Orica Limited (ORI) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Orica Limited Acquisition of Cyanco and Equity Raise Presentation. [Operator Instructions]. I would now like to hand the conference over to Mr. Sanjeev Gandhi, Managing Director and Chief Executive Officer. Please go ahead.

Thank you, everyone. Before I hand it over to Sanjeev. Thank you all for joining us at such short notice. I take it it's a very busy day for most of you, but it's a very exciting day for Orica. Without further ado, I'll hand it over to Sanjeev to run through the presentation, and we'll have plenty of time for Q&A after that. Sanjeev?

Thank you, Delphine, and good morning to everyone from my side. And again, thank you for joining at short notice. We really appreciate it. Earlier today, we announced the acquisition of Cyanco, a U.S. based leader in the manufacture and distribution of sodium cyanide primarily serving the gold mining industries in the U.S., Canada, Mexico, Latin America and Africa. I will run through the key points of the transaction, Cyanco's business and how it fits into our strategy and complements our Mining Chemicals business vertical. And Kim will then cover the equity raising before leaving plenty of time for your questions. You can find the disclaimers in the next few slides. I'm now turning to Slide #9. The acquisition of Cyanco supports our stated strategy to grow our Mining Chemicals vertical. Mining Chemicals and specifically the production and supply of sodium cyanide is one of Orica's key strengths. We have been producing and supplying sodium cyanide safely and securely to our customers for more than 30 years. This is an industry and a product we know extremely well. By adding Cyanco, we are adding significant scale in our manufacturing and distribution network to better serve our global mining customers first, by doubling or more than doubling our existing sodium cyanide production capacity, then by gaining access to cost-competitive U.S.-based natural gas manufacturing, a key consideration as energy prices -- energy price inflation continues. Number two, by creating a leading global sodium cyanide producer with world-class supply capabilities and established customer relationships. Through Cyanco, Orica's network will expand to the highly attractive U.S. and Canadian gold markets, which Orica does not serve today. Sodium cyanide has a strong outlook. Global demand is expected to grow at around 4%, while North America's growth is expected to be around 5% over the next 5 years. Importantly, as it is with our established Mining Chemicals business, Cyanco is a quality business with a high margin and attractive cash-generative financial profile and a fantastic team. In summary, Cyanco is a perfect fit for the Orica portfolio. I will expand on some of these key points shortly. Turning now to Slide 10 and the transaction summary. Orica has signed this morning the agreement to acquire Cyanco for USD 640 million. The purchase price in U.S. dollars represents an implied multiple of 7.5x to 2023 EBITDA. When we include the expected net cost synergy benefits, the implied multiple of 6.7x. The acquisition will be largely funded from Orica's existing cash and undrawn committed debt facilities alongside AUD 400 million underwritten institutional placement. We expect the acquisition to be completed by the end of financial year 2024 which for us is September. As there are certain regulatory requirements and conditions to work through. We've had the opportunity to get to know Cyanco's business and management through a comprehensive due diligence program. We've been extremely impressed by their operational expertise and the quality of the business that they have been running. We are very excited about welcoming the Cyanco team into the Orica family and integrating them into our business post closing. Now moving on to Slide 11. With good margins and strong cash flow generation, Cyanco is a good addition to Orica's business, and we expect it will deliver attractive financial returns. We expect the acquisition and placement to be mid-single-digits earnings per share accretive from the first full year of ownership. Since the 2 businesses are highly complementary, cost synergies of approximately USD 10 million per year are expected by the end of year 3. This represents more than 10% of Cyanco's 2023 EBITDA and will come from head office and network optimization and improvements in manufacturing and supply chain. The return on net assets contributed from the acquisition placement is expected to be within Orica's stated guidance of 12% to 14% in the medium term. Orica's balance sheet remains prudent with pro forma gearing expected to be at the lower end of Orica's stated range of 30% to 40%. We remain committed to delivering on our existing climate change targets and ambitions, and we will integrate Cyanco's emission profile into our inventory and public targets and ambitions. Moving on to Slide 13. The acquisition of Cyanco plays firmly into our strategy, both in terms of our broader Orica strategy of growth beyond blasting and growth in our established Mining Chemicals business vertical. We intend to start reporting a Mining Chemicals segment from FY 2025. On Slide 14, the acquisition of Cyanco enables Orica to establish a leading global mining chemicals business serving our mining business. In terms of sodium cyanide manufacturing capacity, we will more than double our existing capacity at Yarwun in Queensland to approximately 240-kilo tonnes per annum with the addition of 2 manufacturing plants in Nevada and in Texas in the U.S. Importantly, we will gain access to cost competitive U.S. natural gas-based feedstock for our manufacturing assets there. Our global integrated network will be enhanced and highly differentiated. We will have 3 points of manufacturing globally, improving the security of supply to customers and strengthening our competitiveness. We will have a global network of 6 transfer stations, reaching customers in top gold mining regions, both established and emerging. The majority of the sodium cyanide volume could be distributed by land into 4 of the top 10 global mining countries in the world, namely Australia, Canada, United States and Mexico. With the balance distributed by sea across Orica's existing global network of gold mining customers. We will expand our patented sparge technology and operational expertise to ensure the safe and responsible handling, and transportation of sodium cyanide across the entire network. Orica's global footprint and extensive range of solutions will also enhance our ability to service mining customers with a broader suite of products and services across the mining value chain, from exploration to processing. That's what our strategy is all about. Demand for sodium cyanide is attractive to Orica and this is what we know very well and have succeeded in for more than 3 decades. It is often regarded as countercyclical, stemming from its close ties with the gold mining industry. We expect global demand for sodium cyanide to grow at 4% per annum in the next 5 years with the North American demand growing at a higher rate of around 5% per annum. This is due to a strong pipeline of gold mining projects coming online and decreasing ore grades. Basically, you need more sodium cyanide to extract the same amount of gold. The growth in demand, at least in the near term, is therefore, expected to outpace supply as supplies for sodium cyanide take time to scale supply in a complex operating environment, including very high CapEx spends, compliant with regulatory requirements and long lead times as well as a small number of technology providers in this industry. There tends to be a strong correlation between sodium cyanide price and industry utilization. This acquisition will enable Orica to support growing demand. Moving on to Slide 16. This slide shows the pro forma view of how the Cyanco acquisition in addition to the acquisition of Terra Insights, further increases Orica's exposure to attractive market segments and further diversifies our business for growth. Firstly, our Mining Chemicals vertical contribution to group revenue is expected to more than double from 5% to 11%. Secondly, the acquisition will help us to further diversify our commodity mix into gold. Our gold exposure is expected to grow from 21% today to 25% after the acquisition. Finally, given Cyanco's current business is predominantly focused on North America, the contribution will increase our North American segment from 22% to 25% as Orica increases exposure to attractive gold mining regions in the U.S., Canada and Mexico. You can see just how compelling the acquisition of Cyanco is in continuing to grow our exposure in attractive markets and to diversify our business in line with our strategy for profitable growth. Cyanco has a leading market position in North America. In the U.S., a lot of the gold mines are serviced by Cyanco. It's a good margin business delivering around 22% EBITDA margin over the past 3 years and has strong cash generation capability with free cash flow at approximately 90%. Capital expenditure is well managed at around USD 10 million annually, focusing on maintenance and safety improvement spend. Cyanco also has strong commercial discipline embedded in this business model including customer contracts with pass-through structures for cost increases and automatic term renewal mechanisms. Moving on to Slide 19. As I mentioned earlier, Cyanco has 2 factoring assets that are well located to service North American customers and have the flexibility to serve customers internationally via seaborne markets. Both plants are well maintained and operating at high utilization. They have good and stable access to feedstock, including hydrogen cyanide. The facility in Nevada has around 95 kilotons capacity and can produce both solutions and solid sodium cyanide. The plant is the only facility located in the Nevada Gold region and given close proximity Cyanco and transport products to customers by road. Nevada produces more than 70% of U.S. gold production. So this is a critical asset to support the local industry in that region. The Texas facility can produce up to 50 kilo tonnes of solid sodium cyanide per year. Cyanco has a long-term agreement for the site and a third-party arrangement for manufacturing. Since the plant is located close to the Port of Houston, Cyanco is able to transport solid sodium cyanide through a variety of channels, including road and rail and can serve a varied seaborne market across the Americas and globally. I'll now pass on to Kim to talk about the equity raise.

