ORICA LIMITED — Call Transcript 2008

Mar 17, 2008

Attention ASX Company Announcements Platform Lodgement of Open Briefing[®]

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Orica Limited Level 10, 35 Spring Street Melbourne Victoria 3000

Date of lodgement: 18-Mar-2008

Title: Open Briefing[®] . Orica Ltd. Orica Day Discussion

The content of this Open Briefing reflects management and analyst discussion at Orica Day held in Sydney on Tuesday March 11, 2008.

Orica Group

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One of your targets – total shareholder return of 20 percent per annum – implies the need for acquisitions going forward. Given the current tightness in debt markets, what capacity do you have to fund the acquisitions you might need to meet that target?

Graeme Liebelt

Over the next four years, most of that 20 percent total shareholder return will be generated by the organic growth of existing businesses. Longer term of course we’d need some acquisitions to get that kind of return on a recurring basis, but I wouldn’t anticipate any big acquisitions in the course of the next 12 to 18 months – unless something really compelling came along. Nearer term, we think the better strategy for us will be to do some smaller bolt-on acquisitions, such as the Strata Control Systems acquisition we announced recently.

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In April last year you rejected an approach by private equity. Has that prompted any change in your management approach either operationally or strategically?

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CEO Graeme Liebelt

We’re pleased we didn’t progress that approach. We went through a long process with advisors looking at the total value of the company, and we remain certain the private equity approach undervalued the company.

Nevertheless, our own approach to how we do business changed even before April last year. Before that, we’d found out we were at the top of a Citibank list of private equity targets in Australia. That really focuses your mind on reviewing the way you manage the business.

We did a thorough review of how private equity might approach the business and turned up two principles. One was that private equity is very decisive and fast moving, and we tested ourselves against that and believe we compared well. The second principle we tested ourselves on was whether we’re generating as much cash as possible, in our case to fund growth. That led us to introduce the cash conversion targets you’ve seen in our business ever since.

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Orica pays its dividend in Australian dollars but increasingly your earnings are sourced from offshore. What’s the Australian dollar cash coverage of your dividend?

Executive Director Finance Noel Meehan

Our minimum dividend payout ratio is currently 50 percent of net profit. Offshore earnings would now be in excess of 65 percent of our total earnings, and obviously that percentage will increase with a full contribution from Excel Mining Systems, which we acquired in September 2007.

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Can you provide an update on the clean-up of your legacy issues at the Botany site in Sydney?

General Manager People and Community Greg Witcombe

It’s our intention to be proactive in relation to the clean-up of our legacy issues and there’s a lot of activity going on across all of our legacy sites. Having said that, the clean-up program is not without issues. We’ve certainly made it clear that the best solution for the hexachlorobenzene (HCB) waste at the Botany site is export overseas, where there are state of the art incineration plants. We have Australian government support for this, but unfortunately are unable to get German approval. We’re in the process of appealing the decision, and talking to other operators in Europe. We’re confident we’ll be able to dispose of our HCB waste by that means in the short to medium term.

With regard to groundwater issues at Botany, we’ve invested quite heavily in a world class groundwater treatment plant, which has been successfully commissioned. It’s destroying any chlorine contaminant collected from the various pumping stations around the site and we’re now selling the treated water for industrial use.

The third major issue at the Botany site is soil contaminated with low levels of HCB and hexachlorobutadiene (HCBD) in the car park area. In the 2006 financial year we provided for the treatment of that soil via a process called

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direct thermal desorption. There’s about 60,000 tonnes of soil that needs to be treated, and we’re in the process of getting approval for that to proceed.

The clean-up of the Botany site is our major legacy issue, and, as disclosed in our annual report, we still have issues there with dense non-aqueous phase liquids (DNAPL) and mercury contamination. Those issues are currently under investigation.

Mining Services

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Given record high fertiliser prices, can you comment on the economics of investing in ammonium nitrate (AN) capacity for fertiliser as opposed to explosives applications?

