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ASX/Press Release
PENRICE SODA HOLDINGS LIMITED ABN 83 109 193 419 1
5 December 2011
Chairman’s Address to Penrice AGM 5 December 2011 Penrice is a manufacturing company. In some circles these days, manufacturing is not seen as glamorous or trendy. But manufacturing remains a vitally important component of the Australian economy – and Penrice is an important company: to its customers, especially the glass manufacturers, to its suppliers, to its employees, to the economy of South Australia, and in particular to its shareholders. Penrice is a reliable supplier of competitively priced, quality products in the domestic market and an increasingly successful exporter of sodium bicarbonate to around 30 countries, principally in Asia. We sell a wide range of products to many industries: quarry products – over 40 individual lines – to the road and civil construction industries, limestone to our own chemicals business and to cement manufacturers, lime sand to glass manufacturers, soda ash to the domestic bottle and construction glass industries, and soda ash and/or sodium bicarbonate to the stockfeed, detergent, toothpaste, pharmaceutical, uranium and minerals processing industries, and for use as baking powder in cooking and in kidney dialysis machines. If all goes well, Penrice is poised to play a vital role in helping to resolve a major environmental problem facing the coal seam gas industry, with innovative technology developed by its own management team. This technology, the result of four years of research and on which a patent application is pending, enables the separation and crystallisation of the salts within the water streams that accompany coal seam gas. The salts in question are common salt (sodium chloride), sodium carbonate (soda ash) and sodium bicarbonate – all of which we either purchase or manufacture. The recovered salts will be able to be sold into the Queensland and NSW markets or for export, rather than being dumped as waste from evaporative ponds, or reinjected to aquifers or rivers. We still have some way to travel to secure this involvement, but if successful, it could represent a significant source of growth and diversification for the business. The trading difficulties Penrice has been experiencing have been explained to shareholders via the annual report and various ASX updates, although I will take time this morning to summarise them. In recent weeks I have spoken to many shareholders and have been struck by the understanding they are showing for the predicament in which the company finds itself, with unsatisfactory profit performance, excessive debt, the prolonged absence of dividends and an unacceptable share price. I do not for a moment say that these shareholders regard Penrice’s recent performance as commendable, but they do recognise the nature of the external events with which we are grappling, and that a turnaround will take time. They are, in short, realistic. Regrettably, I cannot say the same about our largest shareholder, London City Equities. Over the past three months I have held several meetings with LCE’s chairman and other exchanges of correspondence in an endeavour to re-establish a more productive working relationship following the threatened litigation, and generally strained interactions, of the previous year in relation to events that are now more than two years old.
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PENRICE SODA HOLDINGS LIMITED| ABN 83 109 193 419
At one point, the LCE chairman asked me what I wanted from them. I welcomed the question and replied that it would be sensible to have a constructive, forward-looking and mutually respectful relationship with Penrice’s largest shareholder, rather than one that was fixated on past events, and involved unending negativity. I wanted the opportunity for regular engagement and, as a sign of good faith, offered plant visits and investor briefings – consistent with our disclosure responsibilities. With the authority of the Penrice board, I offered the chairman of LCE a seat on the board. This offer was declined and so was the offer of plant visits and briefings. Nevertheless, I had thought we were making progress until a couple of weeks ago when Penrice received a letter from LCE requisitioning an extraordinary general meeting seeking the removal of all four non executive directors of the company, a repeat of an unsuccessful action attempted in 2009. I cannot think of a less constructive ploy, one that will be distracting to management, wasteful of the company’s financial resources, and disconcerting to our customers, suppliers, banks and employees alike. More generally, LCE has been undermining the efforts of the company with a low level but relentless campaign of criticism, which has now morphed into a self-styled shareholders action group. Just how this assists Penrice improve its position, let alone be consistent with LCE’s own interests as a shareholder, escapes my comprehension. Not once have I seen acknowledgement by LCE of the impact on the company of any of the external factors that have been hurting us. I have repeatedly invited LCE to come forward with specific, positive suggestions. If it did so, we would welcome them – why wouldn’t we, if they promised improvements for all shareholders? I have not yet seen any sign of such proposals, apart from broad generalisations about examining the books, being ‘hands on’ and improving cash flow. One wonders what LCE thinks the existing board, comprised of people with a wealth of managerial and director experience, does with its time. You will gather from these remarks that I am frustrated by LCE’s actions. External headwinds Let me summarise the challenges we face as a company. Overwhelmingly, the high Australian dollar is