Thanks, Sanjeev. Now on to Slide 21. As Sanjeev mentioned earlier, the acquisition of Cyanco and associated transaction costs will be partly funded through a fully underwritten institutional share placement of $400 million. The number of new shares issued is expected to represent about 5.5% of the total Orica's existing issued share capital at a price of $15.84 per share. This represents a discount of 6% to the last traded price of $16.85. The placement will be open to eligible institutional shareholders. We intend that Orica's existing shareholders who bid for an amount less than or equal to their pro rata share of new shares will be allocated to their full bid on a reasonable endeavors basis. We will also conduct a non-underwritten share purchase plan cap to $65 million to facilitate participation for our eligible retail shareholders and which will be free of any brokerage, commissions and transaction costs. Looking at the sources and uses table on Slide 22. We will utilize our existing cash and undrawn committed debt facility to largely fund the acquisition purchase price and associated transaction costs. With the remainder to be funded by the institutional placement we have announced today. Turning to Slide 23, where you can see the pro forma balance sheet. This table combines the balance sheets of the Terra Insights and [ Marulan ] acquisition, Cyanco acquisitions as well as the placement we have announced today with the Orica's balance sheet as at 30th of September 2023. It shows gearing of 32.5% on a pro forma basis, which is at the lower end of the target range of 30% to 40%. Our approach to funding this transaction has been underpinned by our capital management framework. One of the key principles under this framework is the retention of our investment-grade credit rating, and we have sized the debt and equity split on this transaction in accordance with the maintenance of our rating. And finally, you can see the timetable for both the placement and the share purchase plan on Slide 24. With that, I will pass you back to Sanjeev for closing remarks.

