Good morning, everybody. A warm good morning to all in Sydney and to those joining us via teleconference and webcast. Welcome to Orica's results presentation for the half year ended 31st of March 2011. I'm Graeme Liebelt. I'm the Managing Director and CEO of Orica. I'm joined by our Executive Director Finance, Noel Meehan. In line with normal practice, today's presentation is being webcast via the Orica website, and all handouts provided in addition to our analyst compendium have been posted on our website and lodged with the Australian Stock Exchange earlier today. As usual, we'll break this morning's presentation into three parts. I'll start by providing some of the highlights of our 2011 first-half performance. Noel will present a summary of the financial results for each business and talk about some of the key financial metrics.
I'll come back and spend some time providing more detail on the status of a number of our growth projects. We'll be happy to take questions at the conclusion of the presentation, of course. After the Q&A session, for those here in Sydney, there'll be an opportunity for some further interaction with some of the Orica management team. We're pleased with our financial results for the first half, and I'll talk to that in a moment. First, let me turn to an extremely important element of our culture, and that's the commitment to take care of the health and safety of our people and the environments in which we work. On safety, I'm saddened to report the death of a Minova employee in November last year.
He was a passenger in a small truck driven by one of our contractors and involved in a low-speed traffic accident in China. We've, of course, undertaken a thorough investigation and have implemented the preventative measures and learnings that have been identified by those reviewing teams. The group's all-worker recordable case rate of injuries and illnesses improved on the 2010 performance, falling from a rate of 0.73 to a rate of 0.53. All incidents are investigated, along with what we call near-miss events, to ensure that we continue to improve. Orica does continue to benchmark well against other companies in this area. It's disappointing that the number of distribution incidents increased on that recorded in 2010. We're putting a lot of effort into this area. We remain committed to implementing better and more consistent transport safety procedures across the group and within our transport service providers.
In the interest of brevity, I won't spend a lot of time on the full range of measures of environmental performance in this half-year presentation. Given the interest in carbon emissions, I thought we should highlight on the chart Orica's total emissions of CO2 equivalent, which are approximately 2.3 million tons on an annualized rate. That's a significant number, of course. I'm also pleased to report that over the past four and a half years, we've reduced our CO2 equivalent emissions per ton of production by 57%. In terms of financial performance, Orica has delivered a solid first-half result. We've faced some challenging operational conditions, and I think our people have responded very well. We stayed focused on maintaining disciplined management of the business. I think that approach is reflected in these results.
Net profit after tax and before individually material items for the period was AUD 264 million. That's up 5% on the previous half. Those numbers, of course, exclude DuluxGroup from last year. Underlying this was growth in earnings before interest and tax, which I'll now call EBIT, which was up 1%. EBIT growth was driven mainly by an improvement in volumes in some of our markets, improved pricing and margin management, continued focus on productivity. Rising input costs and a strong Australian dollar, of course, worked against us. Disciplined cost management and our relentless focus on productivity continue to be particularly important as we're now seeing inflationary pressures on our fixed cost base in some markets where demand is improving. We've maintained focus on trade working capital management.
Our rolling trade working capital to rolling sales is now at 13%. That's an improvement in the prior year, which was 13.8%. This continues the improvement which commenced way back in 2006. I think it's a great example of the benefits of staying committed to disciplined management over a long period of time. Adjusted gearing, 32.1%. The balance sheet continues to be in good shape. Our banking facilities are more than adequate. Noel will cover the numbers in more detail shortly. In terms of operating conditions in our market, we've seen some recovery in demand, though overall, this has been quite modest. Coal and metals markets in North America have shown good growth. That's helped both our Mining Services and Minova businesses with respect to volume. Coal markets in Southeastern Australia and the Western Australian market generally have also been strong.
We've seen a slow recovery in infrastructure markets in North America and in markets across the Nordics, Europe, CIS, and Africa. Subdued economic conditions in many countries continued to weigh on overall demand. Overall, it's been fairly modest. Coal markets, of course, in Northeastern Australia and in Asia have been adversely impacted by rain and floods. Volumes into these markets were below last year's volumes. We've seen modest pricing benefits delivered in Mining Services and in chemicals. This includes some pricing improvements for ammonium nitrate, higher caustic prices, and continued firm sodium cyanide prices. These benefits are partly offset by price weakness in the Minova business. That's mainly as a result of strong price competition in the North American market. Despite the operational challenges we faced during the period, we were able to remain focused on positioning the business for longer-term growth.
We've made good progress on our expansion projects and invested more in research and development. I'll come back to this later in the presentation. The challenges, of course, are well-known to you. Adverse weather conditions with heavy rain and widespread flooding in Australia and Asia. Some extreme winter conditions in parts of the northern hemisphere. Strong price competition in Minova, North America. Soft demand in some markets, of course, a strengthening Australian dollar. Noel will quantify some of these impacts. Importantly, the strategy of concentrating on the mining and infrastructure markets and maintaining disciplined financial management has proven resilient over a difficult couple of years. I think we're well-placed for maximizing the growth opportunities in front of us. That's all I'll say as an introduction. I'll now hand over to Noel to cover the results in a bit more detail. I'll be back shortly. Thank you.
Thanks, Graeme, good morning to everybody. Today, I'll touch on the underlying drivers of our earnings growth for the half and briefly talk through the performance of each of our businesses. I'll also go through some of our cash flow performance and our key balance sheet metrics. I'll try and keep my comments reasonably brief with some additional detailed information contained in the profit report and the appendix to the presentation which you've got in front of you. At a group level, EBIT from continuing operations was up 1% on the prior year. A good result in light of adverse weather conditions, rise in input costs, soft conditions in some market segments, and some headwinds from foreign currency exchange movements. As Graeme indicated, overall volume was up with an improvement in demand conditions in a number of our markets, though some markets did remain relatively subdued.
