just trying to understand the different economics between the two different plants. So one of them produces HCN, and the other one's got a long-term HCN supply contract. Is there much difference in margin volatility between the two businesses? I'm just trying to get a sense, are you making HCN margin on Nevada, or is Texas more of a pass-through, or are they both sort of similar? Thank you.
Both are similar, but the nature of the products are different. So obviously, the liquor business or the solution business has better margins because you have lower costs. At the solids business, you have to convert liquid into solid and then ship, and then again convert it back to liquid at the customer site. So that obviously has additional cost and then obviously the longer supply chain. You can take solids longer distances, but that also adds freight and handling costs and warehousing costs and intermediate storage and all of that. So yeah, the margin profiles are different. Liquids are clearly the more profitable business because they are lower cost in that respect. In terms of pass-through, both the commercial contracts are similar because the customer doesn't differentiate between which site you get the product from.
The commercial contracts are standardized across all sites.
Okay, and you've talked a lot about replacement costs versus what's on the balance sheet. But, could you talk to has there been much capacity added in the U.S.? And generally, what's the, I guess, EPA or approval process or timeline to add incremental capacity, both brownfield? Thank you.
So the last greenfield or brownfield asset that was built was a Texas plant that we acquired. Since then, there have been a couple of capacity expansions, including ours, but there haven't been too many greenfield dedicated sodium cyanide plants. There have obviously been a couple of acrylonitrile plants that have been built, and the one, for example, in Texas, and that gives you the side product out of which you can make sodium cyanide after significant investment. Permitting times are challenging. Capital requirements are quite high. The technology is very tricky and hazardous, so you need to use special material of construction. I'm very familiar with this technology.
I ran a hydrogen cyanide plant in BASF in my former life, so I know this very well, the Andrussow technology, as it's called, and it's a very tricky technology. Hydrogen cyanide is banned for transport everywhere in the world. The last ban happened a few years back in China, so the product has to be made in situ and then consumed in situ. You cannot transport it. So it's a highly restrictive business, and it needs a lot of special handling, as is the case with ammonium nitrate. Now, we obviously have been doing this for a very long time, so we feel very comfortable in tackling these kind of chemistries.
Okay, thank you.
Thank you. Your next question comes from Ben Wedd at Macquarie. Please go ahead.
Hi. Hi, guys. Thanks for taking the question. Maybe just to a sort of earlier point there, where you were talking about the sort of the strategy coming together. Can you sort of speak to the percentage of the cost base that you could have, you know, could target with your sort of tech, your cyanide business and explosives?
You mean, the share of wallet at customers?
Yeah, correct.
Ah! Okay. Okay. So look, the strategy, and that's how we started, by formulating a strategy, as to how do you grow a market leader? And we are global market leader in explosives, so how do you grow, being a market leader? It was the share of wallet. So explosives was on an average, depending on which industry or commodity you're catering to, anywhere between 2%-5% of a miner spend. So the theory was, if you can double the 2%-5% to 10%, you can double the profitability and double the size of Orica. And that's where we needed new offerings. And that's coming from digital, that's coming from quarry and construction, and that's coming from mining chemicals.
So the idea is basically to grow the share of the wallet of a customer. Now, I can't give you a number because, you know, the requirements in an open cut coal mine are very different to an underground copper mine, for example, or to a gold mine, because the processes are quite different, or iron ore. But in every case, you know, the purpose of the strategy was to increase share of wallet by adding more services and products and solutions to our same customers. So stick to your core. What do we know best? We know mining, blasting. We've been doing this for 150 years. How do we leverage that and bring more products, more customers, and more solutions to the same industry? And that's exactly where we are headed.
Great. Thanks for that. Then maybe just a question for you, Sanjeev, also, Kim, just sort of looking at the gearing, you sort of mentioned there, sort of, low end of the 30%-40% target range, post-completion. I mean, there's some pretty good cash generation over the next few years, potential Deer Park sale as well, which could see that gearing move even lower. So how should we sort of think about capital allocation going forward, and where you might sit in that gearing range?
Yeah, for sure. So let me address that by talking about the equity raise that we've done today, and that has really been sized in relation to preserving our investment-grade credit rating. So at the moment, as far as where we look at positioning our balance sheet, the investment-grade credit rating is a key principle for us. So if you think about going forward, we're sort of sitting at that bottom end of that 30%-40% range, which is probably appropriate place for us to get the balance sheet in a good position and protect our rating.
Great. Thanks, Sanjeev.
Thank you. Your next question comes from Anthony Longo at J.P. Morgan. Please go ahead.
Good morning, everyone. Well, thanks very much for all the color thus far on the transaction and the strategic rationale. Just had a quick question. In the context of the top line growth and, you know, growth that you are seeing within gold, but also cyanide, but also with North America outpacing that, in the context of the strong margins that this business generates and the cash conversion that it generates, I mean, what was the motivation of the seller ultimately to partner this business there, even in the context of the multiple that you have paid?
Yeah, look, I can't talk on behalf of the seller. It's a question you have to ask them. My understanding is that they've held it long enough. They've held it since 2018. We are now in 2024. That's 6-7 years. If you look at the average history of a PE ownership, that kind of falls into that ballpark. Now, obviously, we are a natural owner for this business. We are a strong strategic for that business, and clearly, the management team and the employees must have had a say there, but I really can't comment on behalf of the seller.
Understood. Thank you.
Thank you. That concludes our question and answer session. I'd like to hand back for closing remarks.
Thank you, and thank you once again, us. If there are any further questions, please feel free to reach out to me and we'll, we'll endeavor to get ... But, looking forward to adding this business to the Orica portfolio. Thank you, and have a good afternoon.
Thank you, everyone. That concludes our conference for today. You may now disconnect your lines.