Thank you, Kim. Thank you all for joining us today. I hope you've been able to get a good overview of the key points of the transaction, Cyanco's business and how it fits into our strategy and complements our Mining Chemicals business vertical and how we plan to fund this acquisition. In summary, this is a complementary strategic acquisition supporting our strategy to grow our Mining Chemicals business. It creates scale in our sodium cyanide manufacturing and distribution network in an industry we are very familiar with and have operated safely and securely for more than 30 years. The acquisition will enable us to capitalize on the strong outlook and growth profile for sodium cyanide, expand into highly attractive U.S. and Canadian gold industry, while maintaining Orica's prudent balance sheet and driving attractive financial return for Orica and our shareholders. Cyanco is a perfect fit to the Orica portfolio. We will now go to the questions. Thank you very much.

[Operator Instructions]. The first question today comes from James Wilson at Jarden.

Just a couple of questions from me. Firstly, are you able to run us through what drove the strong earnings performance in that 2023 EBITDA number relative to 2022, please?

Thanks, James. Yes. So I mean, look, the earnings profile of Cyanco which we have disclosed is very similar to the earnings profile of our own cyanide business. Now we obviously do not as yet disclose those numbers, which was difficult for you to compare. But it was quite similar. We had a very strong '23 and there were a couple of reasons for this. One of -- the first one was that the gold demand was very strong. Gold pricing was at very, very high levels, and there was significant need for sodium cyanide and services in the gold industry. There was another factor that has come through in the Cyanco earnings for 2023. If you recollect in '21 and '22, we saw a significant surge in natural gas and ammonia pricing in the U.S. And in the latter part of 2022, this started to [ turret ] downwards. So there is some lag effect of spillovers because we have 3 monthly rise and falls within the contracts at Cyanco and there was some spillover of 2022 earnings that came into 2023, which gave it a bit of tailwind. But overall, the earnings profile was very, very similar to the way we have been running our sodium cyanide business here.

And just another one for me on that mid-single-digit EPS accretion that you've spoken to. Are you able to give us some color on whether that's a preamortization number? And also maybe if that is the case, then the D&A and CapEx intensity of the business you're acquiring?

Yes, for sure, James. So that number that we have announced mid-single digits, it is before PPA, before the amortization. It does include depreciation. So Cyanco has been running at depreciation of around USD 20 million for the last couple of years, and we would expect that to go forward. I'll also call out that it is the cost synergies as well. From a CapEx perspective, I'll hand over to Andy.

Yes, I'm happy to talk to that. As we've published here, the sustenance capital for this business is USD 10 million per annum. As a result of due diligence, we will add a further USD 6 million per annum until 2028. Beyond 2028, it drops back down to that sustenance capital level, which is very consistent with our Yarwun facility.

Okay. Great. So that depreciation number was AUD 20 million and the capital is, call it, [ USD 60 million ] per annum, is that right on a run rate basis?

Yes. So the depreciation was in U.S. dollars, USD 20 million, both numbers were in U.S. dollars.

And just one final one for me. You've spoken to cost synergies of USD 10 million as a run rate after 3 years. Are you able to run us through what some of these are, particularly conscious given that you're acquiring business from [indiscernible].

So [ when we're telling ] that net cost, there is some cost to achieve as well. So we've netted those out. Really, there's 3 principal areas that those cost synergies will be achieved. First is in optimization of our corporate offices. We have our corporate head office in [ Denver ], and they have one in Sugar Land, Texas, so we'll bring those 2 teams together. There'll obviously be some optimization in supply chain and procurement and also some in manufacturing improvements.

And just one final one for me. Just on employee retention under, obviously, Orica's ownership. Are there any incentives for management to stay on?

No, there's not. It's a clean -- as you'd imagine, a clean sale from [indiscernible] but we have engaged at the individual level with the key management folks. And clearly, the manufacturing teams are located on the asset at site, and they're very geographically pleased to continue on, and we'll work through the corporate office in due course.

Your next question comes from Owen Birrell at RBC.

Yes. Just a few questions for me. Just wanted to get a sense of whether there's -- other than the geographic region and customer book that you you're gaining from Cyanco, just wondering if there's any technology or process benefits that you think Orica can leverage from that business?

Yes, Owen, there will be. Obviously, they have very well-run assets. The Nevada asset has been running for nearly 30 years. They have a lot of experience as we do. So there will be a lot of knowledge sharing and sharing between the manufacturing folks in terms of things like yields, like what catalysts we are using, what kind of consumption norms we have for feedstock, how we're handling affluence, how we're managing closed-loop manufacturing. So there'll be a lot of intelligence to the sharing. Orica will learn from our new team. Obviously, we will share our knowledge and experience with them. So that's one obvious one. The other one is, and I talked about it on the call, we have this patented sparge technology, which is a specialized way of handling solution, a very tricky product handler. So we will obviously share that with the team -- with our new team there, and we'll see where those kind of synergies come. Now one of the biggest synergies is obviously the fact that they do not have a blasting business. We clearly are #1 in the world in blasting. So wherever there's opportunity to also upsell with blasting at Cyanco customers and vice versa, we'll do that. And then clearly, we'll also introduce our new Digital Solutions into the Cyanco customer base and the other way around. So there's quite a few in terms of technology sharing and in terms of best practices, but we'll work through it step by step after the closing.

