Well, good morning, everyone. Sorry we're slightly late. Once you've read in detail the disclaimer, I'll go on to the presentation timetable today with some slight changes. You'll see the name Noel Meehan, our Finance Director. Unfortunately, Noel was indulging in his chosen leisure sport of cycling on Saturday, and his front wheel got caught in a tram track. As a result, he's got seven broken ribs and a collapsed lung. I asked him why he wasn't here today, and his doctors told him he cannot fly for six weeks. Anita James, our more than able investor relations person, is filling in for Noel today, which will give you a break from my dulcet tones when we get onto the particulars of finance. Without further ado, we'll progress. What you have here is the safety performance for Orica over the last few years.
The blue bars are the all-worker case rate for Orica or the total recordable injury frequency rate. The green bars are the lost time injury, and the red line at the top is the severity index. The numbers within the blue bars are fatalities within the year. In spite of the fact that we managed to reduce our severity index during the year, and that measures the overall intensity of the accidents that you have within the company, and we continued to decrease our lost time injury frequency rate to cement ourselves in the world's best practice. We did have a fatality at our shock tube plant in Antofagasta in Chile, where one of our employees suffered fatal injuries as a result of an explosion in the shock tube part of the plant.
That's a reinforcement of the point that we still need to be continuing on in our hazard identification and our risk assessments that we've introduced throughout the company. I'll be coming back to that when I talk to Project Sustain. Just on a general environmental note, we've undertaken abatement at all of our major ammonium nitrate sites. We've now installed those technologies. They're working a little better than what we envisaged they would work, and we've taken off the road the equivalent of 150,000 cars. We're doing our bit to abate greenhouse impacts around the world. We've also invested in conjunction with the federal and state government in mineral carbonation with the University of Newcastle. That's a new technology that'll be piloted over the next four years using Kooragang Island's CO2 offtake as a feed point.
It basically looks to combine serpentinite under high temperature and pressure to capture CO2. The great thing about this is it can be retrofitted to power stations. If it works, and we're confident at this stage that it will work, it'll actually open up another industry for us because the serpentinite deposits are pretty close to coal deposits, especially in Australia. It will actually create not only a better way of capturing CO2 than carbon sequestration because it just mimics a natural process and locks it up for the long term, but it will also open up a new industry of digging up serpentinite and supplying it for the abatement of CO2. That's safety and the environment. We'll now move on to our financial results.
You would have seen that our statutory profit after tax went down by 37% to just under AUD 403 million for the year after we took a write-down on Minova. The underlying profit after tax is AUD 650.2 million compared to last year's AUD 642.3 million. After the effect of this write-down of Minova's carrying value, Minova will now be on our books at approximately AUD 1.1 billion. There was an article in the paper this morning that overestimated that carrying value going forward. It'll be on our books at approximately AUD 1.1 billion, AUD 725 million of which would be goodwill. That underlying profit is in line with our guidance, and our guidance for next year is similar to this year. You would note from the subscript of the three at the bottom of this page, it's subject to global economic conditions. The one for this year had plant operations.
You will notice that's been removed. Our NPAT for next year is expected to be higher, given economic conditions, than it was this year. Dividends per share, as you'll note off this presentation point, AUD 0.92 for the year after AUD 0.54 in the second half, which was franked at 44%. The total franking for the year was 41.3%. NPAT, underlying NPAT higher than last year, expected to be higher still in 2013. Our earnings per share, underlying earnings and return on shareholders' funds and dividends will increase from last year. Before I go through the particulars of what drove that result and where we're going in the future, I'd like to call on Anita, who'll be going through the particulars of the financial results.
Thanks, Ian, and good morning, everyone. In Noel's absence this morning, I'll provide some further detail on our operating and cash flow performance for the year. As is usual practice, there is additional detailed information contained in our profit report, the appendix to this morning's presentation, and the compendium, all of which have been posted on the website and lodged with the Australian Securities Exchange earlier today. Firstly, a few words on the Minova asset impairment. As we reported on Friday, the 2012 result includes an individually material item of AUD 247 million after tax relating to asset impairment within Minova. The breakup of that charge is detailed on the slide here. The charge principally relates to goodwill carried in North America and China.
There is also a portion of goodwill carried at the Minova group level, and to the extent that that has been supported by China, that too has been impaired. The impairment charges reflect the challenging market conditions that both North America and China have faced during the period, particularly in the second half, and which are expected to continue in the near term. In North America, demand from coal markets dropped considerably in the second half, with year-on-year volumes down 7%. Continued competitive pressure in a weaker market has meant that we have not seen margins recover to historical averages. In China, we have seen continued competitive pressure, and margins have been constrained. In accordance with accounting standards, the decision to recognize impairment was made following a detailed review of updated forecasts, growth, and discount rates. The growth and discount rates applied are detailed in note 29 to the accounts.
While conditions for Minova are expected to remain difficult in the near term, we do expect to see some recovery in market demand in the medium term. In addition, we should also see benefits from an improvement project we are currently undertaking. Ian will provide more details on this later in the presentation. Group EBIT. At a group level, EBIT was down 1% or AUD 5 million on the prior year, a strong underlying result given the headwinds of foreign exchange and the impact of Kooragang Island. Despite challenging conditions in some markets, we saw improvements in both price and volume. Prices were modestly improved in our mining services business, particularly in North America, and product mix was favorable. We also saw stronger pricing in our mining chemicals business. Partly offsetting this, these upsides were lower margins in parts of Minova. Volumes were up in most of our mining businesses.
In mining services, Australia, Asia, and Latin America performed well. In Minova, Australia and the CIS were up, and in chemicals, sales of emulsifiers were strong. Sales into North American coal markets were understandably weak for both mining services and Minova. Surplus land sales and the non-recurrence of the Monclova plant closure in Latin America positively impacted EBIT by AUD 31 million. On the downside, plant closures at Kooragang Island impacted EBIT by AUD 69 million. We incurred AUD 90 million in the first half of 2012, and in 2011, you'll recall we also incurred costs of AUD 21 million. Year-on-year, AUD 69 million impact. The strong Australian dollar again adversely impacted our translated earnings. Higher depreciation, amortization, and inflationary factors contributed to an increase in our fixed cost base of AUD 40 million, while the trending higher ammonia costs resulted in an unfavorable lag of AUD 25 million.