This was a very good outcome in light of the impact from floods and heavy rains in Australia and Asia, which negatively impacted volumes across all of our businesses. Disciplined management of our gross margins and continued improvements in productivity, which combined delivered an EBIT improvement of AUD 50 million, also contributed positively to the result this half. Inflationary pressures contributed to an increase in our fixed cost base. During the period, we also increased spending on research and development year on year by approximately AUD 5 million. The strong Australian dollar has adversely impacted our translated earnings. As you can see on the slide, hedging benefits partly offset this impact with a net adverse impact of AUD 17 million in the period. During the half, we announced the closure of our 65-kiloton ammonium nitrate plant at Monclova in Mexico.
The plant commenced operation in 1956, was subscale, and was in need of significant sustenance capital going forward. For economic reasons, we decided the best outcome was to close that plant. Closure costs of AUD 17 million have been recognized in the period in the Mining Services business. Overall, the result is pleasing with the factors within our control managed well, and we're able to deliver benefits which more than offset those adverse impacts from external factors. At a business level, again, we saw record results in Mining Services and Chemicals. Margins, however, were slightly down for both businesses due to the one-off events I mentioned earlier, the Monclova plant cost issue in Mining Services and lower sodium cyanide production in Chemicals due to the plant shutdown at Yarwun where we operated capacity.
The Minova business EBIT was down 16% on the prior year, a disappointing result reflecting very challenging market conditions and strong competition. As a result, margins in this business have been compressed. If I just move on to Orica Mining Services. Slide seven. Mining Services business delivered a record result up 1% to AUD 335 million. Market conditions in a number of our markets have recovered modestly, though some segments remain subdued. Adverse weather during the period also softened the volume growth. We saw some modest price and productivity improvements continue to positively impact earnings, and this provided an offset to the effects of rise in fixed costs due to inflationary pressures and the lag in recovery of rise in ammonia costs.
The business increased investment in R&D and also continued work on establishing a centrally managed business model located in Singapore, which together added an additional AUD 11 million to costs year-on-year. Both of these strategic initiatives will deliver value to the business over the longer term. The impact of Australian dollar in the period was modest at only AUD 2 million, essentially due to the benefits of a hedging program put in place. Global ammonium nitrate volumes were up 4%, with improved demand in coal markets in Southeast Australia, the Western Australian market generally, North American coal and metals markets, and a slow recovery and demand in the Nordics, Europe, CIS and Africa. In Australia-Asia, ammonium nitrate volumes were down 1%. This was mostly due to the impact of the rains and flooding in Northeast Australia and Asia, which reduced volumes in the order of about 40,000 tons.
This offset strong demand in Southeast Australia and Western Australia. North American volumes were up 9%, reflecting stronger demand in coal and metals markets. Infrastructure markets in North America were generally soft. Volumes in Latin America were in line with the previous corresponding period, whilst in Europe, some signs of slow recovery were evident, albeit modest. Pleasingly, we saw a very strong growth in Electronic Blasting Systems, our EBS systems, with volumes up 29% year-on-year. EBIT margin for the Mining Services group decreased from 19.9% to 18.3%, due mainly to the one-off costs associated with the Monclova plant closure. Excluding this, EBIT margin would have been 20.1%. Summing up for Mining Services, underlying demand conditions improving and margins well maintained, which has offset the impact of adverse weather and the lag in rise in input costs and the one-off plant closure cost. Moving now to Minova.
The Minova result is disappointing. EBIT was down 16% to AUD 55 million, due mainly to compressed margins as a result of continued strong competition, mostly in the North American market. Volumes were up. Chemicals and steel bolts in North America were up 10% and 5% respectively, reflecting that stronger demand in the coal markets. Markets in the CIS and the Czech Republic demonstrated modest growth, as did hard rock markets in Australia. Volumes in China were steady. In tunneling, markets showed general softness as a result of subdued economic conditions in parts of Europe, as did the mining markets in some parts of Western Europe and Poland. We've continued to work on our integration activities with incremental synergies of AUD 2 million delivered during the period and further productivities of AUD 1 million. That's that AUD 3 million you see on the waterfall chart.
For all intents and purposes, the integration is now complete and there's some detailed information at the back of the presentation. But essentially, when we bought Minova and Excel, we targeted AUD 45 million of synergy at a cost of just under AUD 60 million. We've delivered AUD 42 million, so we haven't got to the 45 of synergy, but it's cost us AUD 42 million, not that AUD 59 million. But we've essentially drawn a line under the integration now of the Minova Excel business. As mentioned, the margins did significantly reduce in the U.S. and in Poland due to the competition and also some rise in input cost issues. As a result, EBIT margins have decreased from 16.7% in the prior year to currently 13.5%. Clearly a disappointing result. Turning to our Chemicals business. The Chemicals business increased EBIT by 1% to AUD 95 million.
This was mostly achieved through improved trading conditions in mining markets, higher global caustic prices offsetting the impact of unfavorable exchange rates. Volumes in general chemicals were up slightly due to strong growth in the mining markets in Australia, which more than offset the impact of soft market conditions in agricultural, food, automotive, and general plastics markets in Australia and New Zealand generally. Margins in the business were well managed. In the mining chemicals business, volumes were down 16% due to the lower production volumes following the planned shutdown at Yarwun to uprate capacity. Demand from gold markets continues to remain strong. Costs within this business, again, have been well managed. EBIT margins reduced to 12.6%, down from 13.2% in the prior period, mainly due to the impact of that foreign exchange and the impact of lower sodium cyanide volumes.
Overall, for chemicals, despite headwinds of foreign exchange and lower sodium cyanide production, I think this was a terrific result which bodes well for the future. Just rounding out now on corporate center and other support costs. As you can see here, corporate and support costs of AUD 48 million were AUD 12 million lower than 2010. The center costs were in line with the prior year, while support costs were down. If you remember last year, we had some higher insurance claims in the prior year relating to the earthquake in Chile and some plant disruption in Latin America. I now turn to cash flow. A lot of detail on this slide, let me try and sort of talk you through the main points. Net operating cash flow of AUD 142 million was down on the prior year by AUD 127 million.