hurting our earnings, just as it is for other import competing companies. When Penrice was floated in 2005 the $A:$US exchange rate assumed in the prospectus was 73 cents. For most of the past year it has exceeded parity. Had the Australian dollar maintained the 73 cent level from 2005 onwards, Penrice would have been earning regular profits, with a solid cash flow, a strong balance sheet and consistent dividends. There may even have been occasional plaudits from shareholders for managerial excellence and board wisdom. To quantify it, each 1c increase in the exchange rate reduces the company’s earnings and cash flow by around $500,000. At the long term average exchange rate of say 80 cents – the average of the past five years – the company’s earnings and cash flow would be around $10 million per annum greater than they have been. We know why this situation has not prevailed: the cumulative impact of a minerals boom and demand, especially from China, that is unprecedented in our lifetimes. We also know that the minerals boom has generated massive increases in Australia’s terms of trade and national wealth, which is obviously beneficial for the country and its people. And we also know that these effects in turn create severe adjustment pressures in other parts of what has become known as a two-speed, or patchwork, economy. Penrice of course can do little to wish these challenges away. We can, and we do, seek to mitigate their effects as best we can – by hedging our foreign exchange exposure, and by adjusting export prices to offset exchange rate movements. By and large, we have been successful in these strategies, but not sufficiently so to offset the full exchange rate effects.
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PENRICE SODA HOLDINGS LIMITED| ABN 83 109 193 419
An allied challenge has been the escalating price of one of our major inputs, coke. Coke prices mainly reflect China steel demand; in addition a serious spike occurred earlier this year when the Queensland floods sharply reduced global supply. Higher coke prices alone reduced Penrice’s earnings by around $2 million in FY11 compared with the prior year. Fortunately coke prices now appear to be moderating, having fallen around 30% from the peak. We have also trialled alternative, cheaper coke and energy sources from several suppliers. The high value of the dollar affects Penrice directly and indirectly. Directly, it reduces the revenue we receive from sodium bicarbonate and soda ash exports, which are priced in US dollars. It also makes imports of soda ash cheaper, thus limiting the ability to increase domestic prices. Indirectly, it exerts the same effects on our customers. Bottle demand – hence demand for soda ash – has been reduced by cheaper imported bottles, or by wine being exported in bulk for bottling overseas. One wine exporter alone has stated its intention to export the equivalent of 80 million bottles in bulk this year for bottling overseas: that is 80 million bottles that do not need to be manufactured locally and which therefore do not require Penrice soda ash. In the flat glass sector, CSR Viridian has commented publicly about the pressure it has been facing via competition from glass imported from China. A further challenge has been flat demand generally. Much has been written about sluggish demand for beer in developed countries. The summer floods and cooler weather in Australia caused beer producers to lament their weakest sales on record. In the construction industry, the number of housing starts – an important determinant of flat glass demand – has not recovered as much as expected following the global financial crisis of 2008. Renewed uncertainty, especially in Europe, is causing cautious behaviour by Australian consumers, with a preference for saving over spending. Shareholders might suggest that Penrice should have anticipated these events by maintaining close contact with customers. We do maintain close contact with our customers, but to be fair to them, they have often not seen these events coming until the last moment and so have not been able to provide us with good advanced warning. On top of these broad challenges from the macro economy, Penrice has also had to contend with two events that were completely unexpected. This time last year there was the sudden failure of our third-party steam supplier, while maintenance upgrades on the Gawler to Adelaide rail line are currently interrupting the transport of limestone from our Angaston mine to our Osborne chemicals plant. The steam supplier failure caused our chemicals plant to shut down suddenly – not the way the plant is managed during maintenance shut downs. After several days without production, it operated erratically for an extended period, as often occurs in such circumstances, depriving us of production targets. We are still pursuing insurance claims but the hit to earnings and cash flow was significant – approximately $5 million. In the case of the rail closure, we have been in extensive discussions with the South Australian Government over several months. Our initial suggestion that the repairs be conducted one track at a time was declined. We were then hopeful of receiving compensation for the additional costs involved – which we calculated, and the Government audited, at approximately $2.5 million over 7 months – but in the end the Government considered that this would constitute a precedent with which it was uncomfortable. What we did not anticipate was the fracturing of some stone from additional agitation in the road transport alternative. This is likely to cost a further $1.5 million in lost production efficiency in the soda ash plant (smaller stone size) and additional screening. We have explained this position to the Government, including recently to the Premier.