As I said, generally a strong underlying result marred by Kooragang Island and foreign exchange. Now looking at mining services in a little more detail. The mining services business delivered a fall in earnings down 3% to AUD 790 million. Demand was generally strong with global AN volumes up 2%, driven mostly by improved volumes in mining markets in Australia, Asia, and Latin America, offset by weak demand in U.S. coal markets. We again saw strong growth in electronic blasting systems, with volumes up 14% on the prior year. Prices were modestly improved. The combined effect was an improvement in earnings of AUD 134 million. Surplus land sales and the non-recurrence of the Monclova plant closure contributed a further AUD 28 million to EBIT.
As you can see from the waterfall chart, these improvements were more than offset by the Kooragang Island shutdowns, higher fixed costs, the lag in recovery of some input costs, and the unfavorable impact of foreign exchange. EBIT margin for the mining services group decreased from 20.7% to 18%, mainly due to the impact of Kooragang Island and foreign exchange. Minova. Minova delivered EBIT up 4% to AUD 109 million. In terms of volume, we saw reasonably strong demand in Australia and the CIS, which more than offset the impact of weak demand in the U.S. coal markets, and subdued activity in many parts of Europe. The benefit of volume improvements combined with productivity and efficiency programs more than offset the impact of continued margin pressure in North America, Poland, and China, mostly arising from competitor activity. As a result, EBIT margins were in line with the prior year at 12.8%.
Chemicals increased EBIT by 8% to AUD 211 million. Mining chemicals delivered another strong result. The sodium cyanide market remains very firm, and emulsifier sales were up. Water care was down marginally on the prior period. The benefit of higher global caustic prices was offset by lower volumes, partly impacted by wet and mild summer conditions, particularly in New South Wales. In general chemicals, overall volumes were down on the prior period. Whilst trading volumes into mining markets were up and Latin America showed good growth in industrial and construction sectors, demand for most industrial markets in Australia and New Zealand were weak. Margins were also down, negatively impacted by strong local currencies. Overall, EBIT margins for the chemicals group increased to 13.3% from 13% the prior period, a good result. Touching on cash flow for the period.
Net operating cash flow was positive at AUD 544 million, down AUD 214 million on the prior period. Key factors driving this movement included the cash flow impact of the Kooragang Island plant closures of AUD 69 million, higher interest paid following the repurchase of the SPS, and higher trade working capital levels, mostly due to higher inventory levels. I will touch on working capital in a moment. Net investing cash flows were AUD 674 million, with lower spend on growth capital and higher proceeds from asset sales. Rolling trade working capital to rolling sales was 13.3% for the period, up slightly on the prior period of 13.2%. The period end trade working capital balance increased by AUD 121 million versus the prior period. This mostly reflects an increase in inventory.
The commissioning of Bontang increased contingency stocks following the Kooragang Island incidents, growth in the Pilbara supply chain, and a stock build in North America ahead of a supplier plant shutdown in October, all negatively impacted closing stock levels. There was no significant bad debt incurred during the period. Briefly looking at capital expenditure. During the period, we spent AUD 234 million on sustenance capital. This included spend on environmental improvement programs at Yarwun and Kooragang Island, as well as a turnaround on our AN plant at Kooragang Island. In the period, we spent AUD 395 million on growth capital. This included spend on Bontang, Kooragang Island, and the Hengze project in China, as well as other smaller projects. In addition, we made initial cash contributions of AUD 41 million to the Burrup joint venture, with site preparation work now progressing.
Ian will provide more detail on these projects later in the presentation. On this slide, we have included estimates for 2013 spend. It is difficult to accurately estimate timing of cash flows, so these estimates should be used as a guide only. Sustenance capital for 2013 is estimated to be in the order of AUD 300 million. This includes spend of approximately AUD 100 million on environmental improvement programs at Kooragang Island and Yarwun. Expansion capital for 2013 is estimated to be in the order of AUD 280 million. In addition, we expect to spend in the order of AUD 200 million on the Burrup joint venture. Briefly looking at our balance sheet. Following the repurchase of the step-up preference shares and the asset impairment of Minova, gearing has increased to 41.5% and net debt has increased to AUD 2.3 billion.
We have over AUD 2.3 billion of committed debt facilities with AUD 800 million drawn at period end. The weighted average tenor for bank facilities is 2.2 years. Interest cover is healthy at eight times above covenant requirements of two times and our internal target of at least five times. Average funding costs for the period were 4.9%, inclusive of commitment and other fees, improved from the previous year of 7.1%. Funding costs excluding these fees would be around 4.5% for the period. Cash conversion has reduced to 72% from 81% in the prior period. The Kooragang Island plant closure and higher trade working capital levels negatively impacted the result. We remain committed to our BBB+ credit rating. In terms of maturity profile, this chart illustrates our maturity profile of drawn debt. Average tenor of drawn debt is approximately five years. We maintain a flat maturity profile with low refinancing risk.
Briefly to foreign currency exposures and hedging. Approximately 30% of our total foreign currency exposures, including foreign currency earnings, for the year have been hedged to date. Due to some uncertainty in global mining markets, we have chosen to take a more staggered approach to our EBIT hedging. Consequently, the percentage hedged at this point in the year is less than we have previously undertaken. Our major exposures and effective hedge position for 2013 are detailed on the slide. Given our hedge position, a 1% unfavorable move in the AUD versus all currencies would have a negative impact of approximately AUD 4 million on an annual basis. Without hedging, the impact would be AUD 8 million. Turning now to environmental issues. We have included here the expected cash outflow over the next few years relating to legacy environmental issues.