Much of this difference is accounted for by the inclusion of Dulux Group cash flows in the 2010 comparative. If we exclude the contribution from Dulux Group, operating cash flows this half were down AUD 14 million, as opposed to that 127 or down 9%. This is mostly due to a higher absolute dollar cash outflow from trade working capital, following increased sales of 8% in sales and higher levels of inventories in our business following the adverse weather conditions, particularly on the East Coast of Australia. Despite having an absolute higher period end closing balance, as Graeme mentioned, one of the key metrics that we focus on is the role in trade working capital to role in sales, and we're pleased to see continued improvement of that at now sitting at 13%.
Five years ago, that was sitting at close to 18%, and we've managed to get it down to that level, and it's probably at a level now where only minimal improvement on the rolling basis will continue. Net investing cash flows, AUD 278 million, AUD 54 million higher than the previous correspondence period, as we've continued to spend more money on growth projects as we progress Bontang, Nanling, Kooragang Island ammonia, and the sodium cyanide uprate. The next slide is familiar to everybody. It just shows that improvement of long-term basis on our sustainable improvement in trade working capital sales. As Graeme has previously said, this has demonstrated a commitment over a number of years to discipline management of working capital on an ongoing basis. I think what you should expect to see going forward is maintaining at around that 13% level.
A consequence of that may well be that the absolute AUD that you see going through the cash flow as we grow the company will increase, but it is really that measure that we look at, as well as debtors' compliance, which, again, is running at a historic high in our business. Turning to capital expenditure. In the period, we spent AUD 172 million on growth projects, progressing a number of projects across the businesses, the most significant of which are detailed on this chart. As you can see, spend in the second half is expected to be higher as we near completion of the Bontang project and progress a large number of small other projects, particularly in our mining services business.
In terms of sustenance expenditure, we spent AUD 81 million in the half, we expect this to increase in the second half, mainly due to a major shutdown at Kooragang Island scheduled for July this year, which will add about AUD 40 million of cost into the sustenance budget for the second half. For the full year, we expect to spend in the region on a full year basis of AUD 700 million, AUD 500 million on growth and AUD 200 million on sustenance as shown on that slide. For those people who have closely followed the company over a number of years, our capacity to spend this amount of money, normally would say that this is a sort of a maximum number as opposed to a minimum number. We will see what happens between now and September. If we now just look at some of our key metrics on our balance sheet.
Our balance sheet is very strong. Adjusted gearing stands at just over 32%, and net debt at AUD 1.3 billion. We have over AUD 2 billion of committed bank debt facilities and have only drawn just over AUD 100 million at period end. Our debt facilities provide us with strong liquidity and the flexibility to pursue our plentiful organic growth opportunities. I guess in these times of economic and financial fragility across some parts of the world, we think it is prudent to have this level of liquidity in our funding portfolio. Interest cover at 5.4 times remains well above our covenant requirements of two times and above our internal target of at least five times. Average funding costs have reduced to 7.1% from 7.7% in the prior period, reflecting the benefits of favorable rates on proceeds from the US private placement we received in October 2010.
The cash conversion number you will see on the chart there of 65.4%, down from 82.8% in the prior period, excluding DuluxGroup, really due to that increase in absolute trade working capital I mentioned earlier, and some level of higher sustenance spending year-on-year. We remain committed to our BBB+ credit rating. If I may just show you what our debt profile looks like. The USPP raising in October 2010 has increased the average tenor of our financing arrangements and smoothed our maturity profile. The chart in front of you illustrates the maturity profile of our drawn debts, and average tenor of our drawn debts is now sitting at eight years. Moving now to a very topical area, particularly in light of the recent depreciation of the Australian dollar, our foreign currency exposures and hedging program.
Around about 60% of our full-year earnings are generated in non-Australian currencies. Therefore, changes in exchange rate represent a major exposure to our reported Australian dollar profit numbers. To reduce the impact of further adverse currency movements to our translated earnings, we continue to undertake a hedging program for a large portion of our EBIT exposures using options. As you recall from the start of the presentation, the impact of adverse currency movements in the half was AUD 17 million after the benefit of hedging. Major EBIT hedges remaining for 2011 are detailed on the slide. The total cost of this hedging program for 2011 is around AUD 10 million, which compares favorably to the prior year, which was AUD 14 million. Of this, AUD 6.5 million relate to hedges that will mature in the second half of our financial year.
Our single largest currency exposure is the Australian dollar against the U.S. dollar. As you look on the chart, you can see that we've hedged now around 80% of this exposure for the rest of the financial year at an effective rate of just over AUD 0.97. If we include hedges across the group for various transactional exposures, around two-thirds of our total expected exposures in 2011's second half are now hedged using options. Given this position, a 1% unfavorable move in the Australian dollar versus all the currencies would have a negative impact of around about AUD 3 million on an annual basis. Without this hedging program in place, the impact would be closer to AUD 7 million. If I may just comment on environmental issues.
What we've attempted to do on this slide is to provide you with the expected cash drain on the company over the next few years as we deal with the legacy environmental issues, as opposed to the accounting nuances around recognition of provisions. As at 31 March, we carried AUD 251 million on our balance sheet for environmental provisions. You see that breakdown on the bottom of the chart. About just over AUD 160 million of that relates to remediation activities at Botany in New South Wales. This includes hexachlorobenzene, so HCB waste treatment, the Botany groundwater remediation, and Botany mercury remediation.
Pleased to say that the groundwater treatment plant at Botany continues to operate at a level required to contain the plume. Cash spend on this treatment plant is expected to be approximately AUD 11 million this financial year, with that recurring ongoing, as you can see on the top chart. In terms of hexachlorobenzene, we've made some good progress on the on-site remediation of the encapsulated HCB waste. Remediation work has commenced and is expected to be completed later this year. In terms of our HCB stockpile at Botany, we have unfortunately been delayed in our plans to export this waste. You'll recall late in 2010, after initially providing consent to receive just over 6,000 tons of our stockpile, the Danish government stated that for political reasons, it would no longer accept the shipment.