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PENRICE SODA HOLDINGS LIMITED| ABN 83 109 193 419
The Premier and the Government understand the cost impost this is having on an already stretched business, which I welcome. I am hopeful that an effective response will be received soon. The Premier certainly recognises the importance of the Penrice business to South Australia. There has been some criticism that we did not announce the rail closure to the market earlier than we did. The reasons were that the impact took time to establish fully, the discussions that were underway with the Government and our desire not to jeopardise them by inappropriate public commentary. The market update released on 22 November stated that Penrice had incurred an after tax loss for the four months to October of $4.3 million, including $1.7 million of one-off costs. This figure, bad as it is, is not significantly worse than we had been expecting for the period or that we had signalled to our banks. We were expecting poor results for the early part of the year as a result of rail line closure costs (although not the additional costs from stone fracturing), export receipts constrained by the exchange rate, sluggish soda ash demand, reduced demand for civil products associated with a downturn in local construction activity, and higher interest charges and bank fees. Our results are usually skewed towards the second half of the year, plus this year there will be the positive impact of operational initiatives which I will summarise shortly. Productivity improvement is crucial Because Penrice’s chemicals plant is necessarily a high fixed cost operation, small swings below normal output for any reason result in the rapid erosion of margins. This is what has occurred over the past couple of years. The American economist and Nobel Prize winner, Paul Krugman, has said that “productivity isn’t everything, but in the long run it is almost everything.” I agree, which is why management has been focusing on restoring competitiveness via productivity improvements and other efficiency initiatives. The CEO’s presentation describes these in more detail, but they include:
• improvements to labour arrangements so as to give management greater flexibility • improved arrangements for the heavy machinery fleet at Angaston • a superior contract for electricity supply • the progressive re-lining of the kilns with an expected boost to soda ash production • a viable mechanism for the disposal of calsilt, involving the ability to blend calsilt with
schist from the mine to make an effective landfill • innovation to secure cheaper coke substitutes, such as briquetted fines, and • diversion of sodium bicarbonate from lower value to higher value end users.
In addition we have reduced employee numbers by around 10%, instituted a pay freeze, and improved prices on sodium bicarbonate exports. The full impact of these improvements will be felt in the second half (and beyond), along with contracted price rises for soda ash with our glass customers. For these reasons, we expect the second half to be better than the first half and for a full year result about breakeven. F
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PENRICE SODA HOLDINGS LIMITED| ABN 83 109 193 419
Strategic review Penrice’s banks continue to be supportive of the company’s strategies to improve performance, although they, like the board, are concerned about debt levels. Cash remains tight and cash management is a day-to-day focus for the company. In the middle of the year the company, with the support of its banks, agreed to undertake a strategic review with the dual aims of improving operational performance and reducing debt levels – or, more broadly, turning the company around and digging it out of the rut it has been in for too long. All options are on the table as part of this review. Sodium bicarbonate price increases and labour cost savings are strategic review initiatives that have already been implemented. An important plank of the review has been a drilling program at the mine to provide a more accurate picture of the size and quality of the limestone resource, well beyond the horizon of the existing 10 year mine plan. The drilling program will form the basis for a longer term mine plan to be prepared in the first half of next calendar year. Initial drilling results are suggesting that the resource is more substantial than previously known, with the maintenance of stone quality at greater depths. Debt levels can be reduced in several ways:
• by improved operational performance • by raising additional equity or related forms of funding, and/or • by asset sales.
