Okay. Well, thank you very much for coming along this morning. Thank you very much for affording us some of your time. I'd just like to pass comment on the fact that Noel is with us this morning, in spite of him having to have an operation last week to fix what happened as a result of a bike accident last November, which precluded him from being present at the full-year results. Please treat Noel kindly. Second thing is, thank you very much, Deutsche, for letting us host this in your premises and for your help this morning. I've had the disclaimer up whilst I've been saying those few words. I'm sure you all would have read it by now. I'll kick off a very short presentation on the financial performance and then hand to Noel, who'll go through cash flow and balance sheet.
Then I'll come back with Ground Support and then go through what's happening with our major projects, and then talk about our fundamental strategy. As you would have seen from the release that went out this morning, our EBITDA is up by 8%, our EBIT is up by 6%, our statutory profit after tax increased from AUD 253 million through to nearly AUD 267 million. Most importantly, our net operating cash flow has improved over last year to a large extent. Earnings per share were up by 8% to AUD 0.735. The board has lifted the profit in line with our progressive profit policy from 38 to 39 for the half. The return on shareholders' funds increased by 14% to 16.7%.
Overall, an indication that things are moving in the right direction, in spite of a few pressure points, which I'll be addressing first up when I come back to speak to the particulars of the result. I'd also like to draw your attention to the last five words of our guidance. We are reaffirming our guidance for the year. I think you'd all agree that the global economic conditions are quite arbitrary and variable at the moment. For anyone to pick the profile over the next six months would be a very brave endeavor indeed. I'm just giving you a flag, as we all know, that those global economic conditions could move against us.
For the balance of probabilities and what we're seeing in place and what our profile looks like for sales, et cetera, over the upcoming six months, we're very happy to reaffirm our guidance point. With that, I'd like to hand over to Noel. Hopefully he'll be able to turn pages, flick, et cetera, with one and a half hands. Over to Noel.
Yeah. Thanks, Ian, and good morning to everyone in the room, and also those people listening online. As Ian said, this morning, I'll talk through some further detail behind the operating and cash flow performance for the half year. As is our usual practice, there is additional detailed information contained in our profit report, analyst compendium, all of which have been posted online this morning and lodged with the Australian Securities Exchange. The waterfall you can see in front of us. At a group level, EBIT was up 6%, AUD 23 million increase on the prior year. This was largely due to the benefit of the non-recurrence of the Kooragang Island incident last year. Offset by the adverse impact of higher depreciation, and as Ian will discuss later, significant weakness in both pricing and demand for the ground support business.
In relation to the Kooragang Island cost shown on the waterfall, the AUD 19 million, which impacted last year's result. This can essentially be broken into three components. Around AUD 16 million was attributed to the costs associated with purchasing ammonia and ammonium nitrate to supply our customers. AUD 15 million for lost volume, so profit that we otherwise thought we would have made, and AUD 15 million for cleanup, legal, and other costs associated with the incident. It was pleasing to see the underlying business, excluding ground support, perform well in what were reasonably subdued market conditions. With positive contributions with both price and mix. In terms of pricing, we saw a positive contribution of AUD 19 million, with higher sodium cyanide pricing and flattish to slight improvement in explosives pricing in some markets, except for Europe, which remains a structurally challenging market.
This half, we wanted to split out the impact that we've seen from our refreshed strategy of focusing on increased service delivery. During the half, we saw a positive contribution from more services and improved product mix as customers have moved towards higher margin product. Globally, combined ammonium nitrate and bulk emulsion products were down 4%. Ammonium nitrate product only sales reduced by 13%, whilst we saw an 8% increase in bulk emulsion products, as well as an increased service contribution in Australia Latin America resulting in the positive contribution to EBIT of AUD 15 million you can see on the waterfall. In terms of global volumes, the impact of volumes was negative AUD 11 million with volume reductions in U.S. coal markets and most Western European markets. This was partially offset by a small increase in Australian volumes.
The next bar on the waterfall, the AUD 47 million, Ian, as he said in his opening, will come back to talk about ground support later on in the presentation. Some one-off costs associated primarily with emerging markets and servicing more value-add contracts in parts of the world, together with inflation, meant that other net costs increased by AUD 18 million on the prior corresponding period. The AUD 18 million higher depreciation you can see on the waterfall has been largely attributed to the start-up of the Bontang plant in Indonesia, as well as higher depreciation on the Kooragang Island ammonia plant as the plant has been operating for the full period. Associate income was down due to the challenging conditions we saw in the North American coal markets.
Finally, the last bar chart there, the AUD 3 million, essentially the small impact there on foreign exchange related to mainly movements in Latin American currencies compared to Australian dollars year-on-year. Not a big impact this half, but AUD 3 million to take us back to that AUD 442 million. If I can talk a little bit more in detail by each region on the key factors driving the results. The net impact of price, mix, and volume shown on this slide is for mining services excluding ground support together with the chemicals business. Starting with Australia Pacific. Sodium cyanide delivered a solid result with higher prices and a 6% volume increase. Whilst explosives, volumes are up at 2% with market share increases in the Pilbara, partly offset by the impact of heavy rain on the east coast of Australia.
Although explosives pricing in the region was generally flat, we and our customers benefited from the move towards more bulk tonnes, which are up 15%, and less straight ammonium nitrate tonnes, down at 23%, together with more full-service contracts. Interestingly, in this region now, if you look at the total tonnes sold, ammonium nitrate only tonnes represent only 25% of the tonnes sold in this region. If I move to North America, the underlying explosive business experienced volume declines due to weakness in coal markets, together with some small price increases, as well as, similar to other regions, a change in the mix of product and services. Ammonium nitrate tonnes in this market were down 15%, which has been partly offset by an increase in bulk tonnes of 4%, resulting in a net 10% volume reduction. Contract wins in metals markets have been service-orientated accounts, further enhancing margin growth.