Okay. That's excellent. Just another question for me, just with regards to the assets that you're acquiring in Nevada and Texas. You mentioned Nevada is 30 years old. I just want to get a sense of how old, I guess, the Texas asset is. And are there any major shutdowns or overhauls that are coming due in the next, call it, 5 to 10 years? And just wanted a sense as to whether there's any major, I guess, gas contracts that are coming due as well.

Yes. So the Texas asset is relatively new. It's 10 years old. And obviously, both assets are very well maintained, and we've done our due diligence there. And we are very impressed at the operating skills and the maintenance plans of our new team there. In terms of shuts, these shuts are not as intensive as you've experienced with ammonium nitrate and ammonia. They are relatively smaller shuts, normally a couple of weeks to a year, and then you have the regulatory shuts every second year or third year, depending on the local regulation, which is 4 weeks. So it's more routine, it's very similar because the technology is very similar to what we run in Yarwun. So we are very familiar with that. Obviously, there is some room for optimization now because we have the flexibility in terms of scheduling our shuts to ensure their supply security for our customers. We don't have unnecessary stock buildup because sodium cyanide has shelf life. So it's a product which is difficult to store and keep for long period of time. And since we were single source we were quite limited in terms of how we take our shuts, how do we plan that. And now that we have this network, we have much more flexibility in planning that going forward.

Your next question comes from Reinhardt van der Walt from Bank of America.

I've just got a basic one. Could you just remind us on the contracting structures that you've got with mining in this -- in cyanide, duration, terms of pass-through, repricing frequency and maybe just sort of the linking between those cyanide prices and the global energy prices?

Thanks, Reinhardt. So the contracting strategy is very similar to what Orica does because obviously, that's industry standard, that's the industry norm. Contracts normally durate -- or range from 12 months [Audio Gap] depending on how critical suppliability is for a certain customer in a certain region. And that's been normal standard on both sides at Cyanco but also here with Orica. The contracts have normally, quarterly rise and falls. And this includes the major cost inputs, such as natural gas, for example, caustic soda, energy costs, CPI and freight costs, and that triggers every quarter as we do. Now the good part was when we looked at the commercial contracts, we saw very strong commercial discipline as we have in Orica. That's been quite pleasing. And that will obviously continue now and we'll leverage of each other skills here in terms of managing the commercial contract book.

Got it. Understood. So you're basically just getting a tolling margin through those plants and you're passing through all of your costs?

That's correct. As we do with our ammonium nitrate business, that's kind of the standard in the industry.

Yes. Okay. And the mobility of product across borders, I understand it's difficult to move. Do the markets tend to be generally quite geographically siloed?

Absolutely. So we are the largest seaborne trader of sodium cyanide in the world because most of our Australian product goes overseas into all parts of the world. If you are selling liquid to a gold miner, which is the preferred solution for them, then you are limited by distance. So you cannot ship liquids over thousands of kilometers. It's just not possible, it's just too expensive. So there is a captive demand in the close proximity of your assets. And then if you have to ship it longer, then you have to first convert it into solids, then box container it, ship it and then again melt it back. So there's significant costs there. So yes, there is geographical restrictions in terms of the ease of transporting the product across the globe. It's not an easy product to handle.

Yes. Got it. Understood. And the CapEx guidance is $10 million plus $6 million for the next couple of years then back down $10 million. Could you just tell us, that $10 million CapEx is that basically enough to sustain the asset into perpetuity? Or what is your turnaround year CapEx look like? And just remind again how frequent those are?

Yes. So it's quite similar to routine maintenance and customs, we do at Yarwun, not much different. We have had a bit of a step-up, as Andy mentioned earlier, for things like cybersecurity at our manufacturing sites, operational technology, upgrading some of the digital control systems of the plant. So there will be a little bit of investment initially and then it will start to normalize that. Now that obviously excludes any special spend for turnarounds. So when you do a turnaround, which happens every 2 or 3 years, depending on the local regulation, there is inspection, so there's regulatory turnarounds and then you open up the equipment. So if there's a pump which has failed or if there is a compressor that has to be changed, that obviously comes on top as capital. On an average, that $10 million is a pretty good number.

Your next question comes from Brook Campbell-Crawford of Barrenjoey.

I'd just like to hear your views on potential price risk for Cyanco in North America, particularly in places like Nevada and which I understand Cyanco has got very high market share. So, I guess, just given consolidation across the customer base in that gold market, how do you get comfortable that you don't sort of go under pressure from pricing and that position doesn't get dislodged by new payers.