Today, Orica continues to safely store the HCB in fully licensed and secure storage facilities at our Botany site. At the same time, all options are being evaluated by us for the safe and environmental sound destruction of this waste. Ongoing discussions are being held with various stakeholders on this matter. We've made some very good progress on the remediation of mercury contamination at Botany. This work has commenced and should be completed in 2011. There are other environmental issues that we are working with to resolve across our business. Spend on these projects is expected to be around about AUD 10 million for the next couple of years. You can see that in the bottom of that chart. Most of this is related to cleaning up sites for future disposal.
If I can now just spend a couple of moments on the establishment of the Mining Services Global Hub. You will have noticed in the half year disclosure, we've included a new reporting segment, which is called Mining Services Other. This segment recognizes some structural and commercial changes we're implementing across our mining services business. These changes have been necessary following the establishment of the Mining Services Global Hub located in Singapore. This further refinement to our organizational structure is a natural evolution of our operating business model within this business. Mining services is moving to a centrally managed business model, managed out of the Global Hub. You can see the Global Hub takes responsibility for a number of things, including the procurement of key input materials, the sale of those materials and finished goods to some of our country-based businesses for on-sale into their local markets.
Also coordinates manufacturing and international logistics. The Global Hub absorbs the commercial risk and costs associated with this new transactional responsibilities and is also rewarded for taking that risk. What does this mean? What this means going forward is that mining services will now be reported under five segments in line with Australian Accounting Standard requirements. The earnings arising from the commercial risk now absorbed by Singapore will be reported under the Other Mining Services segment. A consequence of this is that the EBIT margins in the affected regions will reduce, reflecting the change in function and reduction in business risk, which is now transferred to the Global Hub. We've restated the 2010 segment information to reflect the establishment of the Hub and the separate reporting of the Hub as a separate segment. You will note these changes in the accounts and the compendium for your information.
There's some additional information included in the appendices to this slide presentation which reconciles from what was in the compendium to what you now see in the compendium. That's all I was going to say now. I'll hand back to Graeme.
Thanks, Noel. What I'd like to do then is to spend a little time looking at our strategy and the significant growth opportunities we have in front of us and why we think we're very well positioned to make the most of those opportunities. First, let me just recap briefly on where we've come from. Today, you see a markedly different Orica to that which existed even five years ago. Over that time, through a series of acquisitions, investments, and divestments, we've sharpened our focus on providing high service consumables to the global mining and infrastructure sectors. That's been a very deliberate strategy to position ourselves as the global leaders in markets offering long-term, sustainable, above GDP growth. Today, Orica has evolved to be focused on the mining and infrastructure sectors to the point where 90% of our earnings are now generated from these sectors.
We aim to deliver earnings that are relatively resilient through market cycles. For that reason, our mining businesses are focused on the mining process itself and the processing segments, the mining and processing segments of the mining value chain. Activity in these segments is largely influenced by production volume and is therefore relatively low volatility even in times of economic slowdown. That's proven to be the case over the long term, and most recently it's proven to be the case during the economic slowdown we observed in 2009, 2010. We uprate in an industry which is very attractive, and it's seen considerable consolidation over the last decade, much of it, of course, driven by ourselves. While there's been some volatility in markets over the last couple of years, we remain very optimistic about the strong long-term growth drivers in our industry.
For our businesses, growth will be driven by high growth in commodity demand, especially from the larger developing countries. Declining ore grades and increasing strip ratios. Strong growth in tunneling. Stricter safety regulations, and a greater focus on efficiency and productivity from our customers generally. As demand for commodities increases, particularly from China, our customers are increasingly looking to extract their products as efficiently and as safely as possible, and all this in an environment of diminishing accessible reserves and increasing safety regulation. In short, they need more of our product combined with quality advice and support. We've got multiple avenues for growth. These industry characteristics, I think, provide a compelling underpinning of that growth. Firstly, we've got a significant pipeline of opportunity to expand manufacturing capacity. There's work currently underway on various expansion projects across our businesses.
You know about these, they include the Bontang AN project in Indonesia, the uprate of the ammonia plant and ammonium nitrate expansion at our Kooragang Island plant in New South Wales. The construction of a non-electric detonator facility in Hunan province in China. Upgrade of sodium cyanide capacity at Yarwun from 80,000 tons to 95,000 tons. We're progressing a number of chemicals and steel capacity expansions in our Minova businesses. I'll provide a bit of color on the progress of some of these projects in a moment. Beyond these, we've still got other expansion opportunities in the pipeline. These include AN in Latin America. When demand grows further in Queensland, an upgrade at Yarwun is the next logical expansion we think. In terms of growth avenues, we also have opportunity to increase our geographic footprint.
While we are global market leaders by some margin, we are underrepresented in the high-growth markets of Africa, China, and Eastern Europe. We are making some progress in these areas, including in China, our joint venture with Nanling, and continued market penetration of our Minova products. Positive steps into Eastern Europe on the back of our superior technology offering in both Orica Mining Services and Minova, and some positive steps into Africa on the back of global customer relationships. There is still plenty of growth still in front of us. Finally, we see growth coming from technical and service innovation. Our commitment to research and development, both directly and in partnership with a very wide range of research bodies, has made us a clear market leader in product and service innovation in our market segments. Our investment in R&D is seven to eight times as much as other industry players.
R&D spending in the first half was up on the prior year, as Noel said, and we continue to see growth in new products such as Electronic Blasting Systems, which as Noel mentioned, were up 29% year-over-year. As we near the commissioning stage of a number of our major projects, I thought it would be timely to recap on the contribution we expect from some of these. Let me start with Bontang. Bontang was sanctioned back in 2008. It was for the construction of a 300,000 tonne per annum AN manufacturing facility at Bontang, Indonesia. The plant is favorably located next to ammonia feedstock and favorably located for the coal markets in Indonesia. It complements Orica's already strong market position in Indonesia and will support our participation in further market growth that is expected in that country.