It is fair to say that the banks favour asset sales, of which one option is the sale of all or part of the mine. The board’s preference would be not to sell the mine, just as, looking back, the sale of the salt assets during the period of private equity ownership of the business does not now appear to have been a smart move. It could be that a preferable outcome as far as shareholders are concerned would be for ownership of the entire Penrice business to be transferred to a larger group with a larger balance sheet that could more easily negotiate the economic and commodity cycles such as we are currently experiencing. At present, preliminary discussions are occurring with a number of parties, in which the company is being assisted by its adviser, KPMG Corporate Finance. I am not in a position today to indicate the nature of those discussions, with whom they are occurring, or whether or when they might reach a position that can be announced to the market. As soon as we can tell shareholders anything specific, we will of course do so. In addition, the potential to strengthen the balance sheet needs to be assessed. Given the decline in the company’s fortunes and share price over the past two years, this is a difficult challenge and some shareholders may well point to previous capital raisings and express misgivings. While such a reaction is understandable, we cannot go back to the past. We can only assess what might make sense to shareholders given where we are and what the future holds. One possibility is to consider hybrid instruments such as convertible notes, which might be offered by existing or new shareholders. In that event, the opportunity for all shareholders to participate, should they wish, will be given serious consideration.
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PENRICE SODA HOLDINGS LIMITED| ABN 83 109 193 419
Most of the potential options will only proceed with the agreement of shareholders. In any event, shareholders can be assured that the board’s sole consideration is what is in the best interests of shareholders. Improving operational performance Of course, regardless of what might be occurring with the balance sheet or asset sales, the principal requirement for management is to make sustainable improvements in operating performance. The actions taken in recent months constitute a useful down payment on that objective, as the CEO’s presentation quantifies. Further movements towards trend in coke prices represent additional cost reduction potential. Each of these steps is incremental but collectively they add up, especially if there is some stabilisation followed by strengthening in overall product demand. In the global soda ash market, prices have been increasing over the past twelve months, lead by US producers. Moreover, we understand that shipping costs to Australia have been increasing, so that the import parity price for soda ash is now higher than previously, notwithstanding exchange rate movements. If that situation prevails when our soda ash contracts come due for renegotiation, the potential exists for a boost to revenue. Every $10 per tonne increase in price adds $1 million to earnings per 100,000 tonnes of product sold. The quarry and mining business is continuing to improve its cash flow and there is now only minimal extraction of overburden. We are currently supplying aggregates to the South Road Superway project, which continues the company’s achievement of being a major supplier to road construction projects. The largest of these, the Northern Connector, is expected to commence in 2013-14 and Penrice is well placed to supply it. From the beginning of next calendar year, with an expected exchange rate of about parity, the sodium bicarbonate business will be generating free cash, after the allocation of all overhead costs. It provides the greatest potential return on capital employed, which earns it the right to grow. We have assessed several projects, commencing with two new bag packing lines and concluding with 25,000 tonnes of additional production. The total capital cost of these projects is approximately $8 million, generating additional earnings of around $3.5 million, meaning that the payback periods are highly attractive. The soda ash business remains the biggest challenge although here too there are several positive indicators. I have already mentioned the improved labour productivity, coke prices, electricity contract, calsilt removal, production improvements following kiln re-lining and potential for renegotiated soda ash contracts at improved prices. In addition the recently announced Olympic Dam upgrade will mean increased demand for soda ash by existing customer BHP Billiton, and increased demand for lime suppliers, who in turn we supply. Then there is the medium term potential for our coal seam gas brine recovery technology. Last week a report by the Senate Standing Committee on Rural Affairs on coal seam gas was released. It expressed several concerns about the potential for damage to local communities, agricultural land and water resources from coal seam gas production, while acknowledging the economic potential that the industry possesses. The report reinforces to me that Penrice, in association with its consortium partner, GE Power and Water, is well placed to assist in the effective remedying of one of the environmental challenges to the development of the coal seam gas industry. Shareholders can be assured that we will be doing all we can to secure a role for our technology over the coming twelve months.
