2006 AGM - Chairman's Address
(Don Mercer)

24 January, 2005

Ladies and gentlemen, it is with pleasure that I present to you my report as chairman of your company.

This is my fifth report to you and this year’s report is slightly different from previous years.

I would like to spend more time talking about how Orica is positioned for the future rather than looking back at last year. 

With the work we have done in 2005 and in the preceding years, we have created a strong foundation for your company’s future, a future built around the essential ingredients of first-rate assets, quality people and a strategy which delivers value-adding growth.

In the past year, the businesses achieved an underlying result which was another record – albeit a modest increase over the previous record – but achieved in a year of mixed market conditions.  Managing Director, Graeme Liebelt, will give further details on the drivers of this result shortly.

The success and resilience of Orica’s business mix is particularly gratifying to your directors because it reinforces the long-term strategy established four years ago.

We gave a commitment to fix those businesses which were not making an economic profit, to exit those businesses which were not capable of meeting our performance targets, and when businesses had “earned the right to grow”, to look at acquisitions and organic growth initiatives.   You have seen substantial progress in this area in 2005.

Let me take a brief look at the two “headline” developments which have occurred in the past year. 

They are both in Mining Services; one is organic growth and the other an acquisition.

The expansion of our Ammonium Nitrate Plant at Yarwun, in Queensland is an excellent example of organic growth.  When completed later this year, Yarwun will be the largest industrial grade Ammonium Nitrate plant anywhere in the world. 

This clearly demonstrates our commitment to service our customers – in this case, Queensland’s vast coal province of the Bowen Basin.

Like most recent projects in Australia, ours has had a cost overrun but it will still deliver well above our strict financial return target for all expansions and acquisitions.
It will be a great value-adding project.  We have also announced plans to expand production of ammonium nitrate at our Kooragang Island plant in Newcastle to meet the needs of coal and mineral miners in Eastern Australia and Indonesia.

I’m equally positive about the other major development, which is the acquisition of the Dyno Nobel businesses in Europe, Asia, Latin America, the Middle East and Africa.  The first of these businesses commenced integration early this year, and the acquisition will enable us to deliver an improved and wider range of products and services to our existing and new customers.

Furthermore, the integration of these Dyno Nobel businesses will continue Orica’s transformation into a truly global company.  We will have operations in around 50 countries and sales into another 50 countries. 

More than half our employees will live outside Australia.  We are proud of the fact that Orica, which is an Australian business, is making a contribution in some 100 countries.

This increasing internationalisation of Orica is reflected in other businesses as well.  Chemnet has expanded into Asia and South America in the past 18 months and Orica Consumer Products and Chemical Services also have international operations.

In recent years the growth of your Company has been achieved in conjunction with adherence to an active capital management strategy.  We continue to believe that active capital management best serves shareholders.

Prior to the acquisition of Dyno Nobel, since 2001, the Company has funded over $900M of growth capital for bolt on acquisitions, category expansion and brownfield capital projects, through free cashflow and debt facilities.  During the same period, dividends to shareholders have increased from 16 cents per share in 2001 to 71 cents in 2005. 

To fund the Dyno Nobel acquisition we decided the most capital efficient mechanism would be through a rights issue and a hybrid security.  This combination was chosen to ensure that the financial integrity of the balance sheet was maintained, while at the same time optimising our cost of capital and our credit rating.

The rights issue was renounceable and deeply discounted which meant that it was the most efficient and equitable method of raising capital from existing shareholders.  Thank you for your support in making the rights issue a success.

I am pleased to say that the Board will continue to take an active approach to capital management in the future, and aims to continue with its current progressive dividend policy.

Another strategic imperative for the board has been portfolio management with the divestment of Qenos to the China National Chemical Corporation marking the resolution of the last of our portfolio legacy issues.

I have spoken in the past of the priority that your Board attaches to Succession Planning. Never have we seen the importance of our work in this area more than in the past year. You are all aware, I’m sure, of the unexpected departure of two of our most senior executives, first Finance Director, Jim Hall, and then, Managing Director, Malcolm Broomhead.  I would like to take this opportunity to thank both Malcolm and Jim for their contribution to Orica’s past and future success.