CEO Orica Mining Services Philippe Etienne

If all other things were equal, building an AN plant for fertiliser application is less capital intensive than building one for industrial application. Typically there would be a capital cost differential of around $100 million on a 300,000 tonne plant.

With demand for both fertiliser and explosives running hot, more capacity has to come on stream. That capacity is expensive – every recent AN project has faced significant cost challenges – so unless AN prices rise, there won’t be the financial capacity to make the necessary investment in capacity. And there will have to be price increases above simple recovery of raw material costs because without them, you won’t be able to justify reinvestment in the current environment.

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Can you comment on how much protection from rising ammonia costs you have across each of your operating regions, particularly Latin America given your recent tender to build an AN plant in Peru was unsuccessful? Will you continue to seek to establish AN production capacity in Latin America?

CEO Orica Mining Services Philippe Etienne

Ammonia is a critical input cost and our contracting process recognises that through rise-and-fall mechanisms, so we’re largely protected from moves in ammonia prices. What’s important to recognise though is that the timing of our price rises and falls can lag ammonia prices to varying degrees. Our contracts are reviewed anywhere from monthly to – very rarely – annually, so there can be periods in which our input costs are either favourable or unfavourable compared with our selling prices. But over the long haul the impact is neutral.

Over the last few years we’ve significantly improved our performance with regard to mitigating these sorts of risks, and contracting discipline is fundamental to the way we now operate.

CF Industries’ win of the Peruvian AN plant tender is by no means the end of our interest in establishing an AN production position Latin America. In fact we’ve increased the resources of our team working on this issue.

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Can you comment on the drivers of your pricing process and the magnitude of your contract pricing differential relative to imports into the Australian market?

CEO Orica Mining Services Philippe Etienne

In our pricing process we pay a lot of attention to import parity, to reinvestment economics, and to input costs. In considering reinvestment dynamics we look at two things: one is potential greenfield investment by competitors; the other is our own reinvestment economics and ensuring the prices we set in the market give us returns at or above our target levels.

Then in our contracting with customers we have mechanisms that range from spot-price based contracts to long-term contracts. Directionally, all the drivers of our pricing process are arguing for AN price increases and we’ll be seeking to make sure we’ve got ourselves contracted at the appropriate levels over a reasonable time horizon.

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What’s the expected timing of your development of the proposed AN plant in Bontang, Indonesia, and what’s the likely capacity of the plant?

CEO Orica Mining Services Philippe Etienne

Work has already started on the Bontang project. We’ve started reclamation work on the land we’ve purchased and we’ve ordered long-lead items. It’s worth noting that lead times for some of the major pieces of equipment for AN plants has blown out by over a year, which is another challenge for the global industry in meeting demand. We expect to complete plans for the 250,000 to 350,000 tonne per annum project this calendar year and the next major tranche of capital for the project is due to be approved by our board later in the year.

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What ability do you have to further expand AN capacity in Australia and do you have any plans to do so?

CEO Orica Mining Services Philippe Etienne

We have a number of expansion opportunities in Australia, ranging from 70,000 tonne per annum expansions that are relatively easy, to much bigger expansion opportunities. Those opportunities exist at both our Kooragang Island and Yarwun facilities, and we’re currently assessing which, if any, are appropriate to pursue.

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Can you comment on the progress of the integration of the Dyno Nobel businesses you acquired in 2006, particularly in Latin America?

CEO Orica Mining Services Philippe Etienne

We’re thrilled with the way the Dyno Nobel integration program has gone. We did that acquisition with very little ability to do detailed due diligence because of the competitive dynamics. So committing to $90 million of synergies, was quite a risk. We’re a full year ahead of our synergy delivery schedule and we’re very confident of fully delivering the $90 million of synergies in 2008, which is a great result.

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In Latin America, we’re progressing very much to plan. Latin America wasn’t where we expected to extract the greatest financial synergies but it’s where the greatest amount of work has been, with a lot of rationalisation of smaller operations and redeployment of manpower.