Moving to Latin America. The mining services business saw reduced volumes in Brazil, as well as a shift to more higher service level contracts in other parts of Latin America, specifically Chile and Peru. Pricing in this region has been relatively steady. EMEA, which is Europe, Middle East and Africa. The European explosive market continues to be one of our most challenging ones, with declining price and volume. The European coal markets have been depressed as a result of the follow-on effects of U.S. coal exports, the protracted European winter, in addition to the economic fiscal challenges that I'm sure everyone's aware of. Volumes were down in most markets in the Nordics and Western Europe, and margins have declined due to competitive pressures.
Bright spots in EMEA have been the ability to further grow into Africa and the CIS, which we continue to believe will continue to be growth markets for the business. Included in the next line of other, this includes the Asian region as well as the global hub. Net prices in this region were relatively flat apart from some price weakness in India. Volumes across the region were slightly up, including some increase in volumes in India, offset by a small decline in China and Mongolia. Indonesian volumes period-on-period were flat, with the growth in the sales market offset in spot sales.
Contribution from the global hub was down AUD 7 million on the prior year, mainly due to the impact of lower volumes in Latin America and North America, as I mentioned earlier, as well as the higher purchase costs for ammonium nitrate as a result of a third-party outage of a supplier during the period. In the profit report, based on some feedback from investors, you'll see we've given further details behind each of the earnings components on the global hub, breaking out each regional component so you can go through the result and add back those to individual regions in North America and Latin America to see exactly what's happening from those markets. The last row, chemicals. This is essentially the chemicals business, excluding the mining chemicals business, which is now part of the mining business.
On a global basis, caustic prices were down, but this was offset by higher chlor-alkali pricing and improved product mix, particularly in Bronson & Jacobs . Volumes increased with the benefit of a warmer, drier summer on the east coast of Australia, as well as increased demand in the dairy market in New Zealand, more than offsetting soft demand from the Australian construction, manufacturing, and agricultural industries. If I now move to some comments on cash flow. As you can see from the chart, net operating cash flow increased strongly to AUD 295 million, up AUD 256 million on the prior period. The key factors driving this movement are the effect of the non-recurrence of costs associated with the Kooragang Island plant closure and lower cash outflow from the movement in working capital.
The significant improvements in working capital cash movements were due to improved creditor days and lower payments to ammonia creditors. Essentially, last year, you'll recall, we had to buy a lot of ammonia because the plant wasn't working. This year, obviously, the plant is performing as it should, and we haven't had to do that. Net investing activities, AUD 400 million, AUD 94 million higher than the prior corresponding period, due mainly to higher expenditure on sustaining capital and increased spend on the investment in Western Australia in the Burrup project. Net financing cash flows were down AUD 52 million to AUD 130 million as the higher operating cash flows reduced the requirement for borrowings. Touching then specifically on trade working capital. This slide will be familiar to people.
If you look at the role in trade working capital, and that is rolling each month, not point in time, we exited the year on an annualized basis of 13.6% for the period, which was higher than the period last year, which was 13%. We've gone from 13% up to 13.6%. The period end trade working capital balance increased by AUD 35 million to AUD 827 million invested in working capital, compared to AUD 792 million this time last year. That increase reflects an increase in inventories due to the timing of imported ammonium nitrate into Latin America and increased stock levels in North America. If I can draw your eye to the two red circles you can see on the chart. The first one, referred to as old project, goes back to 2005. You'll recall that in 2005, Orica's trade working capital sales was in excess of 19%.
At that time, we implemented a project to significantly reduce this ratio, which we have done over a number of years. In view of the recent performance in the last few halves and challenging fiscal environments around the world, I've just introduced a new working capital global project with the aim of delivering further sustained improvements in our trade working capital performance going forward. Achieving these improvements in trade working capital is a strategic imperative for Orica to contribute to our productivity objectives, support our net debt target, as well as release funds for growth projects. Once again, pleased to say, during the half, there were no significant bad debts incurred during the period. Moving now to investing activities, briefly looking at capital expenditure. As you can see on the slide, during the period, we spent AUD 125 million on sustaining capital.
This included spending of approximately AUD 30 million on environmental improvement projects, both at Yarwun as well as Kooragang Island. Also in the period, we spent AUD 174 million on growth capital. This included spend on the final commission of Bontang, Kooragang Island, as well as the Hunts project in China, together with a number of other smaller growth projects to support our customers globally. The Bontang plant is now commissioned, and Ian, as he said, will talk more about that project later in the presentation. In addition to the sustaining capital spend and expansion spend, we spent AUD 127 million on acquisition costs and capital expenditure in relation to the Burrup joint venture in the period. On the far right-hand side of the chart, you can see a forecast column 2013. This was the capital spend estimate for 2013 that was provided at the November results in 2012.
A key point I'd like to make is that capital expenditure in the second half of this year will reduce. We will equal or better the full-year guidance of AUD 780 million in total. Moving to our balance sheet. Net debt has increased to AUD 2.6 billion, and gearing is now at 43%. Gearing is within our targeted range of 35%-45%. Interest cover is healthy at 6.7 times, well above covenant requirements of 2 times, and our own internal target of at least 5 times. Average funding costs for the period were 4.8%, inclusive of commitment and other fees. This 4.8% compares to the same time last year, where the average funding cost was higher at 5.3%. If you exclude the commitments and other fees, funding cost for the period is around 4.5%.