As at the 30th of September, we carry AUD 203 million on our balance sheet for environmental provisions, with around AUD 112 million relating to remediation activities at our Botany site in New South Wales. The groundwater treatment plant at Botany continues to operate at the level required to contain the plume. Cash spend on operation of the treatment plant is expected to be approximately AUD 13 million annually. It is important to remember that we are maintaining a provision in the order of AUD 50 million. This cost is incurred as an operating cost in each respective year. We have made good progress on the on-site remediation of the encapsulated HCB waste. Work is almost complete, with landscaping of the remediated area now being finalized. In terms of our HCB stockpile at Botany, we continue to safely store the waste in fully licensed and secure storage facilities at our Botany site.
We continue to assess options for the safe and environmentally sound destruction of the waste. This includes a biological treatment research project we are undertaking in conjunction with the University of New South Wales and overseas affiliates. As we continue to assess options, only the cash outflow associated with current storage costs at Botany are included here. With regards mercury remediation, the initial remediation project was halted early in the year due to unsatisfactory results. We have been working with regulatory authorities in assessing alternative approaches and have submitted a remediation action plan to the EPA. This has been agreed to in principle. We are now working on detailed plans. In the meantime, the area continues to be enclosed within a sealed shed to contain any vapors.
For the purposes of this slide, we have assumed that the remaining provision will be spent over the next two years after we agree a way forward with the authorities. There are other environmental issues we are working to resolve across our business, and spend on these projects combined is expected to be in the order of AUD 13 million for 2013. Much of this expenditure is aimed at cleaning up sites for future disposal. This concludes my comments. I will now hand back to Ian.
Thank you very much. I'm just going to go through the projects and studies that we're undertaking at the moment. If this will stay up here. I'll reposition the computer. Okay. What I'm going to talk to is the Bontang AM plant. I won't be talking specifically about the Kurri Kurri Emulsion Plant or Port Hedland Emulsion Plant. Suffice it to say that they're both completed and in production. They just add to the diversity of supply points that we have throughout Australia. I'll be talking to Hunt, Sustain, Optima, Burrup, and Kooragang Island, of course, but I won't be discussing the studies. Again, I'll just make a quick comment that the future cyanide capacity study is progressing well and the South American AM plant is progressing particularly well.
The Awan AM plant can best be described as being on the back burner, it's a study in name, but we're not spending much on it at all. Okay, let's talk to Bontang. Just one point. In the profit report, it actually says 56,000 tons produced. There were 60,000 tons produced and 56,000 tons sold. We just used the wrong descriptor in the profit report. Basically, over that three-month period, Bontang produced at 20,000 average, but as you would appreciate, that ramped up over that three-month period. It's already proven its installed capacity can be delivered. There are certain points that we're progressing about the bottlenecking of how we get our tons across the wharfs and the way that we take feed over the fence into the plant.
The plant itself has proven its nameplate capacity, over time, we expect to be a slight upside to that nameplate capacity as well. Hunt should be finished early in calendar year 2013, it's expected to be within the original AUD estimates. There will be an end to this project, it's coming up in early 2013. This is an initiating systems plant to supply into the Chinese market and then also supply into the total diversity we have for initiating systems, especially detonators around the world. Project Sustain that I mentioned earlier, this has been kicked off. The whole of the organization is now in line with Project Sustain. We're introducing an informative semi-quantitative risk assessment process throughout the company.
We will be going around assessing all of our operating points to identify hazards. Then those hazards and the engineering controls associated with the hazards will feed into a control group, which will be part of our assessment and payment system. It actually ties our hazard identification back into the way people are incentivized throughout the company. A total approach, certainly encompassing community as well as all the other aspects of the traditional SHE with a very strong emphasis on risk. We not only want to get ourselves into a position where we're seen as being the exemplar in this area, but also the innovator in this area as well. I think some of the approaches we're going to be developing in risk assessment will put us right at the forefront of what anyone is doing around the world.
On Project Sustain, all of the agreed regulatory projects at Yarwun and KI are either on track or completed. At Yarwun, all those improvement projects have been completed, and Kooragang Island improvement projects will be mostly completed by the end of 2013. The largest and longest of those upgrades to the ammonia plant will be the last of the projects. Most of the other improvement projects agreed with the New South Wales regulators will be concluded fairly early in the 2013 calendar year. We've made a lot of progress on those improvement regulatory programs that were agreed with our two state governments in Queensland and New South Wales. Minova to Optima. As was outlined earlier, that impairment to Minova is on the basis of what we're seeing in the markets in the U.S. and in other places around the world.
We've spent a lot of time analyzing how we can reposition Minova to take advantage of the point that we can leverage the bundling of options into the underground mining market. That currently constitutes less than 15% of mining services. There is a growth opportunity and a diversification opportunity that we haven't fully grasped in the past. The business itself has good cash conversion, but it really needs to be repositioned before we fully integrate it into the normal workings of Orica as a whole. We're going to simplify the business model. We're going to optimize the manufacturing, and by optimize, read less manufacturing points. We're also going through our customer base and identifying those customers who may not be providing the level of return that we want. We'll be pushing down in conjunction with the manufacturing base optimization.
We'll be looking at our customer base as well. Then we'll be rationalizing our functional overheads to go with that concentration on less manufacturing points. In conjunction with this profile for Optima, we'll be integrating the operations of Minova in Australasia, Asia, and Africa into the normal parts of mining services and manufacturing during the course of this financial year 2013. In Europe, we'll be undertaking a project where we'll integrate mining services with Minova over the course of 2013 and 2014. Then the Americas will be the large chunk that gets integrated in 2014. By the end of financial year 2014, the Minova operations will be integrated into mining services and manufacturing.
Over the course of the next two years, we'll be undertaking Optima project to push down on the cost base to make sure it's optimized before we take it into the general workings of Orica. This will mean that the earnings in this year will be approximately 20% less than what we saw in 2012. That's driven by two points. Number one, some of the costs of Optima, together with we are under extreme competitive profile in the areas that Minova touches. We're going to preserve our market share, and we're gonna grow our market share. We spent a lot of time putting a strategy in place to actually do that, but you'll see a dip in the earnings this year, and then it'll come back over time.