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PENRICE SODA HOLDINGS LIMITED| ABN 83 109 193 419
Conclusion This address has been longer and more detailed than normal. But, given recent performance, shareholders are owed a thorough explanation of the company’s actions to date and plans for the future which I hope I have provided, with more detail to come shortly from the Managing Director. In short, the external environment, principally via exchange rates, coke price increases and sluggish demand, plus two unexpected major events, have combined to wreak havoc on Penrice’s earnings over the past two years, in the process causing debt to increase to unacceptable levels, dividends to be suspended, and the share price to be crunched. Even earlier than this, but post the float, the company found itself substantially and unexpectedly underfunded through a lack of preventative maintenance at the chemicals plant, and the need to remove and store large quantities of overburden at the mine. The management team and directors worked their way through these previous issues and are now just as determined to work through those of more recent times. The company’s strategic review is endeavouring to turn the existing unsatisfactory situation around, through a combination of operational improvements and debt reduction. Useful progress has already occurred with the former, while a number of discussions are underway that might, in coming months, result in a proposal on the latter being put to shareholders for approval. This might comprise anything from an additional funding proposal to the sale of the entire company. Shareholders need to recognise that the banks will be influential in deciding what occurs, although directors will be solely guided by shareholder interests. Meanwhile, as the full impact of productivity-enhancing actions already implemented takes effect in the second half of the fiscal year and beyond, plus such other initiatives as possible involvement in coal seam gas brine extraction, additional road construction projects within the economic footprint of our Angaston mine, and price increases in contracted sales of soda ash, the prospects remain for a significant improvement in Penrice’s underlying earnings performance. The company remains unable to provide specific guidance for the remainder of FY12, or for FY13, due to the inherent uncertainty which remains, other than to repeat our target of a break even result this year. Finally, may I thank shareholders for their tolerance, and in many cases their active support, through this difficult period. It is greatly appreciated. I wish you an enjoyable festive season, with safe travels, and a more prosperous 2012. Thank you for your attention and I now invite the Managing Director, Guy Roberts, to speak to his presentation. David Trebeck Chairman
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Penrice Soda HoldingsPenrice Soda Holdings2011 Annual General MeetingGuy Roberts MD & CEO5 December 2011
Guy Roberts, MD & CEO
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Disclaimer
This presentation has been prepared by Penrice Soda Holdings Limited. The information contained in this presentation is for informational purposes only. The information contained in this p p p ypresentation is not investment or financial product advice and is not intended to be used as the basis for making an investment decision. This presentation has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person.
No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information, opinions and conclusions contained in this presentation. To the maximum extent permitted by law, none of Penrice Soda Holdings Limited, its directors employees or agents nor any other person accepts any liability including withoutits directors, employees or agents, nor any other person accepts any liability, including, without limitation, any liability arising out of fault or negligence, for any loss arising from the use of the information contained in this presentation. In particular, no representation or warranty, express or implied, is given as to the accuracy, completeness or correctness, likelihood of achievement or reasonableness of any forecasts prospects or returns contained in this presentation Suchreasonableness of any forecasts, prospects or returns contained in this presentation. Such forecasts, prospects or returns are by their nature subject to significant uncertainties and contingencies.
Before making an investment decision, you should consider, with or without the assistance of a financial adviser, whether an investment is appropriate in light of your particular investment needs, objectives and financial circumstances. Past performance is no guarantee of future performance.
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FY2011 overview
Reported net loss of $26.2 million, reflecting impairment charges, unplanned soda ash plant outage (third party steam supply failure)
Normalised EBITDA $15.7 million, down 33% due to tough trading conditions in Australia, impact of strong Australian dollar on glass customers, unseasonal wet weather, lower mine cost capitalisationp