Cash conversion has increased from 46% in the prior period to 60% this period due to lower working capital funding requirements and higher EBITDA. Given the seasonal nature of our business, we expect the full year trend is for cash conversion to be higher and gearing lower than where we currently are today. We also remain committed to our BBB+ credit rating. In terms of drawn debt maturity, we have total debt facilities of AUD 4.1 billion, comprising AUD 416 million of commercial paper, AUD 2.3 billion of committed bilateral bank facilities, AUD 1.3 billion in U.S. private placement, and AUD 100 million of export credit agency funding. This chart shows you our maturity profile of our drawn debt, where the average tenor of drawn debt is approximately 4.5 years.
If we then look at our total debt profile, including the drawn debt plus the undrawn committed facilities, you can see here we have a total facility limit of AUD 4.1 billion on undrawn debt currently of AUD 1.3 billion. Just moving on to environmental issues. Once again, we've included here the expected cash expenditure on the company over the next few years to deal with legacy environmental issues. As at 31 March, we carried AUD 190 million on our balance sheet for environmental provisions, with around AUD 108 million relating to remediation activities at our Botany site in New South Wales. This includes hexachlorobenzene waste treatment, Botany groundwater remediation, and mercury remediation. The groundwater treatment plant at Botany continues to operate at levels required to contain the plume. Cash spend and operation of the treatment plant is expected to be approximately AUD 13 million annually.
You see that running across the top line. It is important to remember that in terms of balance sheet, we maintain around about a AUD 50 million to AUD 60 million provision, which we spend against on top of each year. So you can see the AUD 57 million at the bottom on the key provisions. We've made some good progress on the on-site remediation of the encapsulated HCB waste. Remediation work is complete and final validation of the remediated area is now being finalized. In terms of our hexachlorobenzene stockpile at Botany, Orica continues to safely store the waste in a fully licensed and secure storage facility at our site and continue to address options for the safe and environmentally sound destruction of this waste.
At this time, as no conclusions have been reached, no estimate can be provided on the expected timing and cash outflow associated with the complete remediation project beyond the current storage cost at Botany. You can see in the chart we show on hexachlorobenzene, roughly about AUD 2 million a year, which is the storage cost going through. Just to comment on mercury remediation. We've submitted a remediation action plan to the New South Wales EPA, and this has been agreed in principle. Remediation will commence when regulatory approvals are finalized, and we're also supporting the New South Wales EPA independent process to address community concerns near the Botany site. Orica's current data confirms the mercury-related contamination at Botany presents no unacceptable risk to local residents. This concludes my remarks. I'll now hand back to Ian.
You all right? Thank you very much, Noel. I'll go through a background on Ground Support and finish up with a representation of what expectation is in North America, which is really driving the overall demand profile for Ground Support. In the first half, our EBIT was AUD 10 million. The expectation in the second half is for that to sit between AUD 7 million and AUD 15 million. Now, if you look at the underlying EBITs that go with that, AUD 16 million in the first half, AUD 21 million to AUD 31 million in the second half. The underlying EBIT in a range of AUD 37 million to AUD 47 million, average approximately of around AUD 42 million. We're going to be taking in the year at least AUD 20 million of hits to integrate fully the Ground Support into the ongoing services that we offer out of mining services.
By the end of this year, it will be fully integrated. It will be part, together with sodium cyanide and explosives, of a total packaging approach that we are going to adopt in mining services. Instead of customers being presented with three groups of persons offering Orica services, it will be an integrated approach backed up by technical expertise, where a group of companies or individuals within the companies will know exactly where to go if they want any services from Orica. For the year overall, at least AUD 20 million in integration costs as we reduce the numbers of persons that we have within Ground Support, and we amalgamate the number of plants that we use to support the sales profile of Ground Support.
In the first half, we have already dropped numbers by around 250 persons, and by year-end, that will be at least 400 persons that will be out of the Ground Support business. If you look at that optimization profile, basically we have done it by hemispheres. The Southern Hemisphere is basically integrated as of now. There will be some ongoing costs into the second half, but the day-to-day operations and running of the Southern Hemisphere are in line with the overall profile of mining services. In the second half, the Northern Hemisphere will be fully integrated. We expect the Americas to be fully integrated by the end of July and Europe to be fully integrated by the end of September. To that end on Europe, we announced internally, a team that will be addressing that integration in Europe over the last couple of weeks.
That is clicking up to its final stages of how we go about that integration. The benefits we expect to get out of that integration and optimization in the 2014 year, sit between AUD 23 million and AUD 25 million. That is a fairly tight range. It is based on a fairly conservative view of what the market will look like. I will come back to that in a scenario. In 2015, we expect the savings to be in the range of AUD 28 million to AUD 30 million. Again, based on a fairly conservative scenario. Volumes have dropped by an average of 15% this year, plus we have taken some pricing packs in Ground Support to consolidate our market share. In North America, we have consolidated our market share on the back of those price changes, but across all of the markets, we have seen around 15% volume drop.
If you look at a 1% movement in volumes as an EBIT impact or EBIT uplift potential, that equates to AUD 2.4 million if you use the pricing that we are seeing across the Ground Support business this year. That uplift is an AUD 3.1 million effect if you use the pricing that we saw across last year. Using those as base points, I will just run through a couple of scenarios. This year, we have dropped 15% in volumes. If we got two-thirds of that back next year but kept the same pricing profile next year as we have got this year, i.e., those cuts we have made to prices are not clawed back, then the effect of that would be that in 2014, we would expect an EBIT of around AUD 90 million out of the Ground Support business after we start to get the positive effects out of the optimization.