You can see from those two graphs below that EBIT will be growing over the next five years out of the Minova business at a faster rate than sales, and that's as a function of what we're going to be doing with overheads in the manufacturing base. The rationalization of our customer and marketing base. You see RONA versus WACC over a five-year period. I have to stress that this is before some of the overheads we will drop as Minova gets integrated into Orica as a whole. We've done the whole study on Minova as a standalone. On top of that study, we have further savings from dropping overheads as we integrate Minova into the normal workings. There is a strong opportunity there for growth.
Optima positions Minova in a position where it can truly contribute on the basis of what we expect of any investment within Orica House. Before I leave Optima, I just want to touch on a point of conjecture in the market. It's interesting that people look at trends and past trends and get a little bit confused about what's going on. I just thought I'd give you some clarity from my viewpoint. If you look at prices for gas, the month of April this year showed the drop to an average over April of $2.14. The very bottom of the gas price in the U.S. was on April 20, where it hit $1.82. Since then, the price has recovered by 92%. Fantastic number, but of course, it's off a low base. If you look at October 31, 2012, the gas price was $3.50.
12 months previous, $3.66. Before that, $3.42. The gas price now in the U.S. is actually in line with where it has been for the last couple of years. It's gone up and down over that period, but it's not untoward in the general context of what gas pricing has been. The contribution of coal into the energy curve followed the gas price down and hit its minimum at 32.4%. It's since rebounded to 38%, 39%, and most pundits are saying that coal will contribute to the energy curve to the rate of around 40%-45% going forward. The big driver for coal is twofold. Number one, most people think that the gas price is going to be $4 to $4.50 going forward in the U.S. Number two, we're coming up to another winter.
We're coming up to a reset point after a rather mild winter. A lot of the mines that were to drop out of the U.S. supply point have dropped out. The Appalachians have been hit. Comparatively speaking, that is a small impact on our long-term operations or business. Minova doesn't play heavily in the Apps, the Central Apps, and neither does mining services. People are expecting the contribution out of coal to come back, that is a contribution off a lower supply base, which talks to what we sell into. I'm not in this jaundiced view as others are about the U.S. going forward. On top of that, a lot of the industrial offtake of gas as a feedstock into chemicals, et cetera, is in the process of construction.
Those offtake points for gas haven't actually started to the extent that you'll see over time. There'll be more demand pull on the gas price. The repositioning of Optima and Minova and the way we're going to be approaching our marketing points all feed into the thesis that we've seen the last of gas versus coal in the energy curve. As the U.S. continues to slowly recover, coal will play its part in the supply of energy to the U.S. for many decades to come. Kooragang Island. The project feasibility work is complete and the statutory planning approvals have basically been obtained. An engineering pathway for construction has been confirmed and a detailed technical appraisal has been presented to the board. Most of the long-term items have already been ordered. What we're going to be doing now is going back talking to our customers.
We want to go back and talk to the customers about what their intentions are over the next few years. We have a viable project that will supply the Hunter Valley. Given some of the downturn that we've seen of late, construction probably won't start on that project until at the earliest, the end of 2013 or early 2014, depending on those discussions we're going to have with our customers. We, like others, expect there to be some weakness in coal production going forward in the shorter term before some of the stimulus measures, et cetera, out of China kick in and put a base back under thermal and met coal. We'll be going back to our customers, talking about the profile of the project and what the dovetail looks like for their projects into our project. It's all set to go.
We have the engineering pathway. We'll be wrapping up engineering at around 95% complete. That'll progress as we go through the year, the whole project will be sitting there with all the approvals in place ready to flick the switch when we think it's most appropriate to supply into the Hunter Valley in general. In the meantime, we've completed Kurri Kurri. We've put remelt facilities in Kurri Kurri and in other emulsion plants around the area. We are building the diversity of supply and ensuring our customers that we will continue to supply. We won't be spending capital in front of the demand curve. Turning to Burrup. There's been some misinformation around about Burrup, so I'll dispel that. Site prep activity commenced in October. If anyone wants to go up there and have a look, we'd be more than happy to show you.
Construction is basically started. The other thing that's causing some confusion is about the unique profile that we've adopted for the Burrup joint venture. We paid AUD 110 million entry fee. We're paying 45% of the project capital. We get 100% of the marketing rights to the AN. Anything associated with that AN that we are selling into the Pilbara area, in regards to services or initiating systems, we get 94% of the revenue. 6% of the revenue goes back into the joint venture to be combined with the profit generated out of AN, and then we get 45% of that profit back. Effectively, we get well in excess of 95% of the revenue from initiating systems and services, plus the 45% from AN.
We don't lose any of the marketing rights into what is an area that's been confirmed to be producing in excess of 800 million tons by the end of 2015, which is when the Burrup plant will come into production. We've now finished the emulsion plant at Port Hedland, and we've constructed the 40,000 tons of storage facilities. This is a long-term move into diversification for iron ore and to an area of Australia that we were under-supplying in the past, which is the northwest. We're there for the long term on what is a pretty good arrangement. Let's move on to that security of supply. Once Burrup is up and running, we'll have four large AN prill plants to service what constitutes in excess of 50% of our EBIT.
We're in the process of being granted an export license out of Bontang, and we're going through the testing so we can import the Bontang material into Western Australia. Basically, what we've set up is an archipelago of supply points. The Kooragang Island, Yarwun, Bontang and Burrup can assure supply to those customers in the area that gives us over 50% of our EBIT, in conjunction with all the emulsion plants and all the multiple storage points that we have in this area. On top of that, they can also act as supply points into Africa, especially as Mozambique gets developed, and into South America. This is sort of a centroid of security for our customers, and that mix-and-match capacity is unparalleled in this part of the world. That sort of leads into strategy and where we're going as a company.
The structure is basically in place, and we've refreshed our strategy. As I go through these slides on strategy, just keep referring back in your mind to this business model. All of our structural approach, all of our strategy, the way that we're going forward as a company, is built on the basis of what this business model looks like. A strong, solid foundation of social integrity, built around Project Sustain and what we're going to be doing with our hazard identification and risk analysis, through to the sunlit uplands of our customers and marketing. The Mining Services is a very much a customer-facing unit with manufacturing split out as that security of supply, but only one source of security of supply. That is the basis on which Orica is going to be moving forward.
