Orica shares regained the $32 mark yesterday, two days after they were sold off in the wake of the strong first half profit announcement as investors took profits held since the private equity offer a couple of weeks ago.
ORI shares hit a day’s high of $32.43 fell and then recovered to close at that price.
Investors reassessed the results which showed strong growth in earnings from the company’s mining services and mining chemicals businesses.
As well others punted on the prospect of a higher bid from the buyout group.
Yesterday also saw a long Question and Answer on the corporatefile Open Briefing of the ASX with Orica CEO, Graeme Liebelt.
In it he made clear the emphasis at Orica is on driving deeper into mining services, through explosives, chemicals and the recently acquired Minova business which is already paying its way and looks a well timed and cheap purchase.
These are clearly the businesses the private equity wanted.
“Over the past few years we’ve worked very hard to reshape our business portfolio.
“We’ve increased our exposure to the resources sector, which is one we think is going to grow strongly in volume terms for quite some time – and remember we’re concerned with volume and not so much with commodity prices.
“That will see growth for our Mining Services business, Minova, and for the mining chemicals part of our Chemicals Services business.
“In our other business platforms, although the growth will probably be slower, there are opportunities for us in water treatment, in consumer products by moving more significantly into Asia, and even in Chemnet, which is in a recovery phase at present, we’ll have opportunities to grow both domestically and internationally once the business is stabilised.”
That was seen as an encouraging statement from the CEO: that he will be more interested in growth for earnings sake, not in growth for market share sake.
It was a point emphasised in the following answer.
“No matter what happens with input costs, we’d expect to recover them in the marketplace through rise and fall pricing in our contracts and whilst there are lags in cost recovery, it’s not as significant an issue for us as it once was.
“In terms of margins, we’re focused on growing the dollar of gross margin rather than margin as a percentage of sales.”
Mr Leibelt was then asked about the mining services plans for a new ammonium nitrate plant in Indonesia, despite expectations of a regional oversupply in the chemical because of the Dyno Nobel decision to build a 330,000 tonne per annum plant at Moranbah in Queensland? Would the new plant be viable?
“An Indonesian plant does remain viable for a number of reasons that are largely independent of Moranbah. We’re discussing the supply of ammonia, the main raw material required to make ammonium nitrate, and Indonesia has domestic demand that will sustain a full-scale ammonium nitrate plant.
“Indonesia in that sense needs to be viewed as a stand alone investment
“Frankly, timing is everything here. The impact of the Moranbah plant will depend on when it comes on-stream, which is uncertain, and the underlying growth in the Australian market. Then of course the same factors apply in Indonesia – the underlying growth in that market will be important.
“As for the timing of any Bontang plant, the earliest we’d see production starting is 2010, but the timing remains uncertain.”
Orica is moving ahead to expand its Yarwun sodium cyanide plant in North Queensland where the cost has jumped 25 per cent, or $50 million.
“Everybody’s struggling with the costs of building projects in northern Queensland, where Yarwun is located, and in other regions of Australia where the market’s very hot.
“However as was the case with our Yarwun ammonium nitrate uprate, the good news about this investment is that it’s such a good brown field development that even with the higher costs it still meets all our financial return targets and remains a very attractive investment. Importantly, the plant is likely to be commissioned in the September quarter, which is ahead of schedule.”
But while the concentration was on resources, analysts were impressed by the work done in the more traditional consumer products businesses where underlying earnings were up 10 per cent.
“The underlying market showed some slow and uneven regional growth during the course of the first half. Our business has done extremely well in terms of investing in brands and innovating in order to improve its market share, and that’s been part of the story in the first half.
“As we go into the second half, we’re not certain about market growth however, those fundamentals we’ve put in place in terms of marketing investment and innovation should continue to drive earnings.”
On Chemicals, Mr Liebelt said that “Chemnet has done a great job of realising the cost reductions we targeted in the restructuring project; the reductions have been delivered and you can see them coming through in our first half results.
“The key now is volume and gross margin, which have been weak because of some market share loss and because the underlying market in the Australian/New Zealand region is weak.
“For Chemnet to now achieve its next stage of recovery, it has to build its volumes and gross margins again, and to that end we’ve been investing a lot in retraining the sales force, putting new sales systems in and ensuring we’ve got the right information for our product managers and sales people. We expect to see the reward from those activities over coming months.”
The most interesting business at Orica is the Minova mining services group which it picked up in the second half of 2006.
It made a three-month underlying EBIT contribution to the first half of $24 million on sales of $115.5 million which is, if you think about it, pretty good going.
Mr
