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Dirty environmental legacy could burden Orica chemical spin-off

Orica has signaled an interest in becoming a pure mining business, spinning off its chemical business on its own. But numerous environmental liabilities could be a heavy load to bear for a chemical business.

Substantial environmental liabilities, particularly from a toxic groundwater plume spreading two kilometres around its Botany plant, could weigh heavily on the value of Orica’s chemicals business, if it is indeed spun out as a result of the strategic review canvassed at last month’s annual general meeting.

As mooted in today’s Australian Financial Review, such a demerger — the latest in a long line of businesses spun out of Orica, including Dulux — would turn the parent company into a pure mining services business.

But a demerger of Orica’s non-mining chemical business would have to deal carefully with the company’s environmental liabilities, particularly the contamination of groundwater at Botany in Sydney’s south, which are a legacy of more than a century of operations by the former Imperial Chemical Industries.

In its 2012-13 results last November, Orica disclosed total environmental provisions of $188 million, down from $203 million a year earlier.

Most of that relates to the chemicals business and, in particular, the Botany Industrial Park site, where liabilities are still rising, from $111 million to $113 million in 2013, due to higher provisions for remediation of groundwater ($59 million, up from $56 million) and mercury contamination ($18 million, up from $16 million). Orica is still subject of legal proceedings commenced by the News South Wales Environment Protection Authority over a pollution incident at Botany in 2011. Orica pleaded guilty, a sentencing and mitigation hearing was held in the Land and Environment Court in 2012, and a decision is still pending.

Orica also has substantial remediation liabilities at Villawood in Sydney’s west and Yarraville in Melbourne — sites that are held for redevelopment.

Commonwealth Bank analyst Michael Ward recently crunched the numbers on a demerger, which has been canvassed on and off for years. He valued the demerged chemicals business at $904 million or $1.57 a share after subtracting debts of around $250 million. Orica was trading at $23.48 this morning.

Ward wrote that if Orica was indeed going to spin out chemicals, it was likely to move fast and while the chemicals division would have higher borrowing costs and pay more tax; “we suspect [it] would be enthusiastic about the prospect of being ‘set free’ and excited by the prospect of creating its own culture”. The note did not touch on the environmental liabilities.

A spokesman for Orica this morning said no decisions had been taken and it was premature to be canvassing options for the demerger. The environmental liabilities had all been disclosed, he said.

But as nearby residents are well aware the Botany groundwater contamination is a major ongoing issue — check out The Daily Telegraph’s ongoing coverage  —  and there are no quick fixes.

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    Mardon Chris
    Posted Monday, 10 February 2014 at 9:22 pm | Permalink

    None of this comes as the slightest surprise for me. As a former employee of ICI in the 1960s, I saw a lot of what was happening to their wastes. The Botany factory was built on sand hills close to Botany Bay, while the Yarraville fertilizer factory was conveniently close to the Maribyrnong River. Workers at Yarraville used to joke that the phosphate ships went home a couple of knots faster than they came because all of the barnacles fell off. Both sites are still subject to EPA cleanup notices, but there does not seem to be any deadlines for compliance. Orica is by no means the only sinner, especially at Yarraville where several other nearby sites are also subject to EPA cleanup notices. Also, the oil refineries at Altona and Geelong are notorious for their contaminated sites. That is why the refineries are being converted to imported fuel depots so that the final cleanup can be deferred until the never never. These contaminated sites deserve far more attention than they are currently receiving.

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