No dividend declared (FY2010: 0 cps)
$2.1 million improvement in Quarry & Mineral net free cash outflow from ($ ll ) ($ ll )($2.8 million) to ($0.7 & million)
Maintained strong Chemicals market franchise in Australia in difficult conditions
Grew export sales volumes in Asia
Maximum available Carbon Tax liability reduced 94.5% with EITE statusy
Strategic review launched to improve earnings, reduce gearing
…results reflect difficult trading conditions
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FY2011 in review
• Unprecedented strength in
Chemicals• Unprecedented strength in
AUD against USD - up 27% in FY2011 against FY2010
H ti ll A t li• Hurting all Australian manufacturers including PSH which supplies other Australian manufacturersAustralian manufacturers
• Reduction in FY2011 earnings versus USD 5 year average of $0.80c is $13 – $15 million
• Export revenue $8 million
Import margin impacts $3• Import margin impacts $3 million
• Domestic customer demand $3 million
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FY2011 in review
ChemicalsA$M
4.0 (1.4) (2.0)
(4.0)2.2
12
16
20
15.2 14.0
0
4
8
FY 10 Price Volumes Coke costs Forex Other FY 11
Domestic Chemicals demand lower due to strong A$ impact on glass industry, construction sector downturn and extreme weather events
V l f t l d d b t A$ lth h d d tValue of export sales reduced by strong A$, although demand strong
Normalised Chemicals EBITDA of $14.0 million, down 8% due to lower volumes, higher coke costs, g
One kiln reline completed in July 2011
Alternate kiln fuel successfully introduced
…challenging operating conditions5
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FY2011 in review
Chemicals – soda ash
Demand reduced as glass customers suffered lower consumption from reduced beer demand and wine exports, increased import competition (container glass and flat glass) and construction sector o p o ( o a g a a d a g a ) a d o u o odownturn (flat glass)
Reliance on imports to cover disrupted supply increased costs
$2 million negative impact on EBITDA from higher coke prices
New two year supply contract with Amcor Packaging in South y pp y g gAustralia
Soda ash price strengthens through year
Price increases announced in domestic and exports market
6…focus on improving production efficiency
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FY2011 in review
Chemicals – sodium bicarbonate
Stronger A$ reduced export receipts in spite of volume growth
Export volumes up on continued strong demand, but domesticExport volumes up on continued strong demand, but domestic volumes reduced on impact of extreme weather events (Eastern Australia floods)
Successful anti-dumping action resulted in duties on bicarb imports from China into Australia of 20%
All food and pharma quality accreditations maintainedAll food and pharma quality accreditations maintained
Supply of premium grade bicarb to new customers in Japan
P i i f d ti d t b iPrice increases for domestic and export business
…focus on premium export markets7
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FY2011 in review
Quarry & Mineral(0 7)0
A$M
(2.8)(0.7)
(6.3)5.4
0.42.6
-6
-4
-2
-10
-8
FY 10 EBITDA Inventory build
Capex Other FY 11
Reduced EBITDA reflected lower inventory capitalisation and lower overburden extraction
Cash out flow improved $2 1 million on last yearCash out flow improved $2.1 million on last year
Increased sales of aggregates and industrial mineral sales
O b d i t b ild d t $1 1 illi (FY2010 $6 4Overburden inventory build down to $1.1 million (FY2010: $6.4 million)
Reduced overburden lowers cash costs, improves cash flow
…first positive cash flowReduced overburden lowers cash costs, improves cash flow
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FY2011 in review
Safety & sustainabilityAll Worker Recordable
Energy use per tonne of product increased, reflecting lower
d ti d t t t15
20
0 h
rs
All Worker Recordable Case Rate
production due to steam outage
Water consumption further reduced to 25% of 2005 levels
0
5
10
ry p
er 2
00,0
00w
orke
d
All worker RCR
Recordable case rate in FY12 reduced to 0 87 reflecting
Waste & environmental licence targets met
Inju
reduced to 0.87, reflecting industry best practice
More visible, active leadership from all staff and contractors
Carbon tax liability reduced by 94.5% with EITE status likely impact of $0.4 million in FY2013 from all staff and contractors
New systems & procedures
Preparing for MHF legislation
and $0.5 million in FY2014
Preparing for MHF legislation…”no injuries to anyone ever”
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Market update & outlook
Chemicals
D d f d h i d ti i k iDemand for soda ash remains down on continuing weakness in manufacturing & construction sectors: however packaging and flat glass customers report demand is stabilising – outlook is uncertain and depends on?and depends on?
Poor soda ash plant performance due to damaged limestone from road freighting stone on Gawler rail shut; screening plant now in place to remove damaged limestone and limit losses.