Product from the plant will be sold out domestically, so sold into Indonesia and will substitute for imported product. Currently, over 90% of the AN consumed in that country is imported. Local production will provide customers with both higher quality product and also with increased security of supply. We have actually been very pleased with the progress of the project. Physical construction is now over 80% complete. There are more than 2,000 contractors and staff on the site, and we reached at half year over 6 million site hours worked without a single recordable injury. Our first and so far only recordable injury has, however, occurred in April. This safety record, we think, is an absolutely outstanding achievement given the nature of the project.
First production is expected in the first half of our 2012 financial year, perhaps December 2011, and we expect the plant to uprate at full capacity in 2013. I should add that project costs are expected to be well within the initial estimate of $550 million USD. As to its financial contribution, the project is expected to deliver incremental EBIT improvements from 2012 onwards. This will be delivered from the manufacturing margin on the Bontang production and the additional margin which will be generated from placing tonnes that were previously shipped to Indonesia in some alternative markets. In 2012, the incremental EBIT benefit is expected to be in the order of AUD 20 million. We have realized additional returns in Indonesia through pricing improvements. From 2008, the business has achieved premiums over import costs, as you can see from the second of the two charts on this slide.
It's fair to say that due to the tightness in the global market and the associated difficulty in securing supply back in 2008, the premium we anticipated from better quality and security of supply was realized earlier than expected and is expected to be maintained going forward at the rates shown on this chart. The cumulative total of these returns, so including the pricing benefits, exceeds Orica's financial hurdle of 15% internal rate of return on the project. Turning to KI Ammonia. At Kooragang Island, we're preparing to uprate capacity of our ammonia plant by 65,000 tonnes per annum, taking total plant capacity to about 360,000 tonnes per annum. This uprate will be completed in July this year, this coming July, and at a cost of approximately AUD 110 million, which is equal to our original estimate.
The additional capacity will be initially used at Yarwun, so as a substitute for ammonia imports that would otherwise have been sourced from third parties. Following the proposed ammonium nitrate capacity uprate, the ammonia will be consumed at KI. Initially, it goes to Yarwun. When we uprate our AN at KI, it'll be used at KI. The incremental EBIT contribution from the uprate when used as ammonia feedstock at Yarwun equals the difference between manufacturing costs plus freight to Yarwun and the landed costs of imports from third parties. At the current landed ammonia prices, the returns to the ammonia project are slightly less than our internal target of 15% internal rate of return, but are well above cost of capital.
If the contribution from the project is measured in conjunction with the proposed ammonium nitrate uprate, so you take that project as a whole, the project exceeds our 15% internal rate of return. Turning now to the Nanling joint venture in Hunan Province. We progressed the construction of a non-electric detonator facility, which will supply up to 40 million units into the local Chinese, mostly underground mining and tunneling markets. First production from the facility is expected in the second half of our 2012 financial year. That's behind timeline. Due to the commissioning challenges of a multi-staged assembly line, full production is not expected until around 12 months after that. That, however, is what we expected from the beginning. The total project costs are expected to be AUD 100 million or so, and the project will deliver returns which meet our target 15% internal rate of return.
Then to sodium cyanide. This is at Yarwun. We've successfully commissioned the sodium cyanide uprate. The plant is now, from March onwards, been operating at the 95% at 95 kilotons per annum output rate. Due to the extended shutdown that was required to uprate the plant, incremental volumes in 2011 taken as a whole will be minimal. We will therefore achieve the full benefit of the uprate, in 2012. Financial returns on this project will exceed our 15% internal rate of return hurdle, partly due to the brownfield nature of that project. To sum up, we've achieved another solid result, we think, in the first half of 2011 in fairly challenging conditions. The result demonstrates the strength of the business's strategic direction and our focus on the fundamentals. We've maintained a strong balance sheet, and we're well positioned to pursue plentiful organic growth opportunities.
We progressed a number of these projects during the period and expect to see EBIT benefits flowing from those projects from 2012 onwards. The market outlook in long-term demand is strong, driven by strong growth in commodity volumes, declining ore grades, and increasing strip ratios, growth in Asian infrastructure, and increasing mine safety standards and regulations. We think we're very well positioned strategically and operationally to participate in this growth. We've maintained our guidance statement, that is that we expect group net profit after tax pre individually material items in 2011 to be higher than that reported in 2010 on a comparable basis, subject to the rate of global economic recovery and the extent of further adverse movements in exchange rates. I thank you for your attention, and Noel and I will certainly be very happy to answer any questions you may have. Take a question.
We've got people on the line as well, we go through the usual arrangement here where for as long as we've got questions from both places, we'll alternate between the room here in Sydney and on the line. I think we're starting here in Sydney at back there somewhere. Yeah.
Yeah. Morning, Graham Liebelt from Citi. Just got a question. Slide 16 with your hedging, AUD 3 million for every AUD 0.01 move. The starting point, is that AUD 0.995 or AUD 0.905 from the FY 2010 result?
Good day, Graham. The starting point is that AUD 0.995.
Okay. Thanks. Just a quick question. With the OMS global hub, should we think about that you're going to be making more profits out in Singapore and at a lower tax rate? Does that lower the overall tax rate of the OMS business?
If you look at the overall tax rate for the group, we're sitting at around about 26%. We've been targeting sort of that 25% to 27%. Over the longer term, you could potentially see it coming down a little bit.
Yeah. Because obviously you're making profits out there. Just sort of one final question. Peru essentially fading into the background. I realize the ball's not necessarily in your court. You're dealing with CF plus building a pipeline into Peru. Longer term, you do need manufacturing facilities on the ground in Latin America. Any further updates there?
You're right to observe here that that project has been delayed. CF in one of its recent quarterly calls has indicated that it's probably been pushed back a year or two. That's because they're preoccupied with the integration of the Terra acquisition that they made recently. It's going very well, by the way. There have been some delays in putting in place the necessary pipeline infrastructure. That project still remains a very good project. Whilst it's been delayed, we're still committed to putting something into Latin America to underpin our business there. You're right to observe there's a delay. One on the phone? Thank you. Your first question comes from the line of Matthew McNee from Goldman Sachs. Your line is now open. Please go ahead.