Scenario two, in 2015 financial year, if you take the same volume that we had last year with the same pricing, then the expectation is that the EBIT would be in excess of AUD 100 million, AUD 118 million or thereabouts. Basically what that's forecasting is that volumes should start to recover. Some of you may well be sitting there thinking, "Why?" This is why. That blue line at the back of this graph is an expectation of where the Henry Hub gas price will go in the U.S. I personally think it's a little conservative, but we'll use that as a conservative background point to the North American market. You can see that the Powder River Basin is competitive, AUD 250-AUD 275. End of last week, Henry Hub gas was above AUD 410.
The Illinois Basin, which is our biggest Ground Support market in the U.S., competitive at AUD 325-AUD 350. Central Apps or Central Appalachians isn't fully competitive until AUD 450. There's an expectation that area will continue to be under pressure, Basically that's where you're seeing the most mines close in the U.S. What we're saying is the full effect of gas to coal transfers happened last year in the first half of our financial year, The effect that that ran through in stockpiles, et cetera, is still working its way through the system. Basically, the main areas that we deal in Ground Support in the U.S., are in a position now with the Henry Hub gas prices to be competitive and will continue to be so into the future.
The main effects in Ground Support for us have been in North America and in Europe. Unfortunately, what's happened in North America is not only have they dropped over 100 million tons of production, but they're also exporting over 100 million tons at the moment, trying to drive down that stockpile. The main flow and effect of that is that it's crunching fairly large parts of the European market. Basically, coal out of the U.S. is going into the European market, That's idling some of the European mines. What we're seeing in our volume drops are largely driven by the effect of the U.S. coal to gas conversion points.
As the industrial profile of the U.S. picks up, as the AUD 60 odd billion worth of projects that are going to be drawing on this gas supply point start to come on, A lot of that gas that's been effectively dumped into the energy profile will be put into more productive uses as base manufacturing feed. That's one effect. Second effect is U.S. economy slowly coming back. Third effect, the prices are now above the point where coal, out of most of the productive areas of the coal industry in the U.S., are more than competitive. We see those combined effects starting to drive into the point where the volumes will start to come back. Domestic consumption will go up in the U.S., That'll take some of the pressure points off Europe. That'll be a lever to start to lift coal consumption across both profiles.
That's the scenario we've put in place. We're basically putting our foot down in the full integration of ground support. By the end of this year, fully integrated into the normal operating conditions of mining services, that will give us ongoing increased competitive position in those markets going forward. It will also allow mining services a lever point to extend their marketing offering into underground metalliferous, which we're fairly small in at the moment, less than 12% of our overall EBIT. We see it as a growth point going forward. Just to mention about 2 projects. Bontang, basically now fully commissioned. You see from that graph that in the second half, our annualized rate will sit around the 280,000 ton mark. Got a capacity of around 300.
With the maintenance profile of Bontang that we'll experience in the second half, it's basically running at constructed capacity. I flagged before that we went for and were granted an export license. We'll be using some of the tons out of Bontang to support our growth into the Western Australian Pilbara market. We'll be exporting around 60,000 tons per annum out of Bontang down into Western Australia. Hants, the initiating system site in China, is basically coming to the end of construction and are starting on commissioning. That is a very long commissioning phase because there are multiple lines that we have to bring on for detonator production and place those into the Chinese market. You'll start to see some production out of Hants during the 2013 financial year, and then that'll build up over time.
The total project cost is within the original AUD 110 million for the Hants project. By the way, that's a picture of Bontang in Kalimantan. Moving on to strategy. You've all been through this strategic realignment point that we've been undertaking in the 12 months that I've been with the company. Basically, where we're moving is to a sector that we don't see a lot of our competitors moving into. We'll be willing to source externally into the future. We won't be using a lot of our capital to put into the provision of plants unless it is economically compelling to a very high point.
What we see in the world over the upcoming years is a fair investment in the production of both ammonia and ammonium nitrate, and we want to use those source points to put us in a better position than others. There are a few instances around the world where it makes better economic sense for us to build our own facilities, but we are very open to sourcing externally. At the moment, we source over 50% of our ammonium nitrate externally, and I wouldn't see a situation where that percentage would change dramatically. We also want to move into more of a service orientation. What you're hearing repeatedly is that the miners are talking about cost-cutting. What you'll hear us talking about repeatedly is enabling our main customer base to be more productive. How can we do things differently through a service-oriented model that is value accretive?
Cost reduction is one approach, overall, if you want to build value for the long term, it's got to be value accretive. We think our particular offerings allow our customer base to go in that direction, and I'll come back to some of those examples. Together with our base strategy, we have four main directional points which can aid positive uplift that comes out of price and volume. They are the structure itself. We've moved away from business primacy. The amalgamation of cyanide and ground support into the explosives offering means that people will see Orica as a one-stop shop with technical backup. Our functional support points will be more centralized. As we grow, we won't have duplication of those functional support points. Supply and logistics, because we do source from around the world. We deal with 43 external source points for our major inputs.
That gives us a logistics space unequaled around the world. We can follow our customers anywhere in the globe, and we can offer them multi-channels of supply. Manufacturing still has upside, and I'll go through some examples of that without us having to spend repeated amounts of capital to uplift our output points. Value in use is about how do we talk to our customers about that value creation equation, which both addresses their need for cost reduction, most importantly, addresses their need for greater productivity. When you put all those together, the five-year margin that we're seeing for the business is if you take 2012 as a base point for EBIT margin, there are certain scenarios that could see that EBIT margin being compressed by 10%.