Yes. Thanks Brook. Look, we've been doing this business for 30 years. We know very well the market dynamics. There are 2 aspects to it. So basically, the margin profile of the business, one, is clearly supply-demand. So it depends on when gold customers -- the customers are pulling more and if there's not enough supply, then you get an impact. The other is the input factor which is cost. So it all depends on where we are in the cost cycle. So both of these factors, like in any commodity that they decide pricing, they also decide margin. Now sodium cyanide is globally traded. We are the largest. We have a pretty good view on the global markets. We see that the demand outlook is pretty positive, as I mentioned earlier in my presentation. And then the supply depends clearly on what kind of volumes are available, where they are available, how and what kind of cost competitive supply [ chains ] can you take it from one place to the other. So there's a lot of factors there, given the fact that this business is extremely familiar to us, we feel pretty comfortable with the earnings profile.

And you talked about being familiar with the global dynamics. Can you talk about what the upcoming supply additions look like, I think, in the Middle East and how that compares to global demand for cyanide and, if at all, you're considering this with respect to your opportunity for global cyanide sales both from Cyanco and your own business that you own.

Yes, absolutely. So we obviously monitor any announcement made by competitors. There's one announcement of a debottlenecking happening here in this part of the world. So we are aware of that. Outside of that, there are a couple of projects that have been announced, one in the Middle East, but these are -- if they come, they are a long way off because -- what is interesting about sodium cyanide is there are 2 routes to produce it, one, is on-purpose, which is what we do at Yarwun and the same thing we do also in Nevada, but you also get sodium cyanide as a [ full ] product when you make acrylonitrile. Now that capacity is obviously limited as a side product, but if there is a new acrylonitrile plant somewhere in the world, those producers could decide to invest in converting that side product into sodium cyanide. Now that capacity is restricted. It's obviously a very long value chain, and is extremely capital intensive. So in future, maybe in 5 or 10 years, if there's a new acrylonitrile plant, which goes predominantly into ABS manufacturing, which is an engineering plastic, then there might be a little bit more of capacity coming into the market. But we haven't heard too much in terms of new announcements.

And just one really quick final one. Can you just talk about the capacity utilization at the plant? And are you able to grow with that 4% to 5% demand outlook you talked to over the next few years with your existing asset base? And if that is the case, does that drive margin expansion as you get more volume through your existing assets?

I mean that's correct. We'll get the manufacturing folks together of all 3 assets, they'll share good practices. We'll see what we can do to squeeze capacity out if that's possible. If it needs capital, it will take a bit longer. If it is simple in terms of supply chain optimization in terms of planning turnarounds better so that we always have capacity, then we really will get some volume short term. So that's the work to do in terms of -- we do need more capacity to grow clearly. I mean, that's the whole point of supplementing our existing business. So we'll do everything we can to squeeze more out of our plants. Orica has had a pretty good record -- track record of doing that. We've done that very successfully with our AN assets. We have done that with sodium cyanide. You remember, we announced an expansion in Yarwun in 2021. Those assets are running now at very high loads. So we'll continue to do -- bring that same skill set into the 2 new assets that we've acquired.

Your next question comes from Andrew Scott at Morgan Stanley.

Obviously, if you look at the financials, only USD 200 million or thereabouts of PP&E, given the age of the plants, I imagine there's been a fair amount of depreciation. How would you recess -- how would you assess replacement cost of this level of capacity?

Extremely high. This is a very, very challenging asset to build. I mean if I would build today a new asset greenfield in Yarwun, it would cost me triple -- 3 times or 4 times of what we would have built 30 years back. So it's not just the higher capital cost, the higher replacement value. It's a constrained technology. So it's not easily available. So there's a lot of restrictions in terms of permitting and everything else. So the replacement value of these assets is extremely high. Also the cost of debottlenecking, the specific investment cost in debottlenecking per tonne is extremely high. We experienced it ourselves when we expanded Yarwun in 2021 and added 10% more capacity. This is an expensive exercise and it's an expensive asset to build.

So would I extend that, that you believe that you're buying -- the capacity you're buying below replacement cost?

We've got a great asset here, very well run, well maintained. We are very happy with what we've got, and we are very happy that we have access to more tonnes today in very attractive markets.

Okay. And if I just think big picture, you have been busy over the last 18 months, a number of large acquisitions seemingly a lot on your plate. How do you view the Orica the business makeup, the suite of assets you've got. And do we expect a period of consolidation now? Or are you still seeing some gaps out there?

I think the strategy was -- when I elaborated in 2021, was grow the core, which is lasting for mining and then grow everything else. So we've now successfully developed a very interesting and profitable digital business. We now have a Mining Chemicals business. Our Q&C business is doing very well. So I'm mighty pleased now. I would say the heavy lifting is done. We'll now put our heads down. We'll integrate Terra Insights. We'll integrate Cyanco and then we'll grow the business organically. That's going to be the focus in the next near future.

Your next question comes from Richard Johnson at Jefferies.