Thanks, guys. Just a quick couple of questions just on that centralized hub within Orica Mining Services. Firstly, Noel Meehan, did you say it was AUD 11 million of additional cost that it added? Is that annualized or just for the half?
What I said, Matthew McNee, is with R&D and also hub costs, there was an incremental AUD 11 million on the two of them. The incremental cost on just the hub in the half was about AUD 6 million. So you could potentially annualize that to get a number on the full year basis.
Yeah. Noel Meehan, on the impact of creating that, it looks like the biggest impact's been on North America. Can you just quantify how much of that AUD 19 million of profit that it took in the half would've been in the U.S., just for comparison reasons?
Yeah. Let me try and give you the best description I can. The move to the centrally managed structure is a phased approach, and North America essentially is first cab off the rank. We're moving currently into Latin America. So if you look at the half, the main impact is predominantly all North America, with increased costs then in Singapore as well, outside of the North American implementation.
Okay. The actual impact on North America might have been 20, 25?
I think if you read the profit announcement, we talk in North America of underlying improvement in underlying demand conditions and business conditions. I think where you're heading with your assumption is probably the right way to head.
Okay. Just one final one, just on the plant closure in Mexico, can you just quantify whether there was any tax benefit associated with that?
The AUD 17 million thereabouts, Matt, is roughly split 50/50 between cash and non-cash, any tax implication is gonna be very small.
Okay, thanks.
Graham, good morning. Rohan Gallagher, Credit Suisse. A couple of questions. First, operationally, excuse me. Most of your contracts are now effectively rolled, based on a three-year average contract. Conscious of supply and demand economics and replacement cost economics, what would your expectations be of future contract rolls? My second question is in relation to Minova. Annual run rate is about 7.5% return on net assets pre any tax benefit. It looks like with the pricing situation, XL is probably close to or if not in losses. Can you talk about what steps would be undertaken in terms of your carrying of your asset values in that regards point?
Yes. First of all, on the contracts, if you think about the rollover processes having started in 2007 when conditions were tight, then we are indeed in a phase where we're rolling out the end of that. Of course, it's a continuous process in the end. This is happening constantly and will happen constantly into the future. I think that you'll see from the waterfalls that we've seen some continued benefit in pricing as we've rolled contracts, but it's been less than you've seen in the past. I think, probably for the next six months or so, that would be the reasonable assumption. I expect, though, that the market will tighten up into the future. Our customers have very strong demands. Putting aside for the moment, Bontang and Moranbah coming on, I think the underlying demand conditions will be significantly tighter going forward.
One would hope, therefore, that we'd move back towards replacement cost economics over a period of some years. On Minova. Minova's had a disappointing half in the U.S. market, and that's really to do with very vigorous price competition. Your suggestion that it's in losses is not correct, although probably the industry as a whole, if, say, you're taking into account our competitors as well, there's not an awful lot of money being made. We are in profit, however. We have reviewed the carrying values of the Minova assets, indeed all of our assets for that matter, leading up to the half year. Actually, the headroom is reasonably comfortable, and that's because our required rate of return, if you like, is ahead of the cost of capital. The business, you have to make some assumption about it improving going forward, but those assumptions are not heroic at all.
Your next question comes from the line of Paul Jensz from Austock. Your line is now open. Please go ahead.
Two quick clarifications if I can, Graeme and Noel. Just on hedging, can you talk about hedging into 2012 and whether any hedging's been taken out that far? Secondly, on the hub, are you able to talk through the volatility of the earnings in that hub going forward?
Good morning, Paul. In terms of the hedging, for 2012, the only hedging that we would have in place is for some small transactional hedging. As we make commitments, we obviously match those, and so that will keep ongoing. In terms of translation impact, we do not have any hedging in place for that, and normally would not have until we get within the fiscal year. In terms of your question around the volatility of the hub, essentially the way to think of the hub as a central decision-making process, it will depend on what volatility we would see in underlying demand conditions in various regions as to whether there's volatility in that hub.
Just to clarify that, if I can, Noel. I know it's not a perfect number, but looking at the 2010 number for the hub was -4.2. That wouldn't be a full year of that, but I'm just, I suppose, a little bit concerned that there's going to be a bit of smoothing of the underlying regional EBITs and being pushed into others. That's, I suppose, the external concern that I would have.
Okay. Let me try and allay your concern. The first point I'd make is the segment numbers are thoroughly audited to avoid the suggestion of smoothing. The comparative year-on-year, given this is a program that we've embarked upon in the last 18 months, the 2010 numbers that you see in the Appendix 4D essentially relate to cost as opposed to revenues, because we hadn't gotten the process of implementing North America until this 2011 half.
Thank you, Noel.
Thank you.
Graham, it's Mark Wilson from Deutsche. Just looking at volumes more recently, so after the wet weather floods, what have we seen in Australia and Asia, and what is the outlook there? What are your customers telling you in terms of what underlying demand could be?
Yeah, in Australia, you need to break it down into I think essentially three regions. The west and southeast, which have both been strong, really speaking, even with the rain. They've been improving over the course of the past six months or so. We haven't quite got free of the rain in the northeast as yet. There has been continuing weather impact on our results into April. I think, with a bit of luck and running and no other kind of one-off events, we would expect volumes to be reasonably strong because the infrastructure capacity's there and our customers are certainly saying that they're intending to increase their volumes. Which takes us to Indonesia, which has also been, for us, influenced by two things. One is the rain, so that's an external effect, but also we've lost some market share as we previously foreshadowed.
We're suffering from both of those effects in the half year on half year. Going forward, I think, we would expect to see improving conditions in Indonesia as well. Again, our customers are talking strongly about that. Is there one on the line?
One on the phone.
Okay.
Just a couple for Noel. Given the lumpiness of CapEx this year with Bontang and Nanling, can you just give us an idea of the capitalization of interest in the second half, subsequently the build in net interest from FY 2012? Also, just touching on your balance sheet, your available facilities are now in excess of AUD 2 billion. You pay commitment fees on those facilities. You mentioned organic growth opportunities, but are there any other opportunities you might be looking at utilizing that excess capacity?