Most of the scenarios we look at in a five-year profile suggest that we can lift that EBIT margin over the next five years by around 20%. The cumulative effect of those internal margin uplift points on top of what we could see out of the market in price and volume gives us a positive outlook of where the company is going into the future. We're not just a mining services company at the behest of the markets. We have certain improvement margin points internal to the company that we'll be leveraging to the greatest degree. Let's go through some categories in there. Supply and logistics. I'm using this slide just to counter a few anecdotal points about how China is going to swamp the world and, in particular, Asia. What you see here is the last three halves.
First and second half 2012, first half 2013 imports into Australia. Traditionally, those imports on an annual basis have been 150,000 tons. There was a kick-up when Moranbah was under construction and the construction of contracts around the support points for Moranbah were in place. Then you're seeing the market naturally progress down to where it has been historically. To actually get large amounts into Australia that are economic and set up the infrastructure and transportation to keep them economic is not of a profile that is competitive with the internal producers and the infrastructure that we have within Australia. You've got to remember that some of those tons, although small at this stage, in that first half of 2013, were our first imports out of Bontang into W.A.
We don't see on a competitive basis that Northern Europe or China will be in a position to be exporting large amounts around the world at a competitive pricing point that will be a pressurization for us going forward. The second point about supply and logistics, as we build our infrastructure around the world and we expand into new areas, a lot of that is largely on the back of emulsion technology. A lot of that emulsion technology goes with the product range that we have. It's innate technology that gives us an advantage in certain markets. If you look at a projection or estimation of profile for 2013, mining services sales revenue, ANFO is 18%, emulsion is 30% and growing. If you look at the two smaller pies, 2012 first half versus 2013 first half.
Emulsion has grown from 57%-62%, and straight prilled traditional ANFO has gone down as a percentage. Over time, as we build into Africa, CIS, our customers ask for more emulsions in Australia and North America. Our technology and techniques will be more dependent on things that aren't freely tradable. The ammonium nitrate ends up in the emulsion mix, the emulsion carries a higher margin than traditional AN prill, because of the technological application points on top of what you get out of traditional prill. The traditional prill ammonium nitrate is continuing to go down as a revenue source percentage-wise for the company. Manufacturing excellence. Ammonia out of Kooragang Island, we've been able to stabilize the production profile. In the upcoming half, that'll continue to increase in production output.
What that's enabling us to do is move a fair bit of that ammonia up to Yarwun. We're basically underpinning Yarwun. We can't cover all of Yarwun's production, but a fairly large percentage will be coming out of lifting our productive capacity at Kooragang Island, shipping it up to Yarwun. It gives us an internal leverage point. Then at Yarwun itself, we've appreciably lifted the cyanide production. Again, we've stabilized the profile that you would've seen in 2012 and before. We've been able to lift that, and we'll lift it again in this half that we're in at the moment. The manufacturing excellence approach is not only identifying those economic lever points, but it's putting in place the processes that enable our productive capacity to be expanded without spending capital. That is the main point. We're not having to pay for extra assets.
We're just making our assets sweat a bit. That's the same for the initiating systems. I don't want to get into the technicalities of what an OEE measurement is. Basically, it's an expanded point of utilization. It's not just the utilization of the plant, it's how many of the pieces go through that are in full compliance, et cetera. It takes all of the quality into account and volumes. Basically at Brownsburg, which is our electronic detonator production point, you would've seen how the figures of electronic detonator sales continue to increase. We've been able to lift the productive capacity of that factory, and we can lift it further to meet that demand point without having to put in new capital. The same with the electric detonator plant at Gyttorp.
We're spreading that approach throughout all of our productive points, getting better output without having to spend more capital. On to value in use. I think a lot of you would've seen this. It's a comparison of last year, last financial year, to this six-month period. We've been able to keep most of our customers. Over half of the competitor customers that we go for, we pick up, and three-quarters of the greenfields that we compete for, we pick up. Our customers want us to be dealing with us into the future. The reasons that we get from the customer base about why they want to stay with us are about our service and supply, our product differentiation, and the least feedback point as to why people go with us is on price and cost. We don't fit into the cheap and cheerful end.
We fit into the high-security technology end, which is where we want to play. This next pie really reinforces that. This is early days, but it's an indicator of what we want to be doing as a company. If you take the second half of 2012, 61% of all the bids by revenue that we picked up in that period were for just products. Here's some products. You go and do with them what you want. Only 38% or 39% of the on-site product services type contracts constituted the profile. In the first half of 2013, that product-only type contract dropped to 20-something%. The on-site products and services were able to lift from 39%-70%. It's early days because we've got an average tenor of four-year contract length, and this is only half, so it's half of four years.
It shows the indication of where we want to end up. That yellow wedge is what we want to grow over time. We've started to put in place advanced blasting services contracts. Contracts where we take some risk, where we deal with a customer and we say, "If you want a certain size range, we'll guarantee it." If we hit that size range so you get greater throughput in your mill, et cetera, we want to share in that upside. It's greater productivity to the customer and some reward for our services. Some case studies around that. This is one in South America, as you would pick up, where we've been able to reduce the size of the rock produced out of the blasting. That's enabled them to have a greater throughput in their mills, et cetera.
They acknowledged at the start of this year that we've added AUD 25 million in value so far over the contract period. Comes back to that base point I was talking about. It's not just about cost cutting, it's about value creation with our customer base for the long term, so we both win. Second example, underground development rates. We formed a joint project with our customer, and through that, we've been able to increase the length of each round by 90%, and the rounds fired per day by 129%. Again, I don't want to get into technical blab, but when you drill out an end underground to be fired, that's called a round. If you don't fire it correctly or you don't have the holes in the right spot, you have snap-offs. You effectively keep drilling the same bit and firing it again and again.