Sanjeev, you touched briefly on the market balance or supply-demand balance is right amount of balance, if that is fine. I was wondering more generally, if you could talk around how mature you think the current cycle is?

In terms of gold demand, I mean that's a macro play. All of us follow the gold industry. We have seen the recent consolidation in the industry. People are looking for the M&A and people want to invest. I've talked about ore quality degrading. I've talked about strong anticyclical demand for the business. So I do expect that the gold business will continue as a precious metal, but also into the jewelry business as long as the Indians and our Chinese customers keep buying a lot of jewelry. So that's very positive. In terms of the mining cycle, given the fact that it's very difficult to access new ore of high quality, there will be a lot of effort in trying to extract more out of what you have today. That means this is a direct translation of a very positive outlook for the sodium cyanide consumption.

And on the capacity side, obviously we know about the expansion in the West here in Australia. And I know you've talked about debottlenecking Yarwun in the past. Is that something that you no longer need to do now?

That's correct. That's correct. We do not need to spend capital now in Yarwun. That would have been a [ Plan C if you can ] manage from the supplement our capacity here. So that capital we will save.

Yes. And do you know, how much -- what's the sort of quantum of that capital would have been to expand Yarwun?

It is significant because you can imagine we've been optimizing, Richard, that asset for 30 years, and then you reach a limit so -- in terms of the quick wins, in terms of incremental capacity. After that, you need to do major changes like changing out a reactor that can cost hundreds of millions of dollars. So we've reached a kind of a limit as to how much more we can do in terms of the front end of the plant, in terms of the back end of the plant. There's always possibility, but it's always about payback. How much capital are you willing to spend and what's your payback on the incremental tonne. So it's not cheap to do these kind of debottlenecking in this kind of process technology.

So there's a reasonably significant strategic synergy there, which obviously isn't captured in the numbers you talked about today.

Absolutely.

Got it. And then just on the -- in terms of earnings quality, you've got the very useful slide on #16 showing the split by revenue and the change. If we think about it from a profit perspective, I mean, does this transaction send you well on the way to a blasting-nonblasting split that's roughly even?

We're getting there, but you will know more FY 2025 when we start publishing the Mining Chemicals vertical.

Okay. Great. And then finally, the -- I just want to clarify the comments you made on the slide about the Texas plant. I'm just trying to understand what the operating backdrop to that, is it -- am I right in thinking is operated by a third party? And if that's right, is that something you can take in-house and again generate synergy?

So the Texas asset is part of a chemical complex where there is several different kind of manufacturers and tenants on the site. That's a very common thing in chemical industry. In the past, that chemical complex was owned by a single owner, and then people started divesting the businesses, company split up. And now there are multiple owners, but it's an integrated manufacturing facility. So most of the feedstock is produced to make plastics, as I discussed earlier. And then the core product that comes out of this is raw material that is used to make sodium cyanide. Now we own the asset, we build the asset, we operate that asset. But -- because this is -- this asset is a small part of a much bigger chemical complex, the manufacturing operations are run by the owners of the assets, not by us. We have people there who supervise, who monitor on a day-to-day basis, but we do not physically operate the assets. We have a service level agreement with our raw material supplier. Since it's been integrated asset in the past, it was not a plan to be split-up because then you have a lot of dyssynergies. So just to maintain the synergies and the efficiencies, we have kept the manufacturing model even though the ownership has hanged in the downstream business.

That's very clear. And then just finally, can you remind me what proportion of the gold mine's cost is sodium cyanide?

Roughly 4% to 5%.

That's very small?

Minor. Minor, just like explosives. Small, but critical, yes.

Your next question comes from Daniel Kang at CLSA. Please go ahead.

Sorry, guys. Thanks, Sanjeev. Just a quick one, a couple from me. Most of my questions have been answered. Just -- I'm wondering how does Cyanco's business compare to Orica's own cyanide -- sodium cyanide business?

Yes. Very similar. Similar technologies, obviously, capacity 50% more than what we have. The big difference is that they do not have too much of international trade. So as I mentioned earlier, most of the cyanide we produce here in Australia goes overseas, all over the world to different parts of the world as solid. And then we have our handling stations where we convert it into liquids and then cater to our customers on a daily basis. Their business is mainly within North America, predominantly in the U.S. market, so it's predominantly a liquid business. The Texas plant has solids only and that's the one which has access to see freight through the Houston port. So that business, that product then goes to Mexico, it also goes into Latin America. But the big difference is, first of all, obviously, their cost price. They are based off very competitive feedstock, Henry Hub natural gas pricing. So that's the one big advantage. Secondly, they have very short lead times to their customers. We have very long lead times out of Yarwun. So that's the second channel. And thirdly, they have predominantly their business as liquid because they have these short lead times to their customers. So very similar business but obviously a different customer profile because they are not so much into international trading so far.

Right. So that would -- from your points you've made, it would suggest that their margins are superior to Yarwun, is that correct?

I don't like to top down Orica margins. But from a netback point of view, we have costs for logistics and freight. And obviously, we pay Australian gas prices. We don't pay Henry Hub here.

