Ian Smale - Presentation to the Annual General Meeting, 25th June 2012

To watch a video of Ian Smale’s presentation, please visit http://youtu.be/Az-2YnBXRYQ Ladies and Gentlemen, welcome to the annual general meeting, and my thanks to Neil for the introduction. Thank you for this opportunity to reinforce the messages in the statement Neil has just made, as well as give you my own perspective on your company and our plans for it. Five months into my tenure, I firmly believe that Hydrodec has a unique, proven proprietary clean-technology that is commercial today and has the potential for multiple global applications. The core proposition is a high quality, re-usable oil, derived from used oil from the global electrical utility industry, which can permanently displace new mineral oil. It also has a reasonable aspiration to be the first oil product on the planet to come with a carbon credit. We continue to prove that the technology is competitive and has the potential to be highly profitable, and we are making good progress with the genuinely differentiating components of our product offer to support our market aspirations. In the United States, Hydrodec's Canton plant is well placed geographically and logistically to serve a very wide distribution of the electrical utility industry. Operations are now stable and improving creating a more reliable procurement proposition and high quality product. Recent installation of hydrogen tanks in Canton, the re-siting of the displaced hydrogen generators from Canton to Young and a very successful turnaround at Young are testament to a growing professionalism in the operation.

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Demand for new transformer oil in North America is growing by 6% per annum, and we have competitive offers for our SUPERFINETM product from Mexico to Canada. We can increasingly compete head to head with new mineral oil and we continue to reduce a natural market resistance to a new product. This is helping to close the gap between our sales prices and industry posted prices, which is a trend we work hard to support. We have been able to prove that our product compares at least as well, if not better than new mineral oil, indeed in a blind test conducted by the Doble laboratory in Boston, SUPERFINETM met, or exceeded, the best of the competitor products in 10 out of 12 tests, including the most important test for oxygen stability. SUPERFINETM transformer oil has now been extensively trialled in industry and in OEM-specific tests; it also has several years' service in high-performance applications in multiple countries. The quality of the oil has been endorsed by major OEMs such as ABB, Coopers, Ermco and Howard Industries, amongst others. Furthermore, SUPERFINETM is supplied throughout the industry to companies such as Wilsons, Tyree, Amp Control, Hansom Transformers and Mexicana de Lubricantes. In the US (and Australia), sales volumes and revenue, and plant utilisation and cost are all encouraging and continue to be a substantial step up from 2011 as flagged in April. If we can be confident of our product quality, then the imminent grant of a license to process PCB contaminated oil by the US EPA is a very big milestone for our process. The license endorses Hydrodec as a real alternative to incineration and there is already evidence of change in at least one major company who are now prepared to consider recycling their used oil in a major change of policy. We expect to have first PCB oil through the Canton plant in 3Q and while initial volumes will not substantially displace current used oil, we are encouraged by the level of interest from customers and the attractive margin opportunity they represent. The ability to handle and process PCB oils significantly differentiates the Hydrodec processing offer in the United States; the full impact of this will only become apparent in the next year or so. Already the competitiveness of our process allows us to compete and win substantial feedstock contracts for import and processing, from Canada into the US and now from Mexico to Australia. The recently won mandate from the Mexican National Utility to export 900,000 litres to Young for processing (with SESA, System de Energia SA) will attractively sustain production capacity at Young through to the end of this year, with the potential for further contracts in 2013. This all contributes to Hydrodec's growing significance in the market for used transformer oil. Until now there is no doubt in my mind that the company has both benefitted, but is ultimately constrained by the highly fragmented used oil market, especially in the US. To confidently participate in necessary disruptive change, the full breadth of the Hydrodec offer will be deployed to open new relationships and possibly new partnerships. The final component of this is the quantification of sustainability. Hydrodec has engaged an expert consultancy to work with us to develop a methodology that can quantify and verify the carbon saving benefit of the Hydrodec technology. This methodology is now complete and will be submitted shortly to the UNFCCC (United Nations Framework Convention for Climate Change) expert panel for verification and ultimately approval. Once done, we will be able to apply the method through various country-specific programmes and claim any associated credit. To put this in context, to date Hydrodec has processed about 70,000 metric tonnes of used, contaminated oil since the start of operations; this is roughly equivalent to 250,000 tonnes of saved CO2 emissions, or the equivalent of taking 50,000 vehicles off the road for a year. My personal aspiration would be for Hydrodec to achieve the equivalent of 250,000 tonnes of CO2 saved per annum - not so far-fetched as it can be delivered by 12 processing units and we already have 5. It would make the company relevant beyond its scale in this space, as well as theoretically being worth about AU$3.5m p.a. at current Australian carbon prices were we able to claim credits exclusively there.

Beyond the US, the step out opportunity for our core business is currently best defined in Japan where the regulation of PCB contamination creates a more compelling demand for the Hydrodec offer. As I have said in April, the pace of the joint venture has been a disappointment, but our direct intervention with partners is having an effect, and a permanent representative allows us to take a substantially more influential role. The key milestones for you to look out for will be the land acquisition, contracts for supply, ground breaking and construction, first operation and first commercial transaction. We remain convinced of the attractiveness of this market for Hydrodec where we remain the only licensed non-destructive technology in the market. Finally, extending the technology is an exciting proposition for the future. The different structure and scale of the market will require a partnership agreement with a blender/marketer to re-create the industrial oils; Hydrodec's participation and potential margin structure will be orientated towards a processing and royalty fee or margin rather than the full cycle margin potentially available in transformer oils - but the scale of the potential market and the relatively high concentration of international customers could make this a very attractive proposition; and we are making good progress. Your management's focus remains biased towards the potential of our existing plant and operation and focused on the controllable expansion of our core proposition; the additional capacity we have added to the business has increased cost, but has also underpinned the progress in operations as well as consider and act on selected opportunities in a way the Company has been unable to do in the past. I am pleased with the progress we are making.