If you can reduce that, it gives you an increase in the round length, so you have less times you have to fire the same ground. The less holes you do in each round means you can do it more often because the drilling cycle drops. We've been able to enable them to fire more rounds or ends, and fire them in ways where you get more advance out of each firing. That's a huge productivity increase, and we've been plotting those increases with our customer, and they're more than happy with the results. Again, it's a value-accretive uplift. The last one, we've been dealing with a customer where they had constraints, fume, vibration, overpressure, dust, proximity to public highway, all of those things that miners have to deal with and be productive on top.
We've used StrataBlast, one of our trademarked techniques, and we've been able to have outcomes where all the environmental compliance points have been ticked. The coal recovery has gone up against mine targets. Basically, they're picking up some seams they didn't think they were able to recover. Their washery yields have gone up, and their dragline productivity has gone up as well. They all go straight to the bottom line. It's not just cost cutting. It's about how we can enable miners to be more productive. I'll just go over the fundamentals again. All the pundits, and I haven't seen one pundit say that over the next 20-odd years, you're not going to see fundamental uplift points in the demand for most of the commodities. We might be going through some short-term blips with coal and some other of the commodity pricing points and margins.
Fundamentally, the world needs more of the commodities. They're going to grow over time. If you use Australia as a good data base for the last 30 years, as those commodity growth points enhance, then the demand for ammonium nitrate enhances at a greater rate. What we're seeing at the moment in the mining industry and people starting to cut back on exploration, et cetera, talks to this graph. The greater the percentage of production out of older assets, the higher the strip ratios will be, the higher the amount of explosives they'll use. It drives into our strategy about how can people do that in a more productive manner. Then for cyanide, gold production's gone up by 10%, cyanide consumption's gone up by 60%. That's on the back of grades going down and more gold coming out of copper gold, zinc gold deposits.
That consumes a lot more of the cyanide. You put all that together, and the three basics for the company that will drive us into the future is not only our own internal margin enhancement points, but the fact that the world will continue to be industrialized and urbanized. That will drive fundamental growth in the box going forward. The fact that strip ratios and complexity of ore bodies will go up. Miners always take the best part of their ore bodies first or the best ore bodies first. Over time, logically, strip ratios always go up, especially as exploration expense drops. You can see that in the next few years, that's building the next boom. Then on top of that, people want to address the point about strip ratios and increasing demand with technology and application points that continue to drive a more productive outcome.
They're the three tenets of our strategy. They're the three tenets of what you should see from Orica over the next five to 10 years at least. With that, I'll open up to Q&A. We'll take questions from the floor first, and then we'll go to the phone.
Ian, it's Mark Wilson from Deutsche. Anyway. Amen. That's better.
You're right.
Mark Wilson from Deutsche. Just wondering whether you could elaborate on what customers are indicating to you at this point, across each of the various regions. Are they looking to close mines, cut back production significantly, or is it all about trying to reduce costs and also better manage their CapEx plans?
Yeah. What we're seeing is, if anyone can lift production, they are. That talks to consumption of our products. Some people are extremely worried about their margins, they've started to talk to us about what is the pricing points and whatever. We see that just as much opportunity as some pressure point, because then we can introduce what I was talking about in those case studies. How do we work with you to be more productive? Really what we're seeing in the mining industry at the moment is a bit of a turning point. Three, four, five years ago, it was all about "Don't care what it costs, I just want to get it out." Now it's about, "How can I be more productive and reduce my effective costs over time?" We see that as opportunity.
It's across the whole range, but it's basically all the discussion is about margin squeeze.
Good morning, Ian.
Good morning.
It's Ramoun Lazar from UBS. Just a question. You mentioned there was 60,000 tons of product coming out of Indonesia into W.A. You, I think, previously said it's about 80,000 tons coming out of Yarwun as Moranbah comes up this year. Should we still assume that some of those tons are also going to W.A., or has your customer profile in W.A. changed in any way?
We're actually running some trial shipments to various geographies out of Yarwun at the moment. We've picked up a fair bit of extra tonnage into Queensland to supply others. It's defrayed the effect of where we need to be sending that Yarwun tonnage.
Just one for Noel. Noel, you mentioned funding costs at 4.8%. Is that a sustainable level going forward, do you think?
The 4.8% in terms of where we are, Ramoun, in terms of our interest bill, in terms of fixed versus floating. Fixed, we're running at about just under 30%, the remainder is floating. You look at what's happening globally at the moment in lots of financial markets, particularly the North American market, you're seeing a number of large companies tap those markets for long-term debt at very attractive rates. If that continues, I would say that the 4.8% is sustainable.
Hi, it's Michael Ward from CBA. Just a little bit further to Mark's question around value in use and the service and mix that you talked about. Are there any regional differences between the willingness of your customers to accept that strategy?
Yeah.
Can you elaborate?
South America is the most open to this. Australia is interesting. One of those examples I used, case studies, was out of Australia. We are demonstrating on the ground what the improvement points are. I think the Australians are a little slower than the South Americans to pick up on this. We're starting to get a lot more interest in Central and North America out of these approaches. It's early days in Africa, and it's really about building market share. CIS, we're picking up some bigger contracts on the back of some of our service offerings. I'd say on balance, Australia is slower than the rest of the world.
You also in that Latin American case study, you said they acknowledged that you'd created AUD 25 million of value.
Yeah.
How far advanced are you in the Latin American opportunity in actually extracting some of that back?
Uh, yeah-
Did you get any of that 25 or are you not quite at that point yet?