And Cyanco has 22% margins. How does that -- how did that track over the last few years?

It's been pretty consistent. So there have not been significant spikes here, obviously, because the rise and fall mechanism works. So the margins are kind of in that range or ballpark. And then we looked at historical numbers. So there were no real surprises. A little bit of volatility that comes more from the lags, and I talked about the '23 positive lag, you could also have a negative lag. If there's a significant decline in feedstock pricing and then you see that happen. But that's not unusual. Apart from that, the business has been quite stable and not that cyclical.

I might squeeze one more. Just in terms of customer overlap, if you can just discuss that opportunity.

Yes. So obviously, in sodium cyanide had 0 overlap because we don't sell anything in the U.S. market. In terms of our blasting and digital business, there is some overlap because we do blast at some Cyanco customers, so we have seen them in the market there. And then obviously, with some of our blasting customers in the gold industry in Canada and in the U.S., Cyanco is not a supplier. So we are obviously now going to start opening those on both ends. And then clearly, the Digital business is where we will overlap both with the gold customers but also with the nongold customers.

Your next question comes from Scott Ryall at Rimor Equity Research.

Hopefully, 2 pretty quick questions. So if I look at Slide 14, and I think just some comments you made to the question just now, Sanjeev. Are you expecting not a huge amount of focus from U.S. antitrust perspective?

I think, look, we will have to go through the regulatory process. Our market share in the U.S. is Europe. So we do not expect any unpleasant surprises, but it will take time. And that's why closing is -- yes, yes, closing is not before end of FY 2024 for us, which is September.

Okay. And then my second question refers to Slide 16 and -- again you've talked to this a little bit, but the one that strikes out -- really stands out to me, the shift up of exposure to gold, which you show in the middle set of bars. You talked about gold being macro and jewelry related. But I wonder just sitting a bit higher level, can you just explain why the increase in gold to 1/4 of the revenue is something positive for Orica [ safe ].

We get a double benefit from gold industry. We do blasting and gold and we do chemicals and gold. So that gives us that double benefit that gives us that additional exposure, and that's why it is so attractive to us. And now we are starting to introduce our Digital Solutions into the gold industry. So all 3 means that this particular segment has for Orica a very high value because we are able to multi -- offer multiple solutions out of the different business verticals for us. That's why that business is so attractive and interesting for us.

But is this the end market then where things come together for you in terms of the strategy that you're driving here?

That's a beautiful example of the full service offering we are planning for most of our markets. So you come to blasting, which is a core business. You come with a digital, which is geology to mill, and then you come with mining and chemicals. So exactly, that's the point, right? To bring full solution Orica into the mining industry, not just as an explosive producer.

Your next question comes from Nathan Reilly with UBS.

Sanjeev, previously when you've put a spotlight on the global cyanide industry, you flagged that industry utilization was running around 90%. Can you just give an idea of what you think U.S. utilization is running at? And I guess, also in the context of what you've been able to achieve with your ammonium nitrate businesses in both North America and also the APAC region just around commercial discipline on pricing. Do you see some opportunities here to also extract some of the same benefits around increased commercial discipline focus from this acquisition?

Absolutely. So industry utilization is still quite healthy, anywhere between 80%, 85% to 90% in that range. Yarwun is sold out. I've always said that several times now. So that tells you as a proxy for the global industry that the industry utilization is quite high. Commercial discipline, we were very, very happy the way Cyanco team has been running their business. They have been as sharp and focused as we have been in terms of managing commercial discipline. Now we'll obviously learn from each other in terms of better practices, in terms of how we could do better in that and there will be some knowledge sharing and some value sharing there. But we have not seen any obvious challenges in the commercial contracts and the business that Cyanco has been running.

Your next question comes from Paul McTaggart at Citigroup.

Look, I just -- there's a big intangible number on that Cyanco's balance sheet. So what is that? Is that relating to the previous acquisition where goodwill was kind of booked intangible? What is that $790 million?

Yes, Paul. Thanks, Paul. So the math behind that is simply the acquisition price less the physical assets that we're purchasing, such as, the plant and equipment. If you can then think about what does that number represent? Sanjeev gave a really good overview earlier on around the value of those assets that we've got in those 2 locations over 30 years old, which is relatively new in the chemicals industry, but it's still a 30-year-old asset that's producing significant profit and significant cash flow. And so the value of that is intangible really represents the value coming out of that plant, the customer contracts that we've got and stickiness nature coming through that business.

Your next question comes from Ray David with Blackwattle.

I'm just trying to understand the 2 economic -- the different economies between the 2 different plants So one of them produces HCN and the other one got a long-term HCN supply contract. Is there much difference in margin volatility between the 2 businesses? I'm just trying to get a sense, are you making HCN margin on Nevada versus Texas is more of a pass-through? Or are they both sort of similar?