Yeah. Thank you. In terms of the capitalized interest, you'll see the number was capitalized in the half year of just over AUD 18 million. You should expect that plus some more in the second half in line with that increased growth CapEx that will come through, particularly obviously around any projects that take more than 12 months, so the likes of Bontang and Kooragang Island. Ongoing outside of, let's say when Bontang's complete, depending on when we press the button on Kooragang Island ammonium nitrate or those type of projects, that rate of capitalized interest would continue, but subject to sort of those sanctions. In terms of the bilateral facilities, you're quite right. We do pay fees for them, and we understand why we pay fees for them. The fee that we've paid in the half year, commitment fees and undrawn fees, is about AUD 15 million for the half.
Question is, well, do we need all those facilities? As I said in the presentation, given the uncertainty around the world on sovereign debt, et cetera, we think it's prudent to have it. Your further sort of question in terms of outside of organic opportunities, are we looking at more strategic opportunities on M&A? Yes, we're always looking at those type of things. That's not the reason why we've got the facilities sitting there. The facilities are sitting there to ensure the financial health of Orica.
Any on the line or not?
No, there's none on the phone.
Okay. Yeah.
Good morning. John Purtell from Macquarie. Look, a couple of questions. Firstly, on Bontang, obviously the startup of Bontang will replace some of your imported product from the likes of Yarwun. I would be interested in your updated views on Orica's ability to place or move those tons elsewhere in the Orica system. The second question, just on ammonia, obviously you have a fairly large minus AUD 15 million impact in the half.
There is none on the phone.
Okay.
Yeah. Good morning. John Purtell from Macquarie. Look, a couple of questions. Firstly on Bontang, obviously the startup of Bontang will replace some of your imported product from the likes of Yarwun. I would be interested in your updated views on Orica's ability to place or move those tons elsewhere in the Orica system.
Good morning. John Purtell from Macquarie. Look, a couple of questions. Firstly, on Bontang, obviously, the startup of Bontang will replace some of your imported product from the likes of Yarwun. Be interested in your updated views on Orica's ability to place or move those tons elsewhere in the Orica system. The second question, just on ammonia, obviously, you have a fairly large minus AUD 15 million impact in the half. Is your expectation that that would be lower in the second? Thank you.
Yeah. Thanks, John. With respect to your first question, really nothing has changed, in that those assumptions that we outlined around the whole Bontang Moranbah story, which goes back a little while, you might hear more from Incitec next week. Those assumptions are unchanged from our point of view. We still expect to be able to place all of the tonnage within our system. We do still expect that the Australian market will be long by about that 100 to maybe a little bit more than 100 for both 2012 and 2013. Probably to complete that picture, by the way, we still expect that we're going to need to operate Kooragang Island, and that we'll need that production from about 2014 onwards. Southeast has been very strong.
Michael Ward from CBA. Just firstly, your guidance, you've obviously made that subject to the usual caveats. Can you just give us a sense of what currency you've actually assumed for the second half, given how quickly it's moving?
The way to think about it, Michael, that statement was signed off essentially this morning with the board. That's current as of today's exchange rates. In terms of the forecast going forward, you'll see that we've hedged our U.S. dollar exposure at about $0.97.
Thanks, Noel. Also following on on Bontang. I note in the slides you've given us a chart suggesting that it'll make a cumulative EBITDA of around $50 million. How do I reconcile that with the fact that you're going to spend about $500 million, $550 million and traditionally you've targeted 18% returns? There's a big gap, obviously.
Yeah, Michael, the answer to that is that you need to factor in the pricing uplift that's shown in the other chart there. That in our original assumptions for approving that project, if you like, that goes way back to 2007, 2008, in that range. We made the assumption that we'd be able to increase pricing over import parity because of quality and security of supply and proximity and so on. In fact, because of the tightness of the market, that pricing benefit was delivered in effect sooner. You'll see that we're maintaining that gap going forward. Those pricing benefits are also factored into the return.
Okay. Thank you. Just to clarify the first chart where you've got $45 million-$50 million, that includes the returns from both the manufacturing margin and the additional margin replacing tons previously shipped to Indonesia?
That's correct. Not the pricing benefit.
Not the pricing.
What we're trying to avoid, though, is to have anyone think that that full 18%, as we used originally on the $550, would sort of be incremental from the time of the Bontang plant being commissioned. We've been saying for a couple of years now, that won't be the case because of the pricing uplift that's already been achieved.
Thank you. Just finally, can you just give us a sense of what sort of rates your major AN plants operated at through the first half?
Yarwun was significantly below prior year because of the rain in Queensland. Kooragang Island was ahead of last year, though, and reasonably significantly. The North American plants too, were well ahead of last year in terms of their production. Yarwun's the one that had to, in effect, suffer with lower capacity utilization. I think it was down. Just trying to remember the tonnage. Can't remember at the moment. I'll be able to clarify that. I'll look it up. It was down a bit year on year, quite significantly, actually.
Yarwun's back at full rates now, is it?
If not at full rates, it'll be near full rates, yes.
Thank you.
Andrew Meyer from Merrill Lynch. Just a couple of questions. First for Noel, just in terms of the Minova business, can you make a comment about input cost management? Looking at your slide, well, you know the slide, you can't really see any impact of input costs going up, still rising. I assume there was no major impact in the first half. Is that the case for the second half as well? Second question is just following up on John's question about Indonesia. Graeme, can you give us a sense of, you said you're gonna be using your volumes from Bontang to meet existing contracts. Can you give us a sense of what volumes from Bontang will be going into those contracts? Or what percentage of the total production will be related to contracted volumes?
You want me to answer the second one first?
You do that.
Yeah. Thanks, Andrew. Michael, the answer on Yarwun was that production was about 50,000 tons below prior year, it was a pretty significant impact. Andrew, on Indonesia, we did not take the approach of insisting on having customer contracts in place when we built the Indonesian plant. It wasn't project financed on the assumption they've got long-term contracts with customers already in play. The reality is that at the time that we commission the plant, we're likely to be very highly contracted, at least sort of 70% upwards would be contracted. Maybe even higher by the time we get to that commissioning point. We're quite content to have some exposure to spot markets, if that's necessary.