Well, the reason that we're offering services is you get your margin on your products, and then you get a margin for your service on top. It gives you a greater margin overall. What you actually saw in the first half, and it's buried within the numbers, but in South America, we're building up some of the technical support points. We've got the costs and those new contracts are just starting to roll through. You'll see an effect of that going forward out of South America. Yeah, you do get a greater margin when the higher up the service end you go and the more risk you take, then the higher the margin commensurate with it.
Thanks.
Peter A from Morningstar. Just referring back to your slide 18 on U.S. coal. I'm just wondering if you are starting to see some stabilization in that market now, whether the decline that you had in volumes in the first half would start to see perhaps ease up a bit in the second half.
Yeah. Personally, our customers have stabilized. If you make a statement about the total industry, there's a hangover in the stockpile. It's the same in the Q&C market, quarries and construction. You're starting to see some pickup in U.S. house prices, but we're not seeing it in Q&C yet because it's got to run through its stockpile points, and that's the same with coal. Hopefully, the U.S. will have a very hot summer followed by an extremely cold winter. Then we'll see that translation back into our numbers a little sooner. There's always that buffer of stockpile that you've got to work through.
Thank you.
Richard Johnson from The Mirror. Ian, I just wonder if you could elaborate a little bit on ground support pricing going forward, because in your sensitivity, if you assume flat pricing in 2014 on 2013, it assumes the trend is up on an average basis.
Yeah. That's just a conservative approach. You can't just say ground support pricing. It's the steel bar and the fixity that sticks the steel bar to the ground. We're leaders in the fixities, and the margins are holding up in the fixities. The steel bars are under a fair bit of pressure. Part of this optimization that we're going through for ground support is, how many of those steel points do we want to produce ourselves? Can we get it from others? Can we consolidate those factories and enhance the application points of the fixities? Moving our customers from traditional concrete fixity to a chemical fixity. Those kind of discussions are going on. It's really two markets, steel, fixities.
Tim Mitchell from Citigroup. I was wondering if you could talk around where you're seeing spot AN pricing at the moment versus where some of your contract pricing is.
It's interesting, and it's a reinforcement point to the point I made about Chinese ammonium nitrate. We're not seeing pressure in Australia out of Chinese AN, but we are seeing a little bit in Indonesia. It's interesting, the people that are playing in Chinese ammonium nitrate in Indonesia are only on spot sales. We haven't seen a pressure point back into our base contracts. That talks to security of supply plus quality and the services you pick up as well. The spot pricing is a little below where we are for our base load points, but the margin is not as great as you would think. I'm not going to give you percentages because then you can work back from that. The margin is not that different.
Where people are playing in markets such as Indonesia, it's about their spot tonnages, not their contract tonnages.
Just the second question is, I know you've talked around the confidence in strip ratios longer term being a key driver. Do you think over the short term, maybe the next one or two years, that you could see, I guess, that deviate in strip ratios come back a bit?
Look, you can do it for a while. It depends on the individual deposit. If you're under margin pressure, that's one thing you can cut your costs on for a while. For the average mine, that's three to six months, and then it comes back again.
Thank you.
A trend's a trend.
Morning, Ian. John Purtell here from Macquarie. Just had a couple of questions. Just picking up on the earlier points or question around ground support. Slide 15, you've got an expectation of improved second half there for ground support in an underlying sense. Is that just the improvement in sort of production from, say, Orinoco Basin that's driving that? Is there also some cost reduction benefits from what you've done to date in there? The last part of that is that sort of improvement expectation around some of those, I guess, in the money regions, again, for U.S. coal. Should they not be also positive for North American explosives as you move forward? Because ultimately, they're sort of running off the same sort of end markets. Thanks.
Yeah. I don't want to be glib about this, but it's all of the above. It's a combination of all those. A slight volume uplift, some of the improvement points, some of the sourcing points as a feed into the market in general. It's all of that agglomerated.
Hi, Ian. Scott Hudson, CLSA. Just wondering if you could talk about Bontang and whether or not you're still expecting a positive margin contribution as, I guess, we come into the second half and it's now running at optimal volume.
Yeah, very much so. Actually, I think it contributed and paid for its capital in the first half. With another uplift point in the second half, we certainly expect it to be a contribution point to the profile.
Could you just touch on your market share now in Indonesia, I guess, post some of those spot volume losses?
Yeah, look, somewhere around the 45%-50% mark. It's pretty hard to put the numbers together for the total market in Indonesia. A lot of the Indonesian producers have been dropping their spot sales as well. To get the most up-to-date numbers in Indonesia is quite difficult. It's not as transparent as the Australian market, as you'd understand, but we're around 45%-50% mark.
Thanks. Just lastly, I guess, with Glencore taking over control of Xstrata, do you see any change in the way they approach their assets, specifically in the Hunter Valley?
No, we haven't had any negative feedback on that. We've certainly been in discussions with Xstrata about how we go forward on contracts, et cetera. That's been a play point in the background, but it certainly hasn't influenced the relationship we have with Xstrata going forward. We've been having discussions with Xstrata at the very highest levels, so yeah. We don't take it as a negative at all.
Thanks.
Stuart Jackson from JP Morgan. You alluded to in the result, some start-up costs associated with that moving towards that service model in Latin America and in Africa and so forth. Can you give some quantification around that, but also the outlook for that as you continue to evolve that sort of strategy? Looking at North America, there was an outage, and you had to obviously pay for some ammonium nitrate rather than through the contracts you've got at the moment. Again, quantification of that, but also what you're doing to mitigate the cost impact of when those contracts actually expire over the next sort of two to three years.