We've refreshed the strategy and we presented that strategy to the board last week. This isn't a huge shock to anyone. We haven't gone through the strategy and decided that we're going to move into being a producer of garments or whatever. We're going to stick to our knitting, but there'll be a very different emphasis on how we deliver that knitting. The internal focus has been nuanced into external relationship focus. With the social responsibility area, the interface points of corporate affairs, we are looking out more and more. With that emphasis coming out of mining services, which is purely customer facing, it's reinforcing the point that we have to be externally focused. Whereas in the past, I think Orica has been very much internally focused. We've moved from business unit primacy to strong functional accountability. There's centralized functions supporting the value stream.
That is the emphasis of the company going forward. In the past, we've had a lot of product innovation. By moving Jez to a centralized point, agglomerating all of R&D under Jez and putting him on the executive, the emphasis is on commercialization. We do spend more than anyone else on R&D, but we're going to use it in leverage ways that put us way in advance of any of our competitors. We will be commercializing what the customers want a lot more rapidly than anyone else. Then control and ownership of major plants and product source is nuanced to we'll be pursuing the lowest cost product source. Where it is capitally efficient to manufacture, we will. If it isn't, we won't. We'll be pursuing strategic alliances and control of the supply chain.
I don't know how many of you actually know the points about how we supply at the moment. On top of our major AN plants, we deal with in excess of 40 customers of ours to access and supply ammonium nitrate around the world. That's a spread and depth that no one else has. We're going to nuance that in ways that give us multiple source of supply, multiple channels to market, and ways that give us flexibility in the application of capital. If we had pursued the control and ownership of major plants, you would have seen us going ahead with KI right now, Yarwun expansion, et cetera. Spending over the upcoming 5 years in excess of AUD 6 billion just on those plants. We're not going to be doing that. We're going to use our size and spread to better fit ourselves to the market.
The explosive part of nitrogen is very small. There is a very big industrial base that converts nitrogen into ammonia. We've got to use that as a flexibility leverage point to make sure we keep delivering the best returns. Putting that in slightly different nomenclature, it's a provision of differentiated product services and solutions which talk to what our customers want, supported by reliable, low-cost, multi-source supply, capital efficiency, and differentiated products and services. That's really what the market wants. That's what our customers want. We're going to guarantee our customers that when we have a relationship with them, we can give them what no one else can give in this industry, multi-channels of supply. We can actually back them up. You'll see under geographic applications that we're thinking about splitting out Africa from what was EMEA.
You'll see a greater concentration of Africa as a growth point for us. Already dominant in the Australian, Latin American, North America, and Indonesian market. Africa is a point where we want to grow in the future. Our structure within Mining Services will be determined such, you'll see a greater emphasis on resourcing in the African sphere. If you look at all the suppliers in this industry, and we basically have eight competitors, most of them are moving down the path where they're making more and more of their product offering internally. They're basically going for basic offerings. Where we're going to position ourselves, and we're probably the only one in this industry that can do it, is to leverage those 40 odd relationship points that we have, plus our manufacturing base, to give people differentiated services.
We'll be willing to source externally, and we want differentiated services and products. We want to combine our products in ways where we can enhance value and use for our customers. That's basically the new emphasis you will see out of our strategy. Let's talk to some of the other ways that you can think about our strategy and how we're going to grow as a company over time. Price and volume are obvious ways to build margin. On top of that as a company, we have great opportunity to build margin as well as price and volume. The structure itself talks to margin.
As we grow as a company, because of the way that we've set up those centralized functional groups, we won't have to replicate and duplicate those cost structures as each of the business primacy points grow of their own accord into the market. Our manufacturing excellence will give us improved margins over time. From my perspective of where I come from and my background, our manufacturing plants are not world's best. We're going to make them world's best. Their uptimes are not world-league. They will be within two years. We're going to push down on our manufacturing base. We're going to change the way we go about our maintenance. We're going to build margin from the base up. Value in use is another way we can build margin.
It's interesting that in this market, people are coming back to us wanting to have general discussions, some of which touch on price. That's a great opportunity for us because what we're having with people in a more enlightened way than we were having 12 months ago is a value in use discussion. How can we apply our unique set of products and techniques in ways that you can have high-intensity blasting or through-seam blasting , which gives a better outcome for the customers? Those discussions are starting to have a lot of traction. Basically, we are in a position and of a size where we can take risk in those discussions to prove to our customers that we can add a better value proposition through the use of our techniques in ways that builds our margin, but it also builds the customer's margin. Then sourcing logistics.
As I said before, we have unparalleled access to multi-source supply points, and we'll be using those to give ourselves the most flexible approach. Whether gas prices are up or down, whether people over-commit to ammonia projects going forward, which we hope they will, because we want lots of capital invested in that ammonia place, that will give us greater flexibility and build margin as well. We're building our capability to deal with that market for the size that it represents. We have these four particular points of margin growth on top of price and on top of volume. That will put us in a unique position as a company. I just turned this off, which is not a good idea. Manufacture excellence. That's one of those margin growth points.
We've already done a deep dive on Kooragang Island, and that is the first of every manufacturing point that we're going to be doing a similar exercise on. What we're already seeing out of Kooragang Island is our maintenance measures are improving. As your maintenance measures improve, over time, you spend less on sustenance capital because you actually maintain more effectively and more efficiently. As your uptime lifts on the back of proper maintenance programs, you produce more, and it costs you less to produce each unit. You get a multiplier effect. We're going to be going through the same approach at all of our manufacturing plants. You'll start to see that.
I'll be able to point out some of the effects of that at the end of the first half of this year, and then it'll aggregate as we go forward over the next two years. That gives you a bit of a glimpse into what we've been doing over the last eight to nine months. A new structure, nuanced strategy. Basically, to build from the opportunities that we have because urbanization is going to continue, and that'll drive commodities. The quality of the deposits those commodities will come from will continue to diminish. We will be able to deal with our customers in ways that gives them unique opportunities for the application of technologies to a point that no one else can in this industry. They're the opportunities we're going to build from. I hope that's given you a good insight into the activities we've been undertaking.