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Can you comment on the AN supply and demand balance in the Australian and Asian markets with and without competitor Dyno Nobel’s Moranbah plant going ahead?

CEO Orica Mining Services Philippe Etienne

Our planning has always assumed Moranbah would be built, and as we’ve said previously, we’d expect the market to reach balance two or three years after Moranbah is in place. Of course there are many variables, such as the AN demand growth rate, which over the last 30 years has averaged about 8 percent.

We’re in a neat position in that we’re a net importer to the Australia/Asia region, so we can modify our AN supply according to our plant output and the imports available to us.

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What’s the outlook for demand from the coal sector in Australia in the next few years, particularly given continuing infrastructure bottlenecks, and has demand been impacted by the recent rain in Queensland, which has shut down some mines for several weeks?

CEO Orica Mining Services Philippe Etienne

We’ve had some impact from the weather but production out of our own plants has been affected only lightly. So the nearer outlook is still good; we’ve been able to maintain our supply chain in Queensland and keep our plants working by pushing more AN offshore. After rain, we might have a bit of a lull in demand, but we tend to see a different product mix because customers want weather resistant products, which carry better margins.

We’ve already seen some infrastructure improvements in the east coast mining regions and these will continue through to 2011.

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What’s the outlook for Mining Services in North America given the slowdown in the US economy?

President, Orica Mining Services North America Craig Elkington

For us, the North American market dynamics are good. The US coal sector continues to operate well and demand for export coal out of the US is, if anything, rising. We’re not overly concerned about the potential impact there of a slowing in economic activity. The US quarry and construction sectors will be impacted in the short term by any slowdown, but we’re not hugely exposed to that sector. Longer term, governments tend to respond to slowdowns by building highways and other infrastructure, and historically we’ve seen rebounds in the quarry and construction sectors within 12 to 18 months. We remain confident about the outlook for our business in the US.

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Of course, a lot of our North American business is in Canada and we’re very happy with our performance there. Over the last six months, we’ve regained pre-eminent market share and seen a lot of growth in the market, particularly in metals. Canada is a quality market that values the sort of products we bring.

Minova International

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Can you elaborate on the barriers to entry in this sector given Orica has booked significant goodwill on the Minova acquisition?

Outgoing CEO Minova International Sandy Arbuthnot

Our plants are based around blending and packaging, so there’s a modest amount of investment involved. The business has a low asset intensity and our sustenance capex is low relative to the Mining Services business.

However, we feel the combination of the chemistry, the manufacturing and application skills, the customer relationships and the brand are great advantages for us. Take for example our resin capsule – it’s quite clever but it’s not rocket science; you could make one in your garage with some readily available chemicals. What you couldn’t do, is make them at the speed, cost and quality that we make them globally – our proprietary manufacturing technology gives us a huge cost advantage.

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How does Minova seek to maintain its technological advantage relative to competitors?

Outgoing CEO Minova International Sandy Arbuthnot

We have some very good chemists working in what’s a highly specialised, niche area. There aren’t many players in this business and we’re the technology leaders in any of our products.

A lot of the time, we’re customising chemistry that’s quite widely known, but because we spend a lot of time with our customers on their actual projects, we have the skill to make the link between a difficulty a customer is having on site and the chemistry we know in the lab. In our injection products for example the speed of foaming and density can be controlled to meet the very specific needs of the job.

CEO Minova International Michael Reich

Cost engineering is also a part of our R&D. You have to be the lowest cost manufacturer to stay competitive. That refers to the equipment that makes the product as well as to the formulation.

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What ability do you have to pass on input cost rises to customers?

CEO Minova International Michael Reich

We have three key raw materials – isocyanine, polyester resin and steel. We cover moves in the cost of steel by a surcharge system under which we adjust the price quarterly via an index linked to the scrap price. For isocyanine, we have formulas in place that relate to the isocyanine content of the product

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formulation, again linked to an index and adjusted on a quarterly basis. We’ve been successful in recovering input cost increases in the market.

