2004 AGM - Chairman's Address

15 December, 2004

Ladies and gentlemen, I’m pleased to report to you on a year in which your Company has made substantial progress.

The strength of our four business platforms has again been confirmed in 2004 with solid financial results and our growth program has increased the size, geographic spread and economic performance of our businesses.

This morning, I want to review our current and future financial performance, to comment on some specific matters of importance and finally, to give a brief view of future direction.

In terms of financial results, this has been another record year with a 20% increase in Net Profit after tax and before significant items, to $326 million. There was a 25% improvement in Earnings Before Interest and Tax (EBIT) to $553 million.

Significant items balanced out to a positive $2 million. This brought net profit after tax, and after significant items, to $328 million, a substantial increase over the prior year.

Each of our four businesses achieved record results. Chemicals achieved $1 billion in revenue in a single year for the first time, and OCP, our shorthand for Orica Consumer Products, realised its first $100 million annual profit.

Mining Services and Fertilisers also grew strongly. For Mining Services, sales revenue was up by 4% to $1.7 billion but if you exclude exchange rate differences, sales were up by 14%. For Fertilisers, EBIT was up by $61 million to $104 million, and this, in a year when many parts of the nation continued to experience the effects of drought. This shows the benefit of synergies and efficiencies from the merger of Incitec and Pivot last year.

Now a look at the results from our shareholders’ perspective. Before significant items, Earnings Per Share were up 22% to 119 cents per share; and Return on shareholders’ funds, increased from 19.6% to 23.1%. The final dividend of 45 cents per share, franked at 21 cents, brings the full year dividend to 68 cents per share, representing a dividend payout ratio of 57% and a yield of around 4% as at the date of Declaration. Also, Orica’s positive earnings momentum has been recognised by the market in a strong share price.

We returned $128 million to shareholders via the completion of our 5% on market share buy-back during the year and we’ve announced that we intend to buy back a further $250 million of share capital on market. An important part of the purpose of this is to ensure that there is no dilution effect from executive share and option plans. In addition, given the fact that our dividends are not fully franked, we see this as a tax-effective way of returning money to shareholders.

We will continue to pursue growth opportunities and will ensure we continue to manage capital effectively. So from a shareholder perspective, I believe the results for the full year have been pleasing. We have a strategy of relatively low risk growth following the key principles of building on our strengths and the need to achieve solid financial hurdles.

In 2004, we saw the successful integration of acquisitions into the Mining Services, OCP and Chemicals businesses and the expansion of existing plants at Kooragang Island and Yarwun. The expansion of Ammonium Nitrate production capacity to meet increasing global demand is a key strategic consideration and opportunity for your Company.

Other successful growth avenues in 2004 were extension into new product lines and expansion into new geographies. Mining Services moved into the African continent and the Former Soviet Union for the first time, while Chemicals and OCP have new ventures in Asia. If we look at growth in terms of dollars, during 2004, we spent or committed, in round numbers, just over $300 million on growth initiatives across the Group on top of the $550 million in the previous year, bringing the running total to more than $850 million. Managing Director, Malcolm Broomhead, will give further details on these initiatives in his presentation.

My message is that our growth will continue and I’m confident that this strategy will contribute to the future financial success of Orica.

I now want to comment on some further matters of importance. I will take the opportunity to outline the views of directors on some Corporate Governance matters and on our Executive Remuneration.

Orica’s directors and management conduct the company’s business ethically and in accordance with high standards of Corporate Governance. You may note that Orica’s policies and practices comply in all substantial respects with the ASX-mandated Corporate Governance principles.

Having said this and without wishing to comment at length on this subject, we believe recent legislation both here and elsewhere, demonstrates that there is a crying need for more objective research into what makes for effective boards and the prudent and socially responsible creation of long term shareholder value, and for less assertion by regulators about how we should conduct our affairs. The detail of our approach to corporate governance is outlined in the Annual Report and I refer shareholders seeking further information to this source in the first instance.

Our guiding principle remains to work in a way that is best for the Company, its businesses and its stakeholders. We have developed policies and processes which suit the needs of Orica. We avoid so-called best practice of the "tick-the-box" variety. We are committed to substance over form.

An example is in the area of executive remuneration. The Board believes that executive remuneration should be fair and reasonable, structured effectively to motivate and retain valued executives and designed to produce value for shareholders. The terms and conditions of any share or options plans, and the remuneration of the CEO and his direct reports, require the approval of the Remuneration and Appointments Committee which is composed entirely of non-executive directors. Non-executive directors do not participate in Orica’s incentive plans. We also take independent advice from remuneration experts. Our guiding principle is to ensure that any plan is consistent with, and aligned to, the performance of the Company over the longer term, and the interests of shareholders.

For our executive ranks, we pay a fixed salary at the middle of the market with the opportunity, through incentives paid for meeting challenging targets, to achieve reward in the top quartile. There is a short term incentive, which relates to specific individual targets, and a long term incentive, aligned to shareholders’ interests through share ownership. We continue to prefer our loan-based share plan to the use of options to achieve this result.