I'm going to call for questions now, first from the floor, secondly, from any analysts on the phone, and then last but not least, the media on the phone. Are there any questions from on the floor?
Ian, it's Mark Wilson from Deutsche. Could you just outline what your customers are currently indicating to you in relation to their production profiles, whether it be over the next quarter or two, or even longer term than that, and across each of the geographies, if you could?
Yep. If you look at our volumes, I'm not talking about comparing this year to last year, you would've seen Australia's volumes have gone up in the second half but at a diminished rate. They didn't go up as much as they did the year before. Indonesia's been fairly flat. North America's been flat to slightly down in the second half. South America's fairly flat to slightly going up. They're the main driving points around the world I just covered. We would expect year on year, fairly flat to slightly up in total demand. One of the reasons for that is that as we push into the northwest and we're building our market in front of Burrup. I announced in Perth some time ago now that we're already two-thirds loaded that plant.
We're on the way to exceeding that diversity of supply out of Bontang will help feed into those 40,000 tons. We're basically opening up a new market. That will give us some upside for the year. What our customers overall around the world, and we're in a great position to look at that, are expecting is flat. Some areas up, some areas down.
Hi, Ian. Michael Ward from CBA. Just firstly on Minova, you put the chart up showing the growth in the RONA towards sort of 17% or 18%. In that chart, do you assume any cyclical recovery or is that pretty much an internally driven improvement?
Yeah, mostly internal. There's a little bit of market share growth in that because of some of the strategies we're going to put in place, especially in North America, will give us a greater share over time. There are certain markets in the U.S. we haven't really gone after that much in the past. We're going to be growing in those markets.
Does it also assume any improvement in the discipline of your competitors in that industry?
You always take that into account. Their position relative to ours, I think we're going to be a little faster out of the blocks than the other competitors in that industry.
Okay. Just on the last points you were making here around your strategy, you talk around manufacturing efficiency. Can you talk about? We've already seen the announcement around the AUD 200 million that you're going to spend over the next couple of years at KI as you roll through and review all your other plants. Are we expecting that CapEx, there'll be a bit of an increase in CapEx, say, relative to depreciation over the next couple of years as you actually go through that process?
KI is a particular point, which is slightly different to the rest of our plants. As I said, we've basically spent what we're going to spend at Yarwun. Going forward, there might be a little extra spend in cyanide to see whether we can get any upside there. We'll spend about AUD 100 million this year on sustenance at KI, mainly around the ammonia plant and the improvements to the ammonia plant that we need to put in place. I'm not talking about output tonnage, but controllability of the ammonia plant. That's sort of a one-off profile, that doesn't suggest that you'll be seeing that sustenance capital roll through the rest of the plants.
Morning, it's Ramoun Lazar from UBS. Ian, can you just touch on, there was an AUD 60 million benefit from pricing through the year in the OMS business. Can you just talk around pricing into 2013 given the flattish volume environment? Also just on Kooragang Island, do your discussions with the customers now involve establishing a base level of offtakes before you flip the switch on construction?
I'll answer the first part, giving the example of North America. Even though we sort of feel the pressure in volumes around coal, we've been able to lift prices in North America. In North America and South America, we think there's upside. In Australia, probably not to the same percentage effect. The overall supply and security of supply, which a lot of our customers value, means that just because we're seeing a flat profile going forward doesn't mean that we can lift in certain markets our pricing points. What we'll be talking to our customers is just reaffirmation of what each of their projects look like over the next couple of years. We want to pick the optimal point at where the KI expansion comes in to supply their projects going forward.
Hunter Valley is a little different to the northeast of Australia, in that there's been a fair investment in the infrastructure to facilitate those projects being exported. We just want to pick the optimal point to make sure the supply is there from us to suit their project profile.
Good day, Ian. Scott Hudson at CLSA. Could you just talk to the Indonesian market in the current environment, and is that an area of some concern at the moment?
Yeah, it's flat. Apart from one mine, and I won't name the particular mine, the rest of the mines have basically hit the bottom now. We could see some uptick. I think thermal coal has actually been through most of the worst. Met coal may have a little bit longer to run just before you see an uptick, and a lot of that will be driven by what China does post their transition of power. Indonesia from this point on, fairly flat.
Thanks. Secondly, in terms of blast-based services, have you seen any, I guess, growth in 2012, and I guess what you're expecting going forward for that business offering?
That's why we're talking more and more about value in use. More people are actually experimenting with some of our technologies, et cetera. One of the interesting things is that you would have seen out of our numbers that our high-end detonating systems went up in sales by 14%. People are still seeking that security of how you control the shot, as well as the security of supplying the materials for the shot. We think security of supply is just as important, if not more so than pricing. The way that you can get a shot at it in the most productive manner gives a return to the miners that they can appreciate. We're seeing more and more people wanting to talk to us about the higher-end products and the higher-end techniques that we have.
Thanks. Lastly, I guess you talked about margin growth going forward. Are there any areas of the business, apart from Minova, where you're seeing any, I guess, margin pressure?
I made the point about, in the U.S., even though quantities were coming off, we were able to lift price. That's horses for courses around the world. Some areas you can lift price, some areas you lift volume, some areas you lift both, or you change the mix of your products and your techniques. It's pretty hard to make a quantitative one-sentence statement about what we're seeing around the world.
Yep. Stuart Jackson from JP Morgan. Just on the cash flow side of things, you did separate out some of the working capital things that would be temporary, I assume, in terms of inventory build associated with KI and Bontang. There's also a fairly large non-working capital or trade working capital increase in working capital in there as well. On a go-forward basis, how much of that's actually going to reverse in 2013 and subsequent periods, and how much do we is a permanent step-up in that working capital balance?
Do you want to take it or do you want me to take it? Oh, thank you. We don't see a reversal going forward. It'll go up and down year to year. One of the things that Anita put up is that we have a fair few environmental provisions. What we never talk about as a company is we've got a fairly large land bank as well. Over time, we'll be not only improving the environmental profile of our land bank, but looking to sell off parts of that land bank. That's been going on for a few years. I think we're getting to the point where you'll actually see a fair contribution over time coming out of that land bank. That is one area that did contribute into that other part of working capital, et cetera.