Additionally, we would all send our best wishes to Malcolm for a full recovery from the illness which caused him to step down.

As you know, both roles were filled by internal candidates; Graeme taking over as Managing Director and Noel Meehan becoming Executive Director Finance.  There have been a number of other executive changes during the year including the heads of four of our five business platforms. 

I introduced them to you earlier.

This is a credit to our program of Succession Planning which extends through the management levels of the organisation.  More importantly, it underscores the quality of the people within Orica – a characteristic of your company to which your board attaches the highest importance.

The identification and nurturing of talent within Orica doesn’t happen by chance.
The continued success and growth of Orica can be achieved only if we continue to attract, motivate and foster the best people.

An important element of that is recognition and reward.

I want to take a moment to talk with you about Directors’ and Executive Remuneration.   While I am happy to address these specific issues at the appropriate time in the meeting, I believe that your understanding of this matter and any subsequent discussion will benefit from an outline of our strategic philosophy. Also there is a very comprehensive outline of the Remuneration Plan in the Annual Report.

In relation to non executive directors, the growth in regulatory requirements relating to Corporate Governance as well as the international expansion of your company has placed increased demands on your board in terms of time and commitment.  This needs to be recognised in financial compensation.

However, it is Executive Remuneration that I want to talk about in a little more depth.  Our over-riding approach is to do what is best for Orica and for our specific circumstances; and is guided by three key principles:  one, that remuneration will reinforce the short, medium and long-term objectives of the company; two, that rewards are linked to the creation of shareholder value and returns to shareholders; and three, that remuneration must be competitive in international terms to attract and retain the best people.

In line with these principles and like most companies of our size and international character, we provide the opportunity for employees to earn significantly more than their basic salary through achievement of specific goals which are value creating for shareholders.

We do this by establishing remuneration packages for executive directors and senior executives which include a fixed component and an at-risk or performance-related component.  The fixed component is reviewed annually and is developed from a series of criteria including market benchmarking.  The at-risk component, which comprises both short-term and long-term incentives, is an essential driver of Orica’s high performance culture and is to the benefit of all shareholders.

The mix between fixed and at-risk remuneration is also designed to reflect job market conditions at different seniority levels. For example, the remuneration package for the CEO and his direct reports is split approximately 50% fixed and 50% at risk.

At lower managerial levels, the ratio is more fixed and less at risk depending on the role.

The short-term incentive is individual and based upon precise and measurable targets which are agreed with the employee in advance and objectively assessed at the end of the period.

The Long Term Equity Incentive Plan is designed for all executives and senior managers who are able to influence significantly the generation of shareholder wealth by having a direct impact on Orica’s performance.  There are currently some 260 senior managers in the scheme.  The long-term incentive plan is offered each year and facilitates share ownership through a three-year interest-free limited-recourse loan.  The plan links a significant proportion of our managers’ potential remuneration to our total shareholder returns over a three-year period.

The remuneration value will be less if the share price performs disappointingly during the period and increase if the share price does well, so there is a strong incentive to create shareholder value.

We favour the use of a limited recourse share loan plan rather than an option plan because it involves a much lesser use of equity.  It is also more cost effective than other share schemes.  Importantly it provides certainty as to the cost to the company while providing uncapped upside to managers.

The targets for the long-term incentive are based upon growth in Orica’s Total Shareholder Returns.  The advantage of a TSR target is that it is clear, and measurable without reference to other companies.   Employees understand exactly what’s expected of them.  Let me tell you that if our TSR target is reached, you will have an outstanding company with exceptional results.

In closing, I want to take this opportunity to personally thank the Orica team for their contribution to another successful year for the company. 

To tell you about the key elements of that successful year, I’ll now hand over to your Managing Director, Graeme Liebelt.

Contacts:

• Frank Micallef, Manager, Investor Relations: (03) 9665 7479 Mob:  0413 187 000
• John Fetter, Group Manager, Corporate Affairs: (03) 9665 7870 Mob: 0412 311 371