Gawler rail shut estimated to cost $4 million ($2.5 million cost and $1 5 million lost production)$1.5 million lost production)
Planned annual maintenance shutdown completed in budget, but slower restart estimated to cost $0.5 million in lost production
Continued negative influence on earnings from strong A$
10…conditions remain tough
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Market update & outlook
Contracted price increases to deliver additional revenue in H2 FY2012
New Japanese customers for premium grade bicarb and new contract for sale of soda ash to Amcor Packaging
L H2 FY2012 t f l t i it k d l bLower H2 FY2012 costs for electricity, coke and labour
…focus on improved earnings
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Market update & outlook
Quarry & Mineral
Demand for quarry products from SA construction sector, down 15 to 20% and likely to remain weak – outlook is uncertain
Supplying large quantities of quarry products to USJV for South RoadSupplying large quantities of quarry products to USJV for South Road Superway, largest road project in SA
Other industrial market segments on track
Extra crushing capacity for aggregates production for concrete
Approval by EPA of new blended products for civil engineering fill market recycling Angaston mine overburden and Osborne plant by-market, recycling Angaston mine overburden and Osborne plant by-product to landfill Gillman site
Commencement of drilling program at Angaston mine to define the resource to JORC compliance: encouraging indicative results as to depth and quality of ore reserve
…drilling program to better define mine value12
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Market update & outlook
$10 million drawdown of working capital facility since year end
Balance sheet
$10 million drawdown of working capital facility since year end• Unplanned Gawler rail line closure costs and production impacts
on soda ash plant • Seeking further small increase in facility
Believe banking syndicate will continue to support PSH & that obligations will be met as they fall due
Reduction in term debt remains PSH’s top priority
PSH in compliance with banking covenants
…continued support of banking syndicate13
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Strategic review
Objective is to reduce term debt and improve operating performance
Update on progress
Objective is to reduce term debt and improve operating performance
Initiatives already implemented:• Price increases implemented in Chemicals exports in October, toPrice increases implemented in Chemicals exports in October, to
produce $2 million extra margin in FY2012 and $3 million in FY2013
• Labour costs cut by 10% by October, saving $2 million in FY2012 d $3 illi i FY2013and $3 million in FY2013
• New electricity contract and lower coke costs, saving $1 million in H2FY2012 and $2 million in FY2013
f• Drilling campaign underway at Angaston mine to define available resource, leading to new mine plan to be completed in H2 FY2012
Options to reduce debt levels being considered include assets salesOptions to reduce debt levels being considered include assets sales and equity raising
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…focus on shareholder returns, deleveraging
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Strategic review
Quarry & Mineral continues to be profitable, has greatly improved cash
Update on progressQ y p , g y pgeneration and should deliver positive cash flow in FY2012 (FY2011 ($0.7) million and FY2010 ($2.8) million)Chemicals is insufficiently profitable and not generating cashy p g g
Bicarb business in FY2012 is profitable and generating free cash –including the export business for the first time at A$/US$ parityAsh b siness is not p ofitable and not gene ating cash needs gentAsh business is not profitable and not generating cash: needs urgent action
• Contracted price increases will improve profitability• Underlying demand from glass customers I forecast to stabilise, but
uncertainty clearly remains with A$ and construction downturn• Plant is sold out but needs to run with out interruption: no steam
failure (FY11), no rail outage (FY12)• Two kiln relines @$1.5 million each over the next 18 months will de-
risk performance and lift output, on top of July 2011 kiln reline• Labour, electricity and coke cost savings benefit in H2
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Strategic review
T d i d i i th P i G th Pl
Penrice Growth Plan
Two drivers underpinning the Penrice Growth Plan are -
Maintaining market leadership (delivers better returns)
• Number One supplier of soda ash in Australia• Number One supplier of soda ash in Australia
• Number One supplier of sodium bicarbonate in Australia and leading supplier in Asia
• Number Two supplier of quarry products in SA
Growing close to our core (minimises execution risks) and leveraging our innovative technology (delivers better margins)leveraging our innovative technology (delivers better margins)
• Planned 25,000 tonne expansion of sodium bicarbonate plant at cost of $8 million, generating $3.5 million pa uplift in exports
• Selective Salts Recovery pilot plant construction underway could lead to commercial scale plant, with fee based income streams
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…focus on cash generating opportunities
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Strategic review
Sodium Bicarbonate business in H2 FY2012 generates cash with Penrice Growth Plan - Chemicals
greater potential upside capital returns, earning the right to grow
• Continue to grow margins in Asian export markets by shifting sales mix to higher priced marketssales mix to higher priced markets