Just on Bontang, if you could just update us in terms of what the ramp-up profile, because obviously the 60,000 tons of production this financial year was still well below that nameplate. How do we look at that ramp-up over through 2013 and 2014 and reaching that peak or full nameplate of 300,000 tons?
One of the reasons we've went for and been granted the export license is to make sure that we can get to nameplate as quickly as possible. This is contingency planning, if you like. If Indonesia continues to be soft, we can export to WA. If there's better margins than anything, we'll export to WA. That 20,000, as you would appreciate over the three months, is not even. You start off low and you ramp up. We've already demonstrated that the installed capacity is there. We would see it running within a couple of months up around the 300,000 mark.
It's Andrew Scott from CIMB. I just want to go back actually to the first half of the question Stuart asked, but more so on the actual trade working capital. I'm just wondering if we could get some more color on the individual items that Anita mentioned, and in particular, are they items that should back off next period or not recur? For example, the contingency stock for Kooragang Island. Is that something that is now at the new base level as your customers have asked you to put redundancies in? If we just get an idea of those items which have stepped up, are they things that we should expect to reverse in the next period or not?
We're certainly not going to back off from contingency stock around KI, the management of that contingency stock should be a little better than what we saw in this 12 months period. Backing off a little, not a lot. What KI showed us and our customers is that value that you have to have a multi-source supply, and that's basically what we've done in KI. We have a contingent backup system through our emulsion plants and storage points, et cetera. We're not going to be walking away from that. It's one of the guarantees we give our customers now. The management of that, as I said, will get a little better. It'll come down a bit. We want to expand our sales to make sure that that ratio continues to drop over time.
Just on the Minova writedown, I think you indicated there's still a very healthy amount of goodwill in there. I think you need about a 70% profit improvement just to get to a 17% return over five years. Are you confident you've gone hard enough on that asset base, Ian, and are you maybe leaving a bit of upside in the numbers that you put in the chart there?
Yeah, especially the areas we hit. So we hit North America by, what, 50% in goodwill, China by 60%. So the particular emphasis points. And then there was an unallocated amount on top of that we hit, and we think that's an appropriate profile for Minova business going forward.
Thanks.
Hi, good morning, Ian. John Purtell from Macquarie. Look, two questions. Just firstly on KI, just confirming that that plant is running back at nameplate capacity and as a consequence, you expect to recover the vast majority of the AUD 66 million impact from fiscal 2012 into 2013?
Yeah. Well, the first one's yes. We faced most of that effect sometime earlier in the year.
Okay. Second question, just related to Minova. You comment on the outlook for the non-U.S. businesses. Clearly, the U.S. business is more challenged given coal. What about the outlook for China and Australasia moving into 2013?
Well, what we're seeing in Australasia is that some of the additional services we were providing through Minova have been pushed down on as people constrict their usage of contractors. We see a slight dip in that going forward, picking up again in the years afterwards. That's all been taken into account by that overall statement that EBIT will be dropping by around 20% this year. In the U.S., we're diversifying and we're pushing into Canada a lot more than we have in the past. This is through the Minova base. We think we can bundle with some of the mine services entry points into Canada going forward. That's one of those leverage points we're going to ascertain during the year as well.
If I look at the EBIT from your Australasian mining services business and add back the Kooragang Island impact of AUD 66 million, that'd take it to about.
No, that's not the impact. That's a comparative impact.
Yeah, I know, relative. Well, just talking relative to the prior year.
Okay.
If I add that back and look at the prior year, or add both of them back, the growth rate in EBIT in Australasia-Asia is lower than the actual growth rate in volumes of 5% year-over-year. It implies that your profit per ton of ammonium nitrate's actually fallen during the year. Can you just give us an understanding of where that's actually coming from primarily?
Okay. The volumes were up second half on first half. Some of the overhang effect of what we went and sourced to make sure our customers got full supply or as close to full supply as we could do, pushed down on our margins. That has a ripple effect as it goes through. Indonesia, I said that that's fairly flat and it's about at the bottom point that you'll see out of Indonesia, so that pushed down as well. All of those effects flow into Australasia-Asia as mining services.
Just one more on Australasia. Just in terms of Bontang, could you maybe just confirm the previous guidance around the additional earnings we should expect from that plant contributing to group level? Is the thought process around exporting product, is that driven by the pricing pressure in the Indonesian market as well and your ability to get that premium pricing because of security issues? Also maybe if you can touch on Yarwun and where the additional volumes coming out from contracts falling off from Moranbah are going as well, and the impact to your Queensland business.
How many questions was that? The export license in Bontang is about flexibility. We want to back up Western Australia before Burrup comes on. As a business, we can be flexible out of Yarwun around to Bontang or around to Burrup area, Port Hedland as well. It's just to reinforce that point. We will put those flexible tonnes wherever we get the best margin or wherever we see supply points into the market being necessary. As to guidance and earnings out of Bontang, I don't think I've ever given any. If someone gave them before, you'll have to refer to Anita after the presentation. Your point on Yarwun again was?
Just wondering what sort of tonnes are displaced as a result of the Moranbah plant coming on next year or ramping up next year as a result.
Yeah, there's extra tonnes coming into the market out of Moranbah, we expect Yarwun to be fully loaded for this year.
Richard Johnson from Nomura. Ian, you sounded reasonably upbeat about your growth options in Latin America. I was just wondering if you could elaborate a bit on that. Thanks.
Yeah. Latin America's been a great hunting ground for us in the past, and it'll continue to do so. There are a lot of projects still on the go in Latin America. Our customers, unlike Australia, are still talking about a lot of those projects going ahead. We're well-positioned there. We've got about 50% of the market. We see ourselves growing not only in total volume but in the particular application of products and techniques. Some of those in high-intensity blasting simulation techniques that we've developed have been on the back of some of the trials we've been running with South American customers. They've been very open to being some of the leaders in testing those techniques. Projects continue to go in South America, plus the application of new techniques in South America is a little in front of Australia. Okay. Four on phone? All analysts?