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What’s the competitive landscape in the sector post your acquisition of Excel Mining Systems and what level of pricing power do you have in the market?

Outgoing CEO Minova International Sandy Arbuthnot

Worldwide, we’re the leader in resin products. In the US, we’re the market leader, the other main player being Jennmar. Dywidag-Systems International (DSI), a steel bolt business under private equity ownership, is a new entrant in the US market and is gradually consolidating its position via acquisition of minor resin players. Here in Australia, we have a strong position in resin capsules and until we completed the Excel transaction, hadn’t been playing in the bolt market. The pending completion of the Strata Control Systems acquisition will further enhance our market position in Australia. In Europe, resin anchoring is not a big product, and in South Africa, we have 7 percent of the market.

CEO Minova International Michael Reich

We’re the only global player and the only globally recognised brand and our unique formulations and production technology give us a strong position in the market. There’s always room for improvement in margins but we’re confident we can defend our position.

Chemical Services

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How do you work with other parts of the group to get access for your water treatment and mining chemicals products to customers in offshore markets such as Latin America?

General Manager Chemical Services Andrew Coleman

If you take Latin America as an example, we’ve been supplying a number of the customers, predominantly through Chemnet. When Chemnet acquired a position in Latin America, it gave us access to a salesforce. We’ve been providing technical support to that team and have won a number of projects, the biggest being supply to the Yanacocha gold mine in Peru.

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You expect the MIEX  watercare technology to be installed in 30 plants by the end of this calendar year, up from 12 plants at the end of 2007. When do you expect the MIEX  operations to be profitable, and what level of growth do you expect going forward?

General Manager Chemical Services Andrew Coleman

We’re targeting break-even this year, although we’ll look to invest in further resources ahead of pipeline growth. The growth of MIEX  is about trying to drive our installed base, which we measure by megalitres per day of treatment capacity. The 30 plants we expect to have in place this year will give us a total capacity of about 200 megalitres per day. We’re looking to add about that amount of incremental capacity annually over the next few years, and we’re trying to set up a project pipeline to achieve that. Just looking at the number of

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plants isn’t always the best indicator. As MIEX  becomes more successful as it is in the US, we’re seeing increases in the size of the plants that take up the technology, which is a positive. It means we get a bigger equipment sale, a higher margin on the equipment and more significant increases in volumes.

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One of Orica’s clear investment criteria is that its businesses must “earn the right to grow” by consistently producing a return on net assets (RONA) of at least 18 percent, yet you’ve spent over $50 million on MIEX  , which is loss making, over the last three years. How do you justify that investment?

General Manager Chemical Services Andrew Coleman

The investment in MIEX  is all about creating a sustainable competitive advantage by exploiting new technology. That requires investment. We’re prepared to take a longer-term view and invest in these types of technologies to create a business that could ultimately deliver our RONA target. Our installed asset base relating to MIEX  is not all that large, so we could be hitting the hurdle return within the next couple of years.

CEO Graham Liebelt

It’s worth pointing out that our 18 percent RONA target includes an allowance of about 1 percent for investments in new technologies such as MIEX  and our enzyme water-treatment project.

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To what extent are you short in production of caustic soda?

General Manager Chemical Services Andrew Coleman

We both import caustic soda and produce it as a by-product of chlorine production. We need both sources to meet market demand and that will be the case for the foreseeable future. The more chlorine we can produce, the more by-product caustic we get, so the challenge is to optimise production at our three plants by continuing to find opportunities in hydrochloric acid, sodium hydrochloride etc. Hydrochloric acid is a real opportunity on the back of recent resources projects, for example we’ve just signed a contract to supply the Goro nickel mine in New Caledonia.

Chemnet

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Given the demand pressures in the auto sector, what’s the outlook for the Marplex business?

General Manager Orica Chemnet Bronek Karcz

Marplex operates in the plastic and polymer compounding market here in Australia and supplies to a lot of building and construction applications as well as the automotive and white goods industry. We restructured the business in 2006 and 2007 to get it scaled to the demand we’re looking at. Marplex is now running to plan and we’d expect steady growth in the EBIT line going forward.