In this context, I was delighted to announce earlier this year that Malcolm Broomhead has agreed to extend his contract for two years as Managing Director and CEO and continue with Orica until 2008. I’m sure you would agree that Malcolm has been an outstanding leader of a team which has generated substantial value for shareholders. His task, which needs extra time, is now to bed down the company’s growth program.

As part of the agreement to extend his contract, Malcolm wishes to repay one third of his existing share loan under the senior executive share loan plan. Upon repayment of one third of the loan , one third of his shares, that is 500,000 shares, will be released from the existing holding conditions. Shareholder approval will be sought later in the meeting to enable the company to meet this condition of the Managing Director’s contract extension. The Board considers that this is entirely reasonable in the circumstances. The Managing Director will maintain a total of 1.5 million shares under Orica’s long term incentive plans as Malcolm will acquire an additional 500,000 shares at current market prices as part of the new senior executive incentive plan which I outlined to you last year.

Another matter I want to mention relates to issues with the Australian Taxation Office. As many of you will be aware, we recently received from the ATO an amended assessment with respect to the sale of the pharmaceuticals business to Zeneca in 1998. Including the additional primary tax, penalties, and interest at the statutory rate, the total amended assessment was $210 million. Based on Queen’s Counsel advice, Orica intends to vigorously contest this and has already lodged an objection against the amended assessment. Nevertheless, we have had to pay in advance $105 million.

My concern is that matters of this nature are not dealt with more expeditiously by the ATO. In this instance, it is some six years since the original sale of the business and it may be some years before this matter is resolved legally. In the meantime, we are substantially out of pocket.

You will be pleased to know that the process for the sale of Qenos has now commenced in line with our strategy of improving Qenos’ business fundamentals and then seeking a buyer. We have appointed an adviser and will be issuing detailed documentation early next year. Qenos is operating well and polyethylene prices are currently buoyant.

I now wish to turn to environmental remediation issues. We have a substantial track record in cleaning-up former operating sites which are now prime residential and light industrial areas in some of our major cities. We are committed to meeting our primary responsibility of remediating contaminated sites and disposing of chemical waste but we are also looking for commercial opportunities around environmental projects. For example, at our Botany site in Sydney, we are cleaning up groundwater which was contaminated decades ago on a site where the plants have long since been closed. After we take out the contaminants from the water, we plan to recycle it through commercial arrangements with other companies in the area. Also, we will seek to use the technologies and expertise developed by Orica in more general environmental remediation.

We are also giving increased focus to the environmental performance of our current operations. We need to ensure our plants are "good neighbours" to our communities and that we are not creating the legacy issues of tomorrow. To ensure this objective is given the appropriate direction, we introduced in August, 2004, an Environmental Committee of the Board to assist in the effective discharge of our responsibilities in relation to environment matters arising out of activities within the company, past and present, as they affect employees, contractors, visitors and communities.

Our standard of environmental management must lift to match the standard of our safety performance over recent years, which ranks with the world’s best. In discussing safety, it is with great regret that I advise of the death of three employees and a contractor on our sites in South America in two separate incidents. The loss of our colleagues hangs heavily over our safety performance and is a constant reminder that even though our safety statistics are improving year by year, we have a long way to go to achieve our goal of "No Injuries To Anyone Ever".

Let me reassure you that safety is a matter to which the board and management gives the highest priority and the achievement of an injury-free workplace is a challenging goal. It is not something which can be legislated to occur. It requires the commitment of every one of our employees and contractors to safe processes and a safety culture encompassing every aspect of the way we work. We measure our safety performance against our peers internationally and we know we are among the best in the world. But even then, we have suffered the tragedy of workplace accidents resulting in the deaths of workmates.

In this context, State Governments seem to believe that increasing penalties for management and boards and increasing the role of trade unions will somehow improve work place safety. More likely, the opposite is the case.

Our goal of an injury-free Orica requires even greater attention as we grow our company and increase the number of employees and sites through acquisition and development.

As the Company grows, the Board recognises the importance of ensuring we maintain the excellence of our workforce. Our management, staff and employees have demonstrated performance of the highest quality and I wish to record the Board’s appreciation of their skill and commitment. A personal highlight has been the opportunities to meet employees on Board visits to sites both in Australia and overseas. The Board members regard it as important that we maintain knowledge of operations through a site visit program.

Finally, I want to take a brief look to the future. Orica is a company with very strong fundamentals. Our businesses are market leaders with well-known brands and products which help to meet vital human needs such as food, water, power and shelter. Our company is growing through acquisition, organic growth, plant development and geographic expansion and every year, these growth initiatives, which are based upon sound financial criteria, contribute to profitability. While we live with the impacts and uncertainties of the global economic environment which will influence our performance, I am positive about the future of the company and the ability of the Orica people to drive profitability, enhance productivity and capitalise on our growth initiatives.

Now, it is with pleasure that I invite Malcolm to address the meeting.

END