Okay. I don't know how many questions you squeezed into that one question, I'll try and take them one at a time. When you go to a full service model and you're guaranteeing size ranges, et cetera, then you either want to put your own experts on the ground or put people there that can help the mine site people conduct the blasts in ways because we carry part of the risk. When you kick that off, there is an initial service uplift. As we go to more and more emulsion, you've got to invest more into the emulsion plants. The productivity of your MMUs or your big trucks drops off a bit because you're pumping rather than augering. All of those things have to be invested in as you pick up in those percentages.
They will flow through over time, you do get a slight differential as you move into that area of the market. As to preservation of contracts, that value in use overhead I put up, we managed to hold 99% of our customers and pick up 75% of greenfields. I think we're preserving our profile of contracts going forward, and you should see some increase in volumes out of that going forward. We're not seeing them deteriorate. Within each contract, it's a variability because as you'd understand, even if they haven't got take or pay, they've got a production range. Some of those are coming off, in other areas, they're lifting. The overall volume effect should be that revenue continues to pick up going forward.
I was actually more interested in the supply contracts for ammonia or ammonium nitrate in North America because they roll off between 2014 and 2016, it's a fairly significant step up in your cost base what will come through from that.
Yeah. As I said, overall, we see a pretty big investment in ammonia and ammonium nitrate around the world. There's a fair few projects about to come on. We've got two project teams looking, one specifically at North America, one in global supply. We're talking to, I don't know, Andrew, six or seven groups, at least, on top of our normal suppliers, who are all wanting a group such as us to not only underwrite some of their investments, but to give them security of offtake. You're right, some of our long-term contracted positions in North America do roll off, we don't see a shortage of opportunity going forward. I think that's it from the room. Are there any by phone?
The first question comes from the line of Mr. Ben Chan from Merrill Lynch. Your line is open. Please go ahead.
Thanks very much. I'm just actually interested in slide 27, if I could, please. Just the slide where it's showing you're shipping Kooragang on ammonia to Yarwun. Presumably, Yarwun turns a price back to ammonia, this would be reducing your cost base there by, I don't know, maybe a couple of hundred AUD a ton. Are you keeping that full benefit, or are you passing some of that back to your customers?
If there's a contract that goes back to ammonia, as ammonia prices come off, we pass that back to the customer. If the contract goes back to gas, we move accordingly on that as well.
I presume most of the Yarwun contracts are priced to ammonia, though.
Yeah. The majority of the contracts are priced to ammonia.
Right. Cool. Could I just ask one more, sir, and sorry for my lack of understanding here, but is Indonesia in Australia Pacific or in other? I'm just trying to reconcile that comment that you made, Ian, just about the Bontang's covering its cost of capital with the Asian bit of other, which is down 41% at the EBIT line.
Yeah. It did cover its cost of capital, but I don't think we'd go out for many dinners on the amount it covered it by. I'm just flagging that it's already covering the cost of capital in the second half. That should improve further.
Right. Indonesia's in other, then?
That's correct, Ben. It's in other.
Yeah. Asia and other.
Yeah.
Thanks.
Okay.
The next question comes from the line of Mr Matthew McNee from Goldman Sachs. Your line is open. Please go ahead.
Thanks. Ian, I just want to touch on a point you made about margins going forward, and potentially, under some scenarios, going up 20%, in other scenarios, going down 10%. I assume there's obviously a lot of different margins you can make, manufacturing margins, distribution margins, service margins. The mix effect is really the biggest driver, I assume, of what your margin outcomes are. Is it that positive mix effect of getting more services? Just looking at slide 31, where you're already pointing to the fact a lot of the business you're winning
Is having more margin included or more services. Are we going to start seeing that positive margin come through? I mean, just on the basis of what you won on the first half?
Yeah, you will see it come through. I made the point that the percentage of the products at the very high end of the service, that was for a six-month period, and the average 10 of our contracts is four years. It's.
Yeah
One-eighth of the base, and it takes the time lag before it starts to kick in. It's indicative of the trend we're starting to see. You'll start to see it come through in the numbers, but don't expect it to be a windfall in the short term. The other thing about the margin growth, and that's EBIT margin, so the combined effect of all those initiatives with price and volume. We expect to get just as much out of sourcing and manufacturing excellence as we do out of value and use, so it's spread right across the field.
Your expectations around margin are more about, as you say, the manufacturing sort of improvements and the better mix of revenues rather than actual absolute pricing?
Yeah, that's right. I think Noel, in his slides, made the point that we actually picked up the amount of emulsion, which we did in the six months just finished. That carries a higher margin.
Yeah
Because of the intrinsic nature of the emulsion and the application point of the technique. That mix will continue to drive margin just as much, if not more so, than price going forward.
Yeah. The negative scenario you mentioned, was that just about pricing pressure or was that about a negative mix?
I think anyone in this type of environment at the moment that doesn't say that there is a chance-
Yeah
that things could go badly in the U.S. and China and translate into fundamental market contraction is doing a little bit too optimistic. There are certain scenarios that can play out, low probability, but they are there.
Yeah.
If China and U.S. was to fundamentally contract, then we would see our volumes and price pressure go up disproportionately. I'm not suggesting for one minute that that would happen. It's just part of the scenario mix you do in a five-year plan.
Yeah. No worries. Thanks.
There are no further questions from the phone at this time.
Okay. Well, thank you very much for your time this morning. Once again, thanks to Deutsche. I hope the presentation not only showed that fundamentally we're on a track of improvement, but also that we have a profile and deal with our customers in a way that should build margin going forward over time. Thank you once again for your time. Thank you.