We acknowledge Marplex isn’t our strongest business, but it gives us a platform to import plastics and polymers into Australia, which is a growing

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trend with General Electric’s plastics and polymers operation the latest to move offshore.

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Is there a danger with a big and presumably lucrative contract like the one you have with Fonterra, that at the end of the contract Fonterra cuts you out and goes direct to the suppliers?

General Manager Orica Chemnet Bronek Karcz

That goes to the heart of how we run our business and why we differentiate our trading and distribution businesses. The Fonterra dairy processing contract falls into distribution. Not only do we supply the chemicals to Fonterra, but we also mix them and deliver them to storage tanks we own at Fonterra facilities. We also supply the 32 technicians who work exclusively with Fonterra on its dairy tank cleaning processes. In other words, we’re embedded with a customer like Fonterra, supplying both chemicals and services.

We know Fonterra has looked at other sources for its cleaning chemicals but it has stayed with us and now wants us to look at similar structures at its operations in Chile and China.

We want to push as much as we can into the distribution area, because we know trading is quite often just a price game.

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Assuming Chemnet achieves the 18 percent RONA target, how do you intend to grow the business – will there be another round of acquisitions or can you grow organically?

General Manager Orica Chemnet Bronek Karcz

We’re cautious about acquisitions in this business. We might do acquisitions where they’re strategically important, but this business can grow organically with small investments up front, in a warehouse for example. And the style of acquisition we’d probably look at would be like the one we did in Columbia. The business was a small trader with four people who really knew the market, which we acquired for a small payment up-front and further payments linked to the EBIT the company generates over time. That way, those four people are incentivised to stay, and they like it because they get access to the Orica/Chemnet sourcing capability through which they can grow the business.

Consumer Products

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Can you comment on the likelihood of Consumer Products expanding via acquisitions that take you into new categories versus new geographies?

General Manager Orica Consumer Products Patrick Houlihan

Our acquisition of Yates, which was a new category and a significant step out for us, was premised on the fact that we had a strong position in distribution to retailers. We’ll continue to look at bolt-on acquisitions close to our core businesses – Dulux, Selleys, or Yates – where we can bolt on the gross margin and avoid bringing the overheads across. We’ll do that where we can find the

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right value-adding opportunities. Domestically, I don’t see us making acquisitions that are significant step-outs beyond our existing core.

We’ve looked at significant acquisitions in new geographies, but haven’t been able to get them across the line. We continue to monitor appropriate acquisitions but we have no identified opportunities at this point. Nevertheless, we remain committed to keeping our growth options open for the medium to long term. That’s why we’re continuing to drive greenfield expansion. For example, last year we opened an office for the Selleys adhesives and texture coatings business in China and we now have a team of 30 on the ground there.

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How important is branding in the trade paint market as opposed to the retail market?

General Manager Orica Consumer Products Patrick Houlihan

Distribution is fundamental in the trade market and having a direct relationship with the trade painter. We have over 10,000 trade painters on our books and we have significant direct marketing programs targeted at them. Our trade store network is key and we complement our big hub stores with a network of stores that we have agency relationships with.

Increasingly we’re using the power of the Dulux brand to take our trade painter relationships beyond just products by providing services like our Dulux accredited programs where we bring in trade painters and train them in business skills.

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What ability do you have currently to pass on input cost rises to customers and what’s the general outlook for pricing?

General Manager Orica Consumer Products Patrick Houlihan

We’ve been able to manage input cost rises well over the last couple of years – we’ve had a strong focus on pricing discipline. But ultimately in a competitive marketplace you can only pass through so much, so we also focus on productivity programs. We’ve done a lot of modelling around input cost scenarios – looking at what we buy domestically and what we source internationally – and we’re confident we can continue managing these costs going forward.

For more information about Orica, visit www.orica.com or call Investor Relations Manager Stuart Hutton on (+61 3) 9665 7844

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