Both are similar, but the nature of the products are different. So, obviously, the liquid business or the solution business has better margins because you have lower cost. The solids business you have to convert liquid into solid and then ship and then again, convert it back to liquid at the customer site. So that obviously has additional cost. And then obviously, the longer supply chain. You can take solids longer distances, but that also adds freight and handling costs and warehousing costs and intermediate storage and all of that. So, yes, the margin profiles are different. Liquids are clearly the more profitable business because they are lower cost in that respect. In terms of pass-through, both the commercial contracts are similar because the customer doesn't differentiate between which side to get the product from. So the commercial contracts are standardized across all sites.

Okay. And you've talked a lot about replacement costs versus what's on the balance sheet. But could you talk to, has there been much capacity added in the U.S. And generally, what's the, I guess, [ PPA ] or approval process or time line to add incremental capacity both brown and greenfield?

The last greenfield or brownfield asset that was built was a Texas plant that we acquired. Since then, there have been a couple of capacity expansions, including ours, but there haven't been too many greenfield dedicated sodium cyanide plants. There have obviously been a couple of acrylonitrile plants that have been built and the one -- for example, in Texas, and that gives you the side product out of which you can make sodium cyanide after significant investment. Permitting times are challenging. Capital requirements are quite high. The technology is very tricky and hazardous, so you need to use special material of construction. I'm very familiar with this technology. I ran a hydrogen cyanide plant in BASF in my former life. So I know this very well. The Andrussow technology as it's called, and it's a very tricky technology. Hydrogen cyanide is banned for transport everywhere in the world. The last ban happened a few years back in China. So the product has to be made in C2 and then consumed in C2, you cannot transport it. So it's a highly restrictive business and it needs a lot of special handling as this is the case with ammonium nitrate. Now we obviously have been doing this for a very long time. So we feel very comfortable in tackling these kind of chemistries.

Your next question comes from Ben Wedd at Macquarie.

Maybe just sort of an earlier point where you're talking about sort of the strategy coming together. Can you sort of speak to the percentage of the cost base that you could have -- could target that you'll sort of take your cyanide business and explosives?

You mean share of wallet at customers?

Yes, correct.

Okay, okay. So look, the strategy and that's how we started by formulating strategies as to how do you grow a market leader and we are a global market leader in explosives. So how do you grow being a market leader? It was the share of wallet. So explosives is, on an average, depending on which industry -- which commodity you're catering to, anywhere between 2% to 5% of a minor spend. So the theory was if you can double the 2% to 5% to 10%, you can double the profitability and double the size of Orica. And that's where we needed new offerings. And that's coming from digital, that's coming from coring and construction, and that's coming from Mining Chemicals. So the idea is basically to grow the share of the wallet of a customer. Now I can't give you a number because the requirements in an open-cut coal mine are very different to an underground copper mine, for example or to a gold mine. Because the processes are quite different or iron ore. But in every case, the whole -- the purpose of the strategy was to increase share of wallet by adding more services and products and solutions to our same customers. So stick to your core, what do we know best, we know mining. And lastly, we've been doing this for 150 years. How do we leverage that and bring more products, more customers and more solutions to the same industry. And that's exactly where we are headed.

And maybe just a question for you Sanjeev and also Kim, just looking at the gearing, you sort of mentioned sort of low end of the 30% to 40% target range, post-completion. I mean there's a few -- there's some pretty good cash generation over the next few years, potential Deer Park sale as well, which can see that gearing move even lower. So how should we sort of think about capital allocation going forward and when you might set in that gearing range?

Yes, for sure. So let me address that by talking about the equity raise that we've done today, and that has really been sized in relation to preserving our investment-grade credit rating. So at the moment for us when we look at positioning our balance sheet, the investment grade credit rating is a key principle for us. So if you think about going forward, we're sort of sitting at that bottom end of that 30% to 40% range, which is probably an appropriate place for us to get the balance sheet in a good position and protect our rating.

Your next question comes from Anthony Longo with JPMorgan.

Thanks very much for all the color thus far on the transaction and the strategic rationale. Just had a quick question. In the context of the top line growth and growth that you are seeing within gold, but also -- also the cyanide, but also with North America outpacing that. In the context of the strong margins that business generates and the cash conversion that it generates. I mean, what was the motivation of its seller ultimately to part with this business, even in the context of the multiple that you have paid.

Yes, look, I can't talk on behalf of the seller. It's a question you have to ask them. My understanding is that they have held it long enough. They've held it since 2018. We are now in 2024, that's 6 to 7 years. If you look at the average history of [indiscernible] ownership that kind of falls into that ballpark. Now obviously, we are a natural owner for this business. We are a strong strategic for that business. And clearly, the management team and the employees must have had a say there. But I really can't comment on behalf of the seller.

That concludes our question-and-answer session. I'd like to hand back for closing remarks.

Thank you, and thank you once again for joining us. If there are any further questions, please feel free to reach out to me, and we'll endeavor to get [Audio Gap] looking forward to adding this business to the Orica portfolio. Thank you, and have a good afternoon.

Thank you, everyone. That concludes our conference for today. You may now disconnect your lines.