Again, I can confirm that we expect that all of that product that we produce in Bontang is potentially absorbed by the Orica system and all placed domestically in Indonesia based on present assumptions.
Andrew, in relation to your question on Minova, maybe we didn't articulate it in the slides, we did see significant input price pressure, particularly in North America, on both steel bar and steel coil in the first half to the tune of, I think bar went up by 16% and coil went up by 14%. We were unable to pass those input price increases on into the marketplace. Despite us going to the marketplace with the price increases, the market didn't follow, we haven't gotten that recovery. That's why you see such a decline in that business. We have seen some of our chemical inputs into the resin market increase, we also have seen some increase in our selling price on the resin side. It's really that steel side of things on input prices that has hurt us in the half.
If we look at where steel prices are today, that's likely to continue to hurt us if the market doesn't accept increase in selling price.
Thanks, sir. Scott Hudson from CLSA. Just further on Minova, could you just give us some sort of indication of what's happening on the competitive landscape there? Is this just a case of the market needing to recover, or is there a structural excess capacity in the market?
I don't think we can complain about the market recovery, Scott. The underlying volumes have been reasonably good, actually. That's not really the issue. There is excess capacity in the market. The reality is that customers are doing quite well, and the steel companies are doing quite well. The piece in the chain that's not doing quite well is the segment that we're in. That's because of some very aggressive pricing behavior on behalf of our competitors. This industry has actually seen this kind of behavior before and came out of it strongly. We had expected, perhaps hoped, that the probability of this kind of pricing behavior in the segment was reduced because there's been quite a degree of consolidation and so on in the market. Unfortunately, that's not proven to be the case.
frankly, we're in a period where we need to defend the business we've got, and we will do that. We just have to work our way through it. What I can't do is give you a very clear picture as to when I expect it to come out of that situation. Underlying volume is not the issue.
secondly, just in terms of, I guess, the M&A prospects. Obviously, you're coming to the end of your expansion or plans to a certain extent. Are you more active in that space, and what sort of size are you looking at?
We are active in the M&A space. We always are, I think. What I'd say about that is that we will not speak about any specific opportunities, of course, but we're generally interested in M&A opportunities in the three platforms that we're in. Explosives, chemicals, mining chemicals particularly, and Minova. I don't think we're coming to the end of the organic opportunities, though. If you look at the expected growth in the industry and just take ammonium nitrate, the total industry AN is well in excess of 10 million tons now. Even if you think about relatively modest growth rate in the amount of AN required, that's a fairly significant organic growth profile that we need to sustain by sourcing additional AN. Whilst we've got KI on the horizon, we might think about Yarwun and more at Bontang and so on.
There's going to be quite a load of organic opportunities going forward, I think, even though we're not at the point of approving them just yet. As to size of M&A, we're interested in both the sort of smaller bolt-on stuff, which we've done a bit of in the course of the past 12 months. If the bigger opportunities can be identified, we're happy to take those on as well. The problem with M&A is that you can't sort of predict it because a lot of it's out of your control.
Just lastly, are you taking a more aggressive step in terms of organic growth into markets such as Africa, CIS, and China?
Yeah. We'd certainly like to press harder in those areas. All of those geographies are on our agenda. We're pressing harder. We have restructured inside Mining Services a little bit to increase the amount of resource which is specifically focused on those segments, and we expect to see those results flowing through. That's organic at this point, does not look to be a fast rate of growth, but I can tell you that it is happening underneath the scenes.
Thanks.
Graham, hi. It's just a follow-up question directed to Noel. Slide 13, you see capital investment. I acknowledge very good disclosure and your comments about the likely CapEx bill's going to be a maximum versus a minimum Noel, but even if you were to put an annualized run rate, you're about 30% below. Bontang's going to be materially below your $550. We're talking $450, $500, most likely. I think that was the board budget or whatever from last year. Based on your previous statements, that doesn't look like it's almost a realistic number, albeit a maximum number. Is there anything that we should be taking into consideration, conscious of Bontang and Nanling are almost but complete?
Yeah. Thanks, Rohan. Look, in terms of Bontang, obviously with the potential commissioning happening in December 2011 or maybe a month later, but there will be some further spend beyond September 2011 for Bontang. Nanling will traverse across 2011 and 2012. The one that will be completed in 2011 will be Kooragang Island ammonia. There's roughly another AUD 30 million to spend on that one to complete that one. Then we're obviously ramping up our expenditure on the pre-sanction on Kooragang Island for ammonium nitrate. If you look at that chart, the one that sort of always puzzles people is when you look at the other expansion projects of AUD 165 million. That really is predicated on whether demand comes back across the markets when we're putting in trucks and MMUs and emulsion plants and those type of things.
I guess what I'm trying to sort of say to the market is, we're trying to give you a realistic a number as we possibly can. Our capacity to spend historically, running so many multiple projects has meant that we've tended to underspend our sort of estimates. In terms of the comments you made on Bontang, as Graeme said, it's well within our estimate. As we cautioned the market a number of times, these plants are difficult in the last phases of commissioning, and that's where you potentially can get a blow-out in cost if you don't manage it very well. We're just sort of conscious of that.
Thank you. Noel, you made a comment that you've got the uprate in June, July, whatever, for KI. Are there any other anticipated, excuse me, second half costs that you'd be expecting, whether it be in your corporate costs or any plant closures, et cetera, that we should be factoring in?
Nothing material, Rohan, that we wouldn't have already disclosed.
Part of doing the uprate at Kooragang Island, Rohan, is that we'll do a major turnaround of the plant as well, and that's in our sustenance number that you see there. It's about AUD 41 million, I think.
Any on the line, Andrea? No. Anything more from the room here? If not, last call. Thank you all for your attendance and interest in the company. We'll be hanging around for a bit if you want to chat