• Three phase expansion of sodium bicarbonate plant of 25,000 tonnes to 125,000 tonnes pa over 2 year period expected to deliver excellent returns (with capital to be allocated whendeliver excellent returns (with capital to be allocated when appropriate):
• 2 new packaging lines cost $3 million for $1.0 million pa profit liftuplift
• New fine milling plant costs $2 million for $1.0 million pa profit uplift
• Plant capacity expansion costs $3 million for $1.5 million pa profit uplift
• Uses soda ash, less reliance on soda ash demand
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Uses soda ash, less reliance on soda ash demand
• Consumes CO2 – carbon friendly initiative
…focus on capital-light, cash generative opportunities
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Strategic review
S d A h b i i H2 FY2012 d t t f h
Penrice Growth Plan - Chemicals
• Soda Ash business in H2 FY2012 does not generate free cash or adequate return on capital employed
• Need to reduce costs of production and raise productivity
• Reduced costs of electricity – $1 million saving contract with new supplier
Red ced costs of coke of $1 million fo 2012 on ne so cing• Reduced costs of coke of $1 million for 2012 on new sourcing
• Reduced labour cost of $2 million for 2012 from review
• Deliver 5 Year Capital Expenditure Plan of $8 million pa to• Deliver 5 Year Capital Expenditure Plan of $8 million pa to improve output
• Reline of 5 kilns in the next 5 years will underwrite output at better rates of 280 000 tonnes pabetter rates of 280,000 tonnes pa
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…focus on reducing cost, increasing output
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Strategic review
S d A h b i h i d 10% GFC i d d d ti i
Penrice Growth Plan - Chemicals
• Soda Ash business has experienced 10% GFC induced reduction in demand. Plant output and demand are now balanced
• Pursue mineral processing segment for growth in sales
• New mining customer in FY2011 generates profit
• Existing customer BHPB Olympic Dam has long term growth potential fo PSH as the nea est lo est deli e ed cost s ppliepotential for PSH as the nearest, lowest delivered cost supplier
• Selective Salts Recovery pilot plant for QGC expected to generate profit in FY2012 and could lead to game changing outcomes
• Pilot to conclude mid CY2012 and construction of commercial scale plant could be required to commence by end CY2012 andscale plant could be required to commence by end CY2012 and GE/Penrice Consortium is working hard to ensure successful pilot
focus on capital-light cash generative opportunities
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…focus on capital light, cash generative opportunities leveraging innovative technology
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Strategic review
Q & Mi l b i i FY2012 t t f h
Penrice Growth Plan – Quarry & Mineral
• Quarry & Mineral business in FY2012 to generate free cash and adequate return on capital employed
• Continue organic growth in sales in all four growing markets-Continue organic growth in sales in all four growing markets
• Adelaide Brighton - requires limestone for its Birkenhead expansion and to supply more lime for mining industry in SA longer term such as BHPB Olympic Dam projectlonger term, such as BHPB Olympic Dam project
• industrial minerals – Amcor Glass is growing and Onesteel has increased requirements for limestone
• Aggregates – for concrete manufacture as construction sector recovers in SA
• Civils – supplied Sturt Highway duplication FY2010 Northern• Civils – supplied Sturt Highway duplication FY2010, Northern Expressway FY2011, now supplying South Road Superway, with Northern Connector expected in FY2014
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…focus on capital-light, organic growth
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Strategic review
C ti t d t f d ti d i d ti it
Penrice Growth Plan – Quarry & Mineral
• Continue to reduce costs of production and raise productivity
• Planned reduced extraction rates and costs of overburden in 10 year mine plan
• Continue reduced inventory build from less extraction
• Deliver 5 Year Capital Expenditure Plan of $1.5 million pa to imp o e eliabilit and o tp timprove reliability and output
• New investment in crushing capacity during H1 FY2012 for profitable aggregates market
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…focus on low cost, efficient mining
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Longer term outlook
W ll iti d f t d i d ti k t t t d tiWell positioned for turnaround in domestic markets post cost reduction and export price increase programs under strategic review but domestic markets are dependent on general economic activity and the movements in the AUDin the AUD
Continuing strong demand for premium grade sodium bicarbonate from Asian markets with plant expansion potentialp p p
Selective salts recovery from CSG water is potentially company transforming, providing access to fee income from leveraging Penrice technology in operating and marketing rolestechnology in operating and marketing roles
Focus on deleveraging, cash generation to improve balance sheet quality in longer termg
22…positioned for longer term improvement
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Contacts
Guy Roberts, Managing Director & CEOTelephone: +61 (8) 8402 7239
Frank Lupoi, CFO & Company SecretaryTelephone: +61 (8) 8402 7280
PENRICE SODA HOLDINGS LIMITEDABN 83 109 193 419
Solvay Road, OsborneSouth Australia
AUSTRALIA 5017
Telephone: +61 (8) 8402 7000Facsimile: +61 (8) 8402 7250
Email: [email protected]
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