Incitec Pivot (ASX:IPL), the explosives and fertiliser manufacturer, is poised for a tumultuous trading session today (Tuesday) following the release of a mixed trading update well after Monday's trading hours had concluded.
Incitec Pivot (IPL) informed the ASX that its "overall Group financial performance remains broadly in line with the outlook provided in May 2023." The global Dyno Nobel explosives business is surpassing expectations, while the Incitec Pivot Fertilisers business is underperforming.
"As indicated during the half-year results presentation, underlying earnings from the global explosives businesses are expected to be notably skewed toward the second half. Dyno Nobel Americas' emphasis on pricing and cost control in the explosives sector has positively impacted margins in the latter part of the year. The re-contracting of Dyno Nobel Asia Pacific customers is progressing smoothly and aligns with previous guidance."
A standout in the explosives business is the robust performance at its Moranbah, Queensland facility, which is "anticipated to achieve 360,000-370,000 tonnes in FY23 (ending September 30), significantly exceeding prior forecasts. This success is attributed to the cessation of La Nina-induced wet weather and flooding, which disrupted the central Queensland coal mining industry in 2021 and 2022.
In contrast, the fertilisers business anticipates that earnings in the company's distribution segment will fall at the lower end of the typical range of $40 million to $60 million. The latter half of the fiscal year has witnessed increased demand, resulting in full-year sales volumes largely aligning with the previous year. However, profit margins have remained depressed due to product sales in a declining market and farmers shifting to lower-margin products.
Challenges at the Phosphate Hill mine in northern Queensland have impacted returns. The mine relies on sulfuric acid from Mount Isa Mines, but equipment problems at the latter have hindered Phosphate Hill's production. As a result, IPL intends to undertake maintenance and other planned repairs (scheduled for 2024) over a three-week period. This will, in turn, reduce production, sales, and earnings by $13 to $15 million for the September year but will yield approximately $4 million in savings in 2024. The company has also experienced reduced costs related to supplying gas to cover prior shortfalls in the gas supply agreement for the mine.
"Gas supply volumes under the long-term Gas Supply Agreement with Power Water Corporation for the Phosphate Hill plant have exceeded the forecast provided by PWC in June 2023. IPL now anticipates the EBIT (earnings before interest and tax) impact from sourcing shortfall gas for FY23 to be at the lower end of the previously advised $75 million to $90 million range."
IPL revealed that the separation of the fertilisers business from the explosives business is ongoing. However, discussions are confidential and incomplete, with no certainty regarding any agreement or sale transaction. Consequently, the potential demerger has led the company to maintain the suspension of its buyback.
Furthermore, the sale of the Waggaman explosives operation in the US is currently under review by US competition regulators. IPL hopes to obtain clearance for the sale by the end of 2023.