Yes, all analysts.
Okay.
Your first question comes from the line of Ben Chan from Merrill Lynch. Please go ahead.
Thanks very much. Ian, I just want to reconcile a couple of those comments then. You've got Indonesia flat and Australian flat to slightly up, yet we've got another 300,000 tonnes or thereabouts coming on from Bontang. You've also got Moranbah coming online, and you said that you expect Yarwun to be fully loaded. That's a lot of supply on a flat demand outlook. I'm just wondering where to try and reconcile those two comments. The other thing I can think of is maybe displacing a lot of third-party imports into Indonesia. Is that the right way to interpret that?
You've got to remember that over 50% of our supply points aren't manufactured by ourselves. Even though you're going to see some margin amounts into the market, the actual margin with those marginal growth points, if not flat growth points, is going to give us an uplift feeding through into EBIT.
All right. Cool. Just trying to quickly, just up on the land sales, the AUD 28 million benefit I think you had this year, is that all in Europe and Middle East?
There was a little bit in Australia and there was a little bit in Europe.
Right. Vast majority in the EMEA division?
Yeah. Most of the profit that found its way through came out of Europe.
Thanks very much.
Your next question comes from the line of Matthew McNee from Goldman Sachs. Please go ahead.
Ian, just want to clarify a couple of quick things. Firstly, just on that question from Ben, the AUD 28 million uplift included not having the close Monclova, wasn't it? It wasn't all property.
I think that's a comparator to the year before.
Yeah. No, I think it was an AUD 17 million charge last year that obviously you didn't have.
Yeah.
The other one, just, again, going back to Ben's other question, looking at the volumes, you've obviously taken a little bit of market share, just to keep Yarwun fully loaded. Is that in the Pilbara? If so, what customers have you picked up? What sort of impact do you think in volumes?
Well, you know what the capacity of Yarwun is, and if I say we expect it to be fully loaded for the year, you know where most of that feeds in, which is the Northeast. We do a little bit of interplay between KI and Yarwun, but most of it will be going into Northeast Australia.
That's despite obviously losing some volumes to Moranbah. Your starting point's down on where you were last year.
Yeah.
Just one other quick question as well. Just in terms of the Minova 20% EBIT down this year. This might be a hard question, but how much would that have been down if you weren't implementing any of these changes? I'm just trying to get a sense for how much that 20% is underlying market versus the cost of implementing this program.
Look, I'm going to give you some rough numbers here.
Yeah
Don't crucify me on the exact percentage. 25%-40% of that number would come out of market preservation. Then the rest of it would come from the actions that we're undertaking as part of Optima to get ourselves ready to lift returns out of Minova through Optima in the longer term.
Okay. No worries. Thanks.
Your next question comes from the line of Paul Jensz from PhillipCapital. Please go ahead.
Thank you. Just two quick questions if I can, on your ammonia strategy. Firstly, with, say, Kooragang Island, is one of the options you're looking at, Ian, maybe to expand without ammonia expansion?
I'll answer that first. We've already done the ammonia expansion. In the interim period before we actually lift the AN production, that ammonia will be fed back into Yarwun.
Okay. Just tripping across into Peru, you talked about that accelerating a bit faster than you thought. Is that the Orica alone project or is that the JV one or is it a combination?
I don't think I used those exact words. I just said that the study is going particularly well, and we're exploring all sorts of possibilities at the moment. We see various pathways to getting something up and running in South America over the upcoming years.
Finally, if I can, in North America, again, on this ammonia side, would you entertain getting into JVs for the supply of ammonia, or are you going to be really just a third-party buyer? Is that your preference?
The whole strategy is prefaced on horses for courses and flexibility and making sure we've got multiple sources of supply. We've actually got a team looking at North America and our whole approach there. They're investigating all sorts of supply points, how we exercise our flexibility going forward. Everything's on the table.
You seem to have a preference, really just for buying a third party. You want others to put the money in and for you to take that advantage.
I don't. The only preference I have is for making money. If that means that we go in and do a deal with some European producer and we build a prill tower through to building our own plant. Everything is on the table for supply of prill. If there's some stranded gas and we can see something that makes sense converting that into ammonia and shipping that around or using it ourselves, we'll do that.
Okay. That's excellent. Thank you.
Thank you.
Your next question comes from the line of Leroy Gonsalves from Credit Suisse. Please go ahead.
Hi. Thanks. My question is similar to the last one. I was going to ask you, what do you think the trade-offs are with regards to your strategy? It seems to me that for the plain vanilla business, if you're prepared to outsource more often, you might not necessarily be the low-cost deliverer into a market. Is that something you'd be prepared to sacrifice?
Yeah. We sell initiating systems, we sell services, and we sell AN. If in some markets we can position ourselves where we can sell a lot more services and a lot more initiating systems but not have the same margin as another market for AN, we'll assess that for the capacity of our initiating systems, plants, et cetera. We want to optimize the footprint we already have, and if we're going to add to that manufacturing footprint, it's got to give us the greatest margin possible. Now, not all markets around the world reward in the same way. Sometimes it's better to have an entry point coming off another supplier, and we put our services and initiating systems to that. That is the flexibility we're going to be bringing to the way we think about growing around the world.
The worst thing about the technology that exists at the moment in AN is you're either in front of the market or you're behind. If you're talking about a plant that does 300 to 330,000 tons, it's not many opportunities such as the Hunter Valley where you get the opportunity to match exactly to the demand points as you bring on that plant. We want the flexibility and, again, through our technology, to better match our capital to what we see as the market growth points.
Okay. Thanks.
Thank you.
There are no further questions on the telephone lines at this time.
Are there any media questions? Okay. Well, thank you very much for your time today. I hope you've got a deeper appreciation of why we've gone about the structure the way we have, what we're doing with the strategy, and how that's going to nuance us to a point where we'll have multi-channel supply with flexibility around the world. As I said before, we are in a position that not any of our competitors can emulate. We can do that around the world, whereas most of our competitors can't. As the internationalization of mining continues, we can service our customers no matter where they are. Thank you very much for your time.