Explosives giant Orica (ORI) has downgraded its profit guidance, raised the possibility of cutting ammonium nitrate output as an oversupply situation looms, reported a drop in half year profit and told shareholders they will get a steady interim dividend for the six months to March.
The company said net profit fell 8.3% to $222.1 million from $242.1 million a year earlier.
Interim dividend was set at an unchanged 40c a share.
The lower profit and gloomy commentary on its explosives business saw Orica shares dip 2.5% in early trading, but they later rallied as the wider market bounced and they ended up 5% at $21.20.
From commentary in yesterday’s announcement, it is clear the company, which is the world’s biggest supplier of mining explosives, sees problems ahead in the mining sector damaging its core explosives business in coming months.
Orica said it expects full-year global explosives volumes to be “around 3.75 million tonnes” down from its previous estimate of 3.8 million to 4 million tonnes.
ORI 1Y – Patchy outlook for Orica
And the company said the slide in mining activity and cost cutting had seen “explosives prices substantially reset”. As a result the full impact of the slowing in demand and rising output will hit Orica in the second half of the year.
Interim chief executive Alberto Calderon, the former BHP Billiton executive who replaced previous CEO Mike Smith, said yesterday that market conditions are “unquestionably difficult”.
"Orica is continuing to take action to mitigate the impact of market headwinds to build a foundation for earnings resilience through the cycle," he said.
"While the mining price boom has ended, Orica’s operations are more closely correlated to production volumes, which have remained steady."
Analysts have forecast that the Australian ammonium nitrate market will move into oversupply this year as around 500,000 tonnes as new capacity is brought online. Mr Calderon hinted that Orica could look at cutting production.
Explosives volumes in Australia fell 5% in the half year following mine closures and production cuts in the eastern coal states of NSW and Queensland and in the Pilbara iron ore region of WA.
Sales volumes in South America, the former Soviet Union and North America all rose, leading to a 3% rise in total ammonium nitrate volumes for the half.
But group revenue fell 2.3% to $3.3 billion for the six months ended March 31, while earnings before interest and tax fell 9% to $330 million due to weaker pricing and poor performance in the ground support business.
Cost cutting is continuing and the company is looking for costs to fall by up to $170 million in 2015. And the weaker dollar doesn’t seem to have had the same sort of impact on Orica that it did on Incitec Pivot in its first half (as reported on Monday).
And compared to Orica’s gloom, Incitec Pivot was positively optimistic about the outlook for ammonium